Attached files

file filename
EX-32.1 - EX-32.1 - Essent Group Ltd.a15-6998_1ex32d1.htm
EX-31.1 - EX-31.1 - Essent Group Ltd.a15-6998_1ex31d1.htm
EXCEL - IDEA: XBRL DOCUMENT - Essent Group Ltd.Financial_Report.xls
EX-31.2 - EX-31.2 - Essent Group Ltd.a15-6998_1ex31d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the period ended March 31, 2015

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 001-36157

 


 

ESSENT GROUP LTD.

(Exact name of registrant as specified in its charter)

 


 

Bermuda

 

Not Applicable

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

(Address of principal executive offices and zip code)

 

(441) 297-9901

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of the registrant’s common shares outstanding as of May 7, 2015 was 92,659,724.

 

 

 


 


Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Form 10-Q

 

Index

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II.

OTHER INFORMATION

33

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 5.

Other Information

34

 

 

 

Item 6.

Exhibits

34

 

 

 

SIGNATURES

35

 

 

 

EXHIBIT INDEX

36

 

i


 


Table of Contents

 

Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “Essent,” and the “Company,” as used in this Quarterly Report on Form 10-Q, refer to Essent Group Ltd. and its directly and indirectly owned subsidiaries, including our primary operating subsidiary, Essent Guaranty, Inc., as a combined entity, except where otherwise stated or where it is clear that the terms mean only Essent Group Ltd. exclusive of its subsidiaries.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, or Quarterly Report, includes forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

 

The forward-looking statements contained in this Quarterly Report reflect our views as of the date of this Quarterly Report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described below, factors described in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, and factors described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission.  These factors include, without limitation, the following:

 

·                  changes in or to Fannie Mae and Freddie Mac, which we refer to collectively as the GSEs, whether through Federal legislation, restructurings or a shift in business practices;

 

·                  failure to continue to meet the mortgage insurer eligibility requirements of the GSEs;

 

·                  competition for our customers;

 

·                  decline in new insurance written, or NIW, and franchise value due to loss of a significant customer;

 

·                  lenders or investors seeking alternatives to private mortgage insurance;

 

·                  increase in the number of loans insured through Federal government mortgage insurance programs, including those offered by the Federal Housing Administration;

 

·                  decline in the volume of low down payment mortgage originations;

 

·                  uncertainty of loss reserve estimates;

 

·                  decrease in the length of time our insurance policies are in force;

 

·                  deteriorating economic conditions;

 

·                  the definition of “Qualified Mortgage” reducing the size of the mortgage origination market or creating incentives to use government mortgage insurance programs;

 

·                  the definition of “Qualified Residential Mortgage” reducing the number of low down payment loans or lenders and investors seeking alternatives to private mortgage insurance;

 

·                  the implementation of the Basel III Capital Accord, which may discourage the use of private mortgage insurance;

 

·                  management of risk in our investment portfolio;

 

·                  fluctuations in interest rates;

 

ii



Table of Contents

 

·                  inadequacy of the premiums we charge to compensate for our losses incurred;

 

·                  dependence on management team and qualified personnel;

 

·                  disturbance to our information technology systems;

 

·                  change in our customers’ capital requirements discouraging the use of mortgage insurance;

 

·                  declines in the value of borrowers’ homes;

 

·                  limited availability of capital;

 

·                  unanticipated claims arise under and risks associated with our contract underwriting program;

 

·                  industry practice that loss reserves are established only upon a loan default;

 

·                  disruption in mortgage loan servicing;

 

·                  risk of future legal proceedings;

 

·                  customers’ technological demands;

 

·                  our non-U.S. operations becoming subject to U.S. Federal income taxation;

 

·                  becoming considered a passive foreign investment company for U.S. Federal income tax purposes;

 

·                  scope of recently enacted legislation is uncertain; and

 

·                  potential inability of our insurance subsidiaries to pay dividends.

 

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Quarterly Report are based on information available to us on the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

 

iii


 


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements (Unaudited)

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

March 31,

 

December 31,

 

(In thousands, except per share amounts)

 

2015

 

2014

 

Assets

 

 

 

 

 

Investments available for sale, at fair value

 

 

 

 

 

Fixed maturities (amortized cost: 2015 — $994,598; 2014 — $840,213)

 

$

1,008,309

 

$

846,925

 

Short-term investments (amortized cost: 2015 — $111,922; 2014 — $210,688)

 

111,922

 

210,688

 

Total investments

 

1,120,231

 

1,057,613

 

Cash

 

21,902

 

24,411

 

Accrued investment income

 

6,240

 

5,748

 

Accounts receivable

 

15,763

 

15,810

 

Deferred policy acquisition costs

 

9,852

 

9,597

 

Property and equipment (at cost, less accumulated depreciation of $39,994 in 2015 and $39,260 in 2014)

 

8,073

 

5,841

 

Prepaid federal income tax

 

63,673

 

59,673

 

Other assets

 

4,352

 

2,768

 

Total assets

 

$

1,250,086

 

$

1,181,461

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and LAE

 

$

10,065

 

$

8,427

 

Unearned premium reserve

 

164,167

 

156,948

 

Accrued payroll and bonuses

 

5,464

 

14,585

 

Net deferred tax liability

 

53,482

 

37,092

 

Other accrued liabilities

 

20,891

 

8,671

 

Total liabilities

 

254,069

 

225,723

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common shares, $0.015 par value:

 

 

 

 

 

Authorized - 233,333; issued — 92,574 shares in 2015 and 92,546 shares in 2014

 

1,389

 

1,388

 

Additional paid-in capital

 

893,836

 

893,285

 

Accumulated other comprehensive income

 

9,556

 

4,667

 

Retained earnings

 

91,236

 

56,398

 

Total stockholders’ equity

 

996,017

 

955,738

 

Total liabilities and stockholders’ equity

 

$

1,250,086

 

$

1,181,461

 

 

See accompanying notes to condensed consolidated financial statements.

 

1



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands, except per share amounts)

 

2015

 

2014

 

Revenues:

 

 

 

 

 

Net premiums written

 

$

82,257

 

$

52,192

 

Increase in unearned premiums

 

(7,219

)

(7,442

)

Net premiums earned

 

75,038

 

44,750

 

Net investment income

 

4,280

 

1,898

 

Realized investment gains, net

 

649

 

400

 

Other income

 

44

 

773

 

Total revenues

 

80,011

 

47,821

 

 

 

 

 

 

 

Losses and expenses:

 

 

 

 

 

Provision for losses and LAE

 

1,999

 

902

 

Other underwriting and operating expenses

 

27,498

 

23,459

 

Total losses and expenses

 

29,497

 

24,361

 

 

 

 

 

 

 

Income before income taxes

 

50,514

 

23,460

 

Income tax expense

 

15,676

 

8,454

 

Net income

 

$

34,838

 

$

15,006

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.39

 

$

0.18

 

Diluted

 

$

0.38

 

$

0.18

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

90,185

 

82,864

 

Diluted

 

91,514

 

84,696

 

 

 

 

 

 

 

Net income

 

$

34,838

 

$

15,006

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized appreciation of investments, net of tax expense of $2,110 in 2015 and $370 in 2014

 

4,889

 

479

 

Total other comprehensive income

 

4,889

 

479

 

Comprehensive income

 

$

39,727

 

$

15,485

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


 


Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

 

 

 

 

 

 

Accumulated

 

Retained

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

Earnings

 

 

 

Total

 

 

 

Common

 

Paid-In

 

Comprehensive

 

(Accumulated

 

Treasury

 

Stockholders’

 

(In thousands)

 

Shares

 

Capital

 

Income (Loss)

 

Deficit)

 

Stock

 

Equity

 

Balance at January 1, 2014

 

$

1,297

 

$

754,390

 

$

(1,447

)

$

(32,099

)

$

 

$

722,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

88,497

 

 

 

88,497

 

Other comprehensive income

 

 

 

 

 

6,114

 

 

 

 

 

6,114

 

Issuance of common shares net of issuance cost of $6,761

 

90

 

126,649

 

 

 

 

 

 

 

126,739

 

Issuance of management incentive shares

 

2

 

414

 

 

 

 

 

 

 

416

 

Forfeiture of management incentive shares

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

12,520

 

 

 

 

 

 

 

12,520

 

Excess tax benefits from stock-based compensation expense

 

 

 

1,809

 

 

 

 

 

 

 

1,809

 

Treasury stock acquired

 

 

 

 

 

 

 

 

 

(2,498

)

(2,498

)

Cancellation of treasury stock

 

(1

)

(2,497

)

 

 

 

 

2,498

 

 

Balance at December 31, 2014

 

$

1,388

 

$

893,285

 

$

4,667

 

$

56,398

 

$

 

$

955,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

34,838

 

 

 

34,838

 

Other comprehensive income

 

 

 

 

 

4,889

 

 

 

 

 

4,889

 

Issuance of management incentive shares

 

5

 

(5

)

 

 

 

 

 

 

 

Forfeiture of management incentive shares

 

(1

)

1

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

3,261

 

 

 

 

 

 

 

3,261

 

Excess tax benefits from stock-based compensation expense

 

 

 

2,280

 

 

 

 

 

 

 

2,280

 

Treasury stock acquired

 

 

 

 

 

 

 

 

 

(5,023

)

(5,023

)

Cancellation of treasury stock

 

(3

)

(5,020

)

 

 

 

 

5,023

 

 

Other equity transactions

 

 

 

34

 

 

 

 

 

 

 

34

 

Balance at March 31, 2015

 

$

1,389

 

$

893,836

 

$

9,556

 

$

91,236

 

$

 

$

996,017

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


 


Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

2014

 

Operating Activities

 

 

 

 

 

Net income

 

$

34,838

 

$

15,006

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on the sale of investments, net

 

(649

)

(400

)

Depreciation and amortization

 

734

 

546

 

Amortization of discount on payments due under Asset Purchase Agreement

 

 

18

 

Stock-based compensation expense

 

3,261

 

2,783

 

Amortization of premium on investment securities

 

2,360

 

1,153

 

Deferred income tax provision

 

14,280

 

7,107

 

Excess tax benefits from stock-based compensation

 

(2,280

)

(1,631

)

Change in:

 

 

 

 

 

Accrued investment income

 

(492

)

(1,695

)

Accounts receivable

 

(1,151

)

(345

)

Deferred policy acquisition costs

 

(255

)

(455

)

Prepaid federal income tax

 

(4,000

)

(10,000

)

Other assets

 

(1,584

)

(203

)

Reserve for losses and LAE

 

1,638

 

734

 

Unearned premium reserve

 

7,219

 

7,442

 

Accrued liabilities

 

(6,739

)

(7,532

)

Net cash provided by operating activities

 

47,180

 

12,528

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Net change in short-term investments

 

98,766

 

(247,446

)

Purchase of investments available for sale

 

(220,284

)

(291,424

)

Proceeds from maturity of investments available for sale

 

5,525

 

7,232

 

Proceeds from sales of investments available for sale

 

71,077

 

52,215

 

Purchase of property and equipment, net

 

(1,527

)

(507

)

Net cash used in investing activities

 

(46,443

)

(479,930

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Treasury stock acquired

 

(5,023

)

(2,327

)

Payment of offering costs

 

(537

)

(719

)

Excess tax benefits from stock-based compensation

 

2,280

 

1,631

 

Other financing activities

 

34

 

 

Net cash used in financing activities

 

(3,246

)

(1,415

)

 

 

 

 

 

 

Net decrease in cash

 

(2,509

)

(468,817

)

Cash at beginning of year

 

24,411

 

477,655

 

Cash at end of period

 

$

21,902

 

$

8,838

 

 

 

 

 

 

 

Noncash Transactions

 

 

 

 

 

Issuance of management incentive shares (see Note 6)

 

$

 

$

416

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In these notes to condensed consolidated financial statements, “Essent”, “Company”, “we”, “us”, and “our” refer to Essent Group Ltd. and its subsidiaries, unless the context otherwise requires.

 

Note 1. Nature of Operations and Basis of Presentation

 

Essent Group Ltd. (“Essent Group”) is a Bermuda-based holding company, which, through its wholly-owned subsidiaries, offers private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. Mortgage insurance facilitates the sale of low-down payment (generally less than 20%) mortgage loans into the secondary mortgage market, primarily to the government sponsored enterprises (“GSEs”), Fannie Mae and Freddie Mac. Essent Group was incorporated in Bermuda in July 2008. In March 2014, Essent Group formed Essent Irish Intermediate Holdings Limited (“Essent Irish Intermediate”) as a wholly-owned subsidiary.  In April 2014, Essent Group contributed all of the outstanding stock of Essent US Holdings, Inc. (“Essent Holdings”) to Essent Irish Intermediate.  The primary mortgage insurance operations are conducted through Essent Holdings’ regulated and licensed wholly-owned subsidiaries, Essent Guaranty, Inc. (“Essent Guaranty”) and Essent Guaranty of PA, Inc. (“Essent PA”).  Essent Group also has a wholly-owned Bermuda domiciled Class 3A Insurer licensed pursuant to Section 4 of the Bermuda Insurance Act 1978, Essent Reinsurance, Ltd. (“Essent Re”), which offers mortgage-related insurance and reinsurance.

 

We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These statements should be read in conjunction with the consolidated financial statements and notes thereto, including Note 1 and Note 2 to the consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2014, which discloses the principles of consolidation and a summary of significant accounting policies. The results of operations for the interim periods are not necessarily indicative of the results for the full year. We evaluated the need to recognize or disclose events that occurred subsequent to March 31, 2015 prior to the issuance of these condensed consolidated financial statements.

 

Certain amounts in prior years have been reclassified to conform to the current year presentation.

 

Note 2. Investments Available for Sale

 

Investments available for sale consist of the following:

 

March 31, 2015 (In thousands)

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

U.S. Treasury securities

 

$

124,439

 

$

1,685

 

$

(31

)

$

126,093

 

U.S. agency securities

 

3,182

 

26

 

 

3,208

 

U.S. agency mortgage-backed securities

 

83,952

 

2,103

 

(97

)

85,958

 

Municipal debt securities(1)

 

241,653

 

5,076

 

(458

)

246,271

 

Corporate debt securities

 

339,954

 

5,239

 

(112

)

345,081

 

Mortgage-backed securities

 

64,041

 

899

 

(781

)

64,159

 

Asset-backed securities

 

137,377

 

329

 

(167

)

137,539

 

Money market funds

 

111,922

 

 

 

111,922

 

Total investments available for sale

 

$

1,106,520

 

$

15,357

 

$

(1,646

)

$

1,120,231

 

 

5



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

December 31, 2014 (In thousands)

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

U.S. Treasury securities

 

$

73,432

 

$

927

 

$

(143

)

$

74,216

 

U.S. agency securities

 

4,491

 

29

 

 

4,520

 

U.S. agency mortgage-backed securities

 

82,190

 

1,564

 

(214

)

83,540

 

Municipal debt securities(1)

 

191,723

 

4,147

 

(324

)

195,546

 

Corporate debt securities

 

295,507

 

2,123

 

(801

)

296,829

 

Mortgage-backed securities

 

66,396

 

574

 

(884

)

66,086

 

Asset-backed securities

 

126,474

 

136

 

(422

)

126,188

 

Money market funds

 

210,688

 

 

 

210,688

 

Total investments available for sale

 

$

1,050,901

 

$

9,500

 

$

(2,788

)

$

1,057,613

 

 


(1)         At March 31, 2015, approximately 65.7% of municipal debt securities were special revenue bonds, 30.4% were general obligation bonds, 1.2% were tax allocation bonds and 2.7% were certification of participation bonds. At December 31, 2014, approximately 59.7% of municipal debt securities were special revenue bonds, 37.5% were general obligation bonds, 1.5% were tax allocation bonds, 0.8% were certification of participation bonds and 0.5% were special assessment bonds.

 

The amortized cost and fair value of investments available for sale at March 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most mortgage-backed securities and asset-backed securities provide for periodic payments throughout their lives, they are listed below in separate categories.

 

(In thousands)

 

Amortized
Cost

 

Fair
Value

 

U.S. Treasury securities:

 

 

 

 

 

Due in 1 year

 

$

21,905

 

$

21,931

 

Due after 1 but within 5 years

 

44,542

 

44,669

 

Due after 5 but within 10 years

 

57,992

 

59,493

 

Subtotal

 

124,439

 

126,093

 

U.S. agency securities:

 

 

 

 

 

Due in 1 year

 

748

 

756

 

Due after 1 but within 5 years

 

2,434

 

2,452

 

Subtotal

 

3,182

 

3,208

 

Municipal debt securities:

 

 

 

 

 

Due in 1 year

 

 

 

Due after 1 but within 5 years

 

74,064

 

74,393

 

Due after 5 but within 10 years

 

85,930

 

88,529

 

Due after 10 years

 

81,659

 

83,349

 

Subtotal

 

241,653

 

246,271

 

Corporate debt securities:

 

 

 

 

 

Due in 1 year

 

19,281

 

19,331

 

Due after 1 but within 5 years

 

213,360

 

214,853

 

Due after 5 but within 10 years

 

107,032

 

110,602

 

Due after 10 years

 

281

 

295

 

Subtotal

 

339,954

 

345,081

 

U.S. agency mortgage-backed securities

 

83,952

 

85,958

 

Mortgage-backed securities

 

64,041

 

64,159

 

Asset-backed securities

 

137,377

 

137,539

 

Money market funds

 

111,922

 

111,922

 

Total investments available for sale

 

$

1,106,520

 

$

1,120,231

 

 

6



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Essent Group realized gross gains and losses on the sale of investments available for sale as follows:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

2014

 

Realized gross gains

 

$

788

 

$

665

 

Realized gross losses

 

139

 

265

 

 

The fair value of investments in an unrealized loss position and the related unrealized losses were as follows:

 

 

 

Less than
12 months

 

12 months or more

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

At March 31, 2015 (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

23,005

 

$

(31

)

$

 

$

 

$

23,005

 

$

(31

)

U.S. agency mortgage-backed securities

 

5,719

 

(49

)

1,857

 

(48

)

7,576

 

(97

)

Municipal debt securities

 

65,337

 

(410

)

4,632

 

(48

)

69,969

 

(458

)

Corporate debt securities

 

24,411

 

(94

)

5,111

 

(18

)

29,522

 

(112

)

Mortgage-backed securities

 

18,870

 

(174

)

18,910

 

(607

)

37,780

 

(781

)

Asset-backed securities

 

66,311

 

(145

)

6,871

 

(22

)

73,182

 

(167

)

Total

 

$

203,653

 

$

(903

)

$

37,381

 

$

(743

)

$

241,034

 

$

(1,646

)

 

 

 

Less than
12 months

 

12 months or more

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

At December 31, 2014 (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

16,543

 

$

(34

)

$

5,155

 

$

(109

)

$

21,698

 

$

(143

)

U.S. agency mortgage-backed securities

 

2,334

 

 

8,566

 

(214

)

10,900

 

(214

)

Municipal debt securities

 

39,902

 

(229

)

8,684

 

(95

)

48,586

 

(324

)

Corporate debt securities

 

113,717

 

(701

)

12,659

 

(100

)

126,376

 

(801

)

Mortgage-backed securities

 

28,091

 

(264

)

16,092

 

(620

)

44,183

 

(884

)

Asset-backed securities

 

100,248

 

(405

)

2,201

 

(17

)

102,449

 

(422

)

Total

 

$

300,835

 

$

(1,633

)

$

53,357

 

$

(1,155

)

$

354,192

 

$

(2,788

)

 

The gross unrealized losses on these investment securities are principally associated with the changes in the interest rate environment subsequent to their purchase. Each issuer is current on its scheduled interest and principal payments. We assess our intent to sell these securities and whether we will be required to sell these securities before the recovery of their amortized cost basis when determining whether an impairment is other-than-temporary. There were no other-than-temporary impairments of investments in the three months ended March 31, 2015 or year ended December 31, 2014.

 

The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $8.5 million as of March 31, 2015 and as of December 31, 2014.  In connection with its insurance and reinsurance activities, Essent Re is required to maintain assets in trusts for the benefit of its contractual counterparties.  The fair value of the required investments on deposit in these trusts were $117.8 million at March 31, 2015 and $66.7 million at December 31, 2014.

 

7



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Net investment income consists of:

 

 

 

Three Months Ended
March 31,

 

(In thousands)

 

2015

 

2014

 

Fixed maturities

 

$

4,653

 

$

2,056

 

Short-term investments

 

12

 

12

 

Gross investment income

 

4,665

 

2,068

 

Investment expenses

 

(385

)

(170

)

Net investment income

 

$

4,280

 

$

1,898

 

 

Note 3. Accounts Receivable

 

Accounts receivable consist of the following:

 

(In thousands)

 

March 31,
2015

 

December 31,
2014

 

Premiums receivable

 

$

14,041

 

$

13,210

 

Other receivables

 

1,722

 

2,600

 

Total accounts receivable

 

15,763

 

15,810

 

Less: Allowance for doubtful accounts

 

 

 

Accounts receivable, net

 

$

15,763

 

$

15,810

 

 

Premiums receivable consist of premiums due on our mortgage insurance policies. If mortgage insurance premiums are unpaid for more than 90 days, the receivable is written off against earned premium and the related insurance policy is cancelled. For all periods presented, no provision or allowance for doubtful accounts was required.

 

Note 4. Reserve for Losses and Loss Adjustment Expenses

 

The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses (“LAE”) for the three months ended March 31:

 

($ in thousands)

 

2015

 

2014

 

Reserve for losses and LAE at beginning of period

 

$

8,427

 

$

3,070

 

Less: Reinsurance recoverables

 

 

 

Net reserve for losses and LAE at beginning of period

 

8,427

 

3,070

 

Add provision for losses and LAE, net of reinsurance, occurring in:

 

 

 

 

 

Current period

 

2,705

 

1,286

 

Prior years

 

(706

)

(384

)

Net incurred losses during the current period

 

1,999

 

902

 

Deduct payments for losses and LAE, net of reinsurance, occurring in:

 

 

 

 

 

Current period

 

 

 

Prior years

 

361

 

168

 

Net loss and LAE payments during the current period

 

361

 

168

 

Net reserve for losses and LAE at end of period

 

10,065

 

3,804

 

Plus: Reinsurance recoverables

 

 

 

Reserve for losses and LAE at end of period

 

$

10,065

 

$

3,804

 

 

 

 

 

 

 

Loans in default at end of period

 

505

 

192

 

 

8



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

For the three months ended March 31, 2015, $0.4 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $0.7 million favorable prior-year development during the three months ended March 31, 2015. Reserves remaining as of March 31, 2015 for prior years are $7.4 million as a result of re-estimation of unpaid losses and loss adjustment expenses. For the three months ended March 31, 2014, $0.2 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $0.4 million favorable prior-year development during the three months ended March 31, 2014. Reserves remaining as of March 31, 2014 for prior years were $2.5 million as a result of re-estimation of unpaid losses and loss adjustment expenses. The decreases in both periods are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims.

 

Note 5. Commitments and Contingencies

 

Obligations under Guarantees

 

Under the terms of CUW Solutions LLC’s contract underwriting agreements with lenders and subject to contractual limitations on liability, we agree to indemnify certain lenders against losses incurred in the event that we make an error in determining whether loans processed meet specified underwriting criteria, to the extent that such error materially restricts or impairs the salability of such loan, results in a material reduction in the value of such loan or results in the lender repurchasing the loan. The indemnification may be in the form of monetary or other remedies. We have not paid any amounts related to remedies for the three months ended March 31, 2015 or 2014. As of March 31, 2015, management believes any potential claims for indemnification related to contract underwriting services through March 31, 2015 are not material to our financial position or results of operations.

 

In addition to the indemnifications discussed above, in the normal course of business, we enter into agreements or other relationships with third parties pursuant to which we may be obligated under specified circumstances to indemnify the counterparties with respect to certain matters. Our contractual indemnification obligations typically arise in the context of agreements entered into by us to, among other things, purchase or sell services, finance our business and business transactions, lease real property and license intellectual property. The agreements we enter into in the normal course of business generally require us to pay certain amounts to the other party associated with claims or losses if they result from our breach of the agreement, including the inaccuracy of representations or warranties. The agreements we enter into may also contain other indemnification provisions that obligate us to pay amounts upon the occurrence of certain events, such as the negligence or willful misconduct of our employees, infringement of third-party intellectual property rights or claims that performance of the agreement constitutes a violation of law. Generally, payment by us under an indemnification provision is conditioned upon the other party making a claim, and typically we can challenge the other party’s claims. Further, our indemnification obligations may be limited in time and/or amount, and in some instances, we may have recourse against third parties for certain payments made by us under an indemnification agreement or obligation. As of March 31, 2015, contingencies triggering material indemnification obligations or payments have not occurred historically and are not expected to occur. The nature of the indemnification provisions in the various types of agreements and relationships described above are believed to be low risk and pervasive, and we consider them to have a remote risk of loss or payment. We have not recorded any provisions on the condensed consolidated balance sheets related to indemnifications.

 

Note 6. Stock-Based Compensation

 

The following table summarizes nonvested common share and nonvested common share unit activity for the three months ended March 31, 2015:

 

 

 

Time and Performance-
Based Share Awards

 

Time-Based Share
Awards

 

Share Units

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

(Shares in thousands)

 

Number of
Shares

 

Average
Grant
Date Fair
Value

 

Number of
Shares

 

Average
Grant
Date Fair
Value

 

Number
of
Share
Units

 

Average
Grant
Date Fair
Value

 

Outstanding at beginning of year

 

1,290

 

$

14.83

 

1,472

 

$

9.04

 

664

 

$

18.32

 

Granted

 

30

 

24.46

 

89

 

24.46

 

76

 

24.46

 

Vested

 

 

N/A

 

(455

)

9.33

 

(191

)

17.97

 

Forfeited

 

(46

)

16.40

 

(41

)

17.61

 

(1

)

17.00

 

Outstanding at March 31, 2015

 

1,274

 

$

15.00

 

1,065

 

$

9.87

 

548

 

$

19.30

 

 

9



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In February 2015, certain members of senior management were granted nonvested common shares under the Essent Group Ltd. 2013 Long-Term Incentive Plan that were subject to time-based and performance-based vesting.  The time-based share awards granted in February 2015 vest in three equal installments on March 1, 2016, 2017 and 2018.  The performance-based share awards granted in February 2015 vest based upon our compounded annual book value per share growth percentage during a three-year performance period that commenced on January 1, 2015 and vest on March 1, 2018.  The portion of the nonvested common shares that will be earned based upon the achievement of compounded annual book value per share growth is as follows:

 

Performance level

 

Compounded Annual Book Value
Per Share Growth

 

Nonvested Common
Shares Earned

 

 

 

< 11

%

0

%

Threshold

 

11

%

10

%

 

 

12

%

36

%

 

 

13

%

61

%

 

 

14

%

87

%

Maximum

 

> 15

%

100

%

 

In the event that the compounded annual book value per share growth falls between the performance levels shown above, the nonvested common shares earned will be determined on a straight-line basis between the respective levels shown.

 

In connection with our incentive program covering bonus awards for performance year 2014, in February 2015, time-based share awards and share units were issued to certain employees that vest in three equal installments on March 1, 2016, 2017 and 2018.

 

The total fair value of nonvested shares that vested was $16.4 million and $17.5 million, for the three months ended March 31, 2015 and 2014, respectively.  As of March 31, 2015, there was $29.0 million of total unrecognized compensation expense related to nonvested shares outstanding at March 31, 2015 and we expect to recognize the expense over a weighted average period of 2.5 years.

 

In May 2015, 35,896 time-based share units were granted to non-employee directors that vest one year from the date of grant and 40,406 nonvested common shares were granted to an employee in connection with an employment agreement that are subject to time-based and performance-based vesting.

 

Employees have the option to tender shares to Essent Group to pay the minimum employee statutory withholding taxes associated with shares upon vesting. Common shares tendered by employees to pay employee withholding taxes totaled 195,884 in the three months ended March 31, 2015. The tendered shares were recorded at cost, included in treasury stock and have been cancelled as of March 31, 2015.

 

Compensation expense, net of forfeitures, and related tax effects recognized in connection with nonvested shares were as follows for the three months ended March 31:

 

(In thousands)

 

2015

 

2014

 

Compensation expense

 

$

3,261

 

$

2,783

 

Income tax benefit

 

1,141

 

974

 

 

10



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 7. Earnings per Share (EPS)

 

The following table reconciles the net income and the weighted average common shares outstanding used in the computations of basic and diluted earnings per common share for the three months ended March 31:

 

(In thousands, except per share amounts)

 

2015

 

2014

 

Net income

 

$

34,838

 

$

15,006

 

Less: dividends declared

 

 

 

Net income available to common shareholders

 

$

34,838

 

$

15,006

 

Basic earnings per share:

 

$

0.39

 

$

0.18

 

Diluted earnings per share:

 

$

0.38

 

$

0.18

 

Basic weighted average shares outstanding:

 

90,185

 

82,864

 

Dilutive effect of nonvested shares:

 

1,329

 

1,832

 

Diluted weighted average shares outstanding:

 

91,514

 

84,696

 

 

There were 252,180 and 64,469 antidilutive shares for the three months ended March 31, 2015 and 2014, respectively.

 

The nonvested performance-based share awards are considered contingently issuable for purposes of the EPS calculation.  Based on the compounded annual book value per share growth as of March 31, 2015, 100% of the performance-based share awards would be issuable under the terms of the arrangements if March 31, 2015 was the end of the contingency period.  Based on the compounded annual book value per share growth as of March 31, 2014, 0% of the performance-based share awards would be issuable under the terms of the arrangements if March 31, 2014 was the end of the contingency period.

 

Note 8. Accumulated Other Comprehensive Income

 

The following table presents the rollforward of accumulated other comprehensive income for the three months ended March 31, 2015 and 2014:

 

 

 

Three months ended March 31, 2015

 

(In thousands)

 

Before Tax

 

Tax Effect

 

Net of Tax

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

6,712

 

$

(2,045

)

$

4,667

 

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

7,648

 

(2,337

)

5,311

 

Less: Reclassification adjustment for gains included in net income (1)

 

(649

)

227

 

(422

)

Net unrealized gains on investments

 

6,999

 

(2,110

)

4,889

 

Other comprehensive income

 

6,999

 

(2,110

)

4,889

 

Balance at end of period

 

$

13,711

 

$

(4,155

)

$

9,556

 

 

 

 

Three months ended March 31, 2014

 

(In thousands)

 

Before Tax

 

Tax Effect

 

Net of Tax

 

Balance at beginning of period

 

$

(2,227

)

$

780

 

$

(1,447

)

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

1,249

 

(509

)

740

 

Less: Reclassification adjustment for gains included in net income (1)

 

(400

)

139

 

(261

)

Net unrealized gains on investments

 

849

 

(370

)

479

 

Other comprehensive income

 

849

 

(370

)

479

 

Balance at end of period

 

$

(1,378

)

$

410

 

$

(968

)

 


(1) Included in net realized investment gains on our condensed consolidated statements of comprehensive income.

 

11



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 9. Fair Value of Financial Instruments

 

The estimated fair values and related carrying amounts of our financial instruments were as follows:

 

March 31, 2015 (In thousands)

 

Carrying
Amount

 

Fair Value

 

Financial Assets:

 

 

 

 

 

U.S. Treasury securities

 

$

126,093

 

$

126,093

 

U.S. agency securities

 

3,208

 

3,208

 

U.S. agency mortgage-backed securities

 

85,958

 

85,958

 

Municipal debt securities

 

246,271

 

246,271

 

Corporate debt securities

 

345,081

 

345,081

 

Mortgage-backed securities

 

64,159

 

64,159

 

Asset-backed securities

 

137,539

 

137,539

 

Money market funds

 

111,922

 

111,922

 

Total investments

 

$

1,120,231

 

$

1,120,231

 

Financial Liabilities:

 

 

 

 

 

Derivative liabilities

 

$

1,959

 

$

1,959

 

 

December 31, 2014 (In thousands)

 

Carrying
Amount

 

Fair Value

 

Financial Assets:

 

 

 

 

 

U.S. Treasury securities

 

$

74,216

 

$

74,216

 

U.S. agency securities

 

4,520

 

4,520

 

U.S. agency mortgage-backed securities

 

83,540

 

83,540

 

Municipal debt securities

 

195,546

 

195,546

 

Corporate debt securities

 

296,829

 

296,829

 

Mortgage-backed securities

 

66,086

 

66,086

 

Asset-backed securities

 

126,188

 

126,188

 

Money market funds

 

210,688

 

210,688

 

Total investments

 

$

1,057,613

 

$

1,057,613

 

Financial Liabilities:

 

 

 

 

 

Derivative liabilities

 

$

661

 

$

661

 

 

Fair Value Hierarchy

 

ASC No. 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The level within the fair value hierarchy to measure the financial instrument shall be determined based on the lowest level input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

 

·                  Level 1 — Quoted prices for identical instruments in active markets accessible at the measurement date.

 

·                  Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and valuations in which all significant inputs are observable in active markets. Inputs are observable for substantially the full term of the financial instrument.

 

·                  Level 3 — Valuations derived from one or more significant inputs that are unobservable.

 

Determination of Fair Value

 

When available, we generally use quoted market prices to determine fair value and classify the financial instrument in Level 1. In cases where quoted market prices for similar financial instruments are available, we utilize these inputs for valuation techniques and classify the financial instrument in Level 2. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flows, present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows and we classify the financial instrument in Level 3. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

12



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

We used the following methods and assumptions in estimating fair values of financial instruments:

 

·                  Investments available for sale — Investments available for sale are valued using quoted market prices in active markets, when available, and those investments are classified as Level 1 of the fair value hierarchy. Level 1 investments available for sale include investments such as U.S. Treasury securities, U.S. agency securities, U.S. agency mortgage-backed securities, certain mortgage-backed securities and money market funds. Investments available for sale are classified as Level 2 of the fair value hierarchy if quoted market prices are not available and fair values are estimated using quoted prices of similar securities or recently executed transactions for the securities. Municipal debt securities, corporate debt securities, certain mortgage-backed securities and asset-backed securities are classified as Level 2 investments.

 

We use independent pricing sources to determine the fair value of securities available for sale in Level 1 and Level 2 of the fair value hierarchy. We use one primary pricing service to provide individual security pricing based on observable market data and receive one quote per security. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing service and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. We review the reasonableness of prices received from our primary pricing service by comparison to prices obtained from additional pricing sources. We have not made any adjustments to the prices obtained from our primary pricing service.

 

·                  Derivative liabilities — We define fair value as the current amount that would be exchanged to sell an asset or transfer a liability, other than in a forced liquidation. In determining an exit market, we consider the fact that there is not a principal market for these contracts. In the absence of a principal market, we value our ACIS contracts in a hypothetical market where market participants, and potential counterparties, include other mortgage guaranty insurers or reinsurers with similar credit quality to us. We believe that in the absence of a principal market, this hypothetical market provides the most relevant information with respect to fair value estimates.

 

We determine the fair value of our derivative instruments primarily using internally-generated models. We utilize market observable inputs, such as the performance of the underlying pool of mortgages, mortgage prepayment speeds and pricing spreads on the reference STACR notes, whenever they are available. There is a high degree of uncertainty about our fair value estimates since our contracts are not traded or exchanged, which makes external validation and corroboration of our estimates difficult. Considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates may not be indicative of amounts we could realize in a current market exchange or negotiated termination. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

 

13



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Assets and Liabilities Measured at Fair Value

 

All assets measured at fair value are categorized in the table below based upon the lowest level of significant input to the valuations. All fair value measurements at the reporting date were on a recurring basis.

 

March 31, 2015 (In thousands)

 

Quoted Prices in
Active Markets
for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

126,093

 

$

 

$

 

$

126,093

 

U.S. agency securities

 

3,208

 

 

 

3,208

 

U.S. agency mortgage-backed securities

 

85,958

 

 

 

85,958

 

Municipal debt securities

 

 

246,271

 

 

246,271

 

Corporate debt securities

 

 

345,081

 

 

345,081

 

Mortgage-backed securities

 

4,800

 

59,359

 

 

64,159

 

Asset-backed securities

 

 

137,539

 

 

137,539

 

Money market funds

 

111,922

 

 

 

111,922

 

Total assets at fair value

 

$

331,981

 

$

788,250

 

$

 

$

1,120,231

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

 

$

1,959

 

$

1,959

 

Total liabilities at fair value

 

$

 

$

 

$

1,959

 

$

1,959

 

 

December 31, 2014 (In thousands)

 

Quoted Prices in
Active Markets
for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

74,216

 

$

 

$

 

$

74,216

 

U.S. agency securities

 

4,520

 

 

 

4,520

 

U.S. agency mortgage-backed securities

 

83,540

 

 

 

83,540

 

Municipal debt securities

 

 

195,546

 

 

195,546

 

Corporate debt securities

 

 

296,829

 

 

296,829

 

Mortgage-backed securities

 

4,882

 

61,204

 

 

66,086

 

Asset-backed securities

 

 

126,188

 

 

126,188

 

Money market funds

 

210,688

 

 

 

210,688

 

Total assets at fair value

 

$

377,846

 

$

679,767

 

$

 

$

1,057,613

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

 

$

661

 

$

661

 

Total liabilities at fair value

 

$

 

$

 

$

661

 

$

661

 

 

14



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Changes in Level 3 Recurring Fair Value Measurements

 

The following table presents changes during the three months ended March 31, 2015 in Level 3 liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 liabilities in the condensed consolidated balance sheets at March 31, 2015. For the three months ended March 31, 2014, we had no Level 3 liabilities.  During the three months ended March 31, 2015, and in the year ended December 31, 2014, we had no Level 3 assets.

 

(In thousands)

 

Fair
Value
Beginning
of Year

 

Net Realized and
Unrealized Gains
(Losses) Included
in Income

 

Other Comprehensive
Income (Loss)

 

Purchases, Sales,
Issues and
Settlements, Net

 

Gross
Transfers In

 

Gross
Transfers Out

 

Fair Value End
of Period

 

Changes in Unrealized
Gains (Losses) Included in
Income on Instruments
Held at End of Period

 

Derivative Liabilities

 

$

661

 

$

(749

)

$

 

$

549

 

$

 

$

 

$

1,959

 

$

(749

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Level 3 Liabilities

 

$

661

 

$

(749

)

$

 

$

549

 

$

 

$

 

$

1,959

 

$

(749

)

 

The following table summarizes the significant unobservable inputs used in our recurring Level 3 fair value measurements as of March 31, 2015:

 

 

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Weighted
Average

 

Derivative Liabilities

 

$

1,959

 

Discounted cash flows

 

Constant prepayment rate

 

13.91

%

 

 

 

 

 

 

Default rate

 

1.49

%

 

 

 

 

 

 

Reference STACR credit spread

 

3.29

%

 

The significant unobservable inputs used for derivative liabilities are constant prepayment rates (“CPR”) and default rates on the reference pool of mortgages and the credit spreads on the reference STACR notes.  An increase in the CPR, default rate or reference STACR credit spread will increase the fair value of the liability.

 

15



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 10. Statutory Accounting

 

Our U.S. insurance subsidiaries prepare statutory-basis financial statements in accordance with the accounting practices prescribed or permitted by their respective state’s department of insurance, which is a comprehensive basis of accounting other than GAAP. We did not use any prescribed or permitted statutory accounting practices (individually or in the aggregate) that resulted in reported statutory surplus or capital that was significantly different from the statutory surplus or capital that would have been reported had National Association of Insurance Commissioners’ statutory accounting practices been followed. The following table presents Essent Guaranty’s and Essent PA’s statutory net income, statutory surplus and contingency reserve liability as of and for the three months ended March 31:

 

(In thousands)

 

2015

 

2014

 

Essent Guaranty

 

 

 

 

 

Statutory net income

 

$

40,174

 

$

20,847

 

Statutory surplus

 

471,240

 

377,190

 

Contingency reserve liability

 

211,296

 

100,277

 

 

 

 

 

 

 

Essent PA

 

 

 

 

 

Statutory net income

 

$

4,148

 

$

2,656

 

Statutory surplus

 

43,928

 

40,032

 

Contingency reserve liability

 

19,744

 

8,877

 

 

Net income determined in accordance with statutory accounting practices differs from GAAP.  In 2015 and 2014, the more significant differences between net income determined under statutory accounting practices and GAAP for Essent Guaranty and Essent PA relate to policy acquisition costs and income taxes.  Under statutory accounting practices, policy acquisition costs are expensed as incurred while such costs are capitalized and amortized to expense over the life of the policy under GAAP.  We are eligible for a tax deduction, subject to certain limitations for amounts required by state law or regulation to be set aside in statutory contingency reserves when we purchase non-interest-bearing United States Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the Treasury Department.  Under statutory accounting practices, this deduction reduces the tax provision recorded by Essent Guaranty and Essent PA and, as a result, increases statutory net income and surplus as compared to net income and equity determined in accordance with GAAP.

 

At March 31, 2015 and 2014, the statutory capital of our insurance subsidiaries, which is defined as the total of statutory surplus and contingency reserves, was in excess of the statutory capital necessary to satisfy their regulatory requirements.

 

On April 17, 2015, the Federal Housing Finance Agency (“FHFA”) publicly released the final Private Mortgage Insurer Eligibility Requirements (“PMIERs”) which will become effective on December 31, 2015.  The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include new financial strength requirements incorporating a risk-based framework that will require approved insurers to have a sufficient level of liquid assets from which to pay claims.  The PMIERs also include enhanced operational performance expectations and define remedial actions that will apply should an approved insurer fail to comply with the new requirements. As of March 31, 2015, Essent had sufficient assets in its insurance companies to meet the total risk-based required asset amount of the final PMIERs as published.

 

Statement of Statutory Accounting Principles No. 58, Mortgage Guaranty Insurance, requires mortgage insurers to establish a special contingency reserve for statutory accounting purposes included in total liabilities equal to 50% of earned premium for that year. During the three months ended March 31, 2015, Essent Guaranty increased its contingency reserve by $32.1 million and Essent PA increased its contingency reserve by $2.8 million.  This reserve is required to be maintained for a period of 120 months to protect against the effects of adverse economic cycles. After 120 months, the reserve is released to unassigned funds. In the event an insurer’s loss ratio in any calendar year exceeds 35%, however, the insurer may, after regulatory approval, release from its contingency reserves an amount equal to the excess portion of such losses. Essent Guaranty and Essent PA did not release any amounts from their contingency reserves in the three months ended March 31, 2015 or 2014.

 

16



Table of Contents

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read together with the “Selected Financial Data” and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K as of and for the year ended December 31, 2014 as filed with the Securities and Exchange Commission and referred to herein as the “Annual Report,” and our condensed consolidated financial statements and related notes as of and for the three months ended March 31, 2015 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we refer to as the “Quarterly Report”. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report and Part I, Item 1A “Risk Factors” in our Annual Report.  We are not undertaking any obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.

 

Except as otherwise indicated, “Market Share” means our market share as measured by our share of total new insurance written (“NIW”) on a flow basis (in which loans are insured in individual, loan-by-loan transactions) in the private mortgage insurance industry, and excludes both NIW under the Home Affordable Refinance Program (“HARP” and such NIW, the “HARP NIW”) and bulk insurance (in which each loan in a portfolio of loans is insured in a single transaction).

 

Overview

 

We are an established and growing private mortgage insurance company. We were formed to serve the U.S. housing finance industry at a time when the demands of the financial crisis and a rapidly changing business environment created the need for a new, privately funded mortgage insurance company. Our Market Share for the three months ended March 31, 2015 was an estimated 12.1%, compared to 13.7% and 12.1% for the years ended December 31, 2014 and 2013, respectively. We believe that our success in acquiring customers and growing our insurance in force has been driven by the unique opportunity we offer lenders to partner with a well-capitalized mortgage insurer, unencumbered by business originated prior to the financial crisis, that provides fair and transparent claims payment practices, and consistency and speed of service.

 

In 2010, Essent became the first private mortgage insurer to be approved by the GSEs since 1995, and we are licensed to write coverage in all 50 states and the District of Columbia. We completed our initial public offering in November 2013.  The financial strength of Essent Guaranty, our wholly-owned insurance subsidiary, is rated BBB+ with a stable outlook by Standard & Poor’s Rating Services (“S&P”).  On April 27, 2015, Moody’s Investor Services (“Moody’s”) affirmed its rating of Essent Guaranty at Baa2, and changed its outlook to positive from stable.

 

We had master policy relationships with approximately 1,185 customers as of March 31, 2015 and had 1,025 customers that generated NIW during the twelve months ended March 31, 2015.  Our holding company is domiciled in Bermuda and our U.S. insurance business is headquartered in Radnor, Pennsylvania. We operate additional underwriting and service centers in Winston-Salem, North Carolina and Irvine, California. We have a highly experienced, talented team with 339 employees as of March 31, 2015. For the three months ended March 31, 2015 and 2014, we generated new insurance written of approximately $5.3 billion and $3.6 billion, respectively, and as of March 31, 2015, we had approximately $53.3 billion of insurance in force.

 

We also offer mortgage-related insurance and reinsurance through our wholly-owned Bermuda-based subsidiary, Essent Re. As of March 31, 2015, Essent Re provides insurance or reinsurance in connection with Freddie Mac’s Agency Credit Insurance Structure (ACIS) program covering in the aggregate up to approximately $63.5 million of risk on mortgage loans in reference pools associated with debt notes issued by Freddie Mac. Essent Re also reinsures 25% of Essent Guaranty’s GSE-eligible mortgage insurance NIW originated since July 1, 2014 under a quota share reinsurance agreement.

 

Legislative and Regulatory Developments

 

Our results are significantly impacted by, and our future success may be affected by, legislative and regulatory developments affecting the housing finance industry. See Part I, Item 1 “Business—Regulation” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legislative and Regulatory Developments” in our Annual Report for a discussion of the laws and regulations to which we are subject as well as legislative and regulatory developments affecting the housing finance industry.

 

On April 17, 2015, the FHFA publicly released the final PMIERs, which will become effective on December 31, 2015.  The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac.  The PMIERs include new financial strength requirements incorporating a risk-based

 

17



Table of Contents

 

framework that will require approved insurers to have a sufficient level of liquid assets from which to pay claims.  The PMIERs also include enhanced operational performance expectations and define remedial actions that will apply should an approved insurer fail to comply with the new requirements.  As of March 31, 2015, Essent had sufficient assets in its insurance companies to meet the total risk-based required asset amount of the final PMIERs as published. See additional discussion in “— Liquidity and Capital Resources —Private Mortgage Insurer Eligibility Requirements.”

 

Factors Affecting Our Results of Operations

 

Net Premiums Written and Earned

 

Premiums are based on insurance in force, or IIF, during all or a portion of a period. A change in the average IIF during a period causes premiums to increase or decrease as compared to prior periods. Average premiums rates in effect during a given period will also cause premiums to differ when compared to earlier periods. IIF at the end of a reporting period is a function of the IIF at the beginning of such reporting period plus new insurance written, or NIW, less policy cancellations (including claims paid) during the period. As a result, premiums are generally influenced by:

 

·                  NIW, which is the aggregate principal amount of the new mortgages that are insured during a period. Many factors affect NIW, including, among others, the volume of low down payment home mortgage originations and the competition to provide credit enhancement on those mortgages;

 

·                  Cancellations of our insurance policies, which are impacted by payments on mortgages, home price appreciation, or refinancings, which in turn are affected by mortgage interest rates. Cancellations are also impacted by the levels of rescissions and claim payments;

 

·                  Premium rates, which represent the amount of the premium due as a percentage of IIF. Premium rates are based on the risk characteristics of the loans insured, the percentage of coverage on the loans, competition from other mortgage insurers and general industry conditions; and

 

·                  Premiums ceded or assumed under reinsurance arrangements. To date, we have not entered into any third-party reinsurance contracts.

 

Premiums are paid either on a monthly installment basis (“monthly premiums”), in a single payment at origination (“single premiums”), or in some cases as an annual premium. For monthly premiums, we receive a monthly premium payment which is recorded as net premiums earned in the month the coverage is provided. Net premiums written may be in excess of net premiums earned due to single premium policies. For single premiums, we receive a single premium payment at origination, which is recorded as “unearned premium” and earned over the estimated life of the policy, which ranges from 36 to 156 months depending on the term of the underlying mortgage and loan-to-value ratio at date of origination. If single premium policies are cancelled due to repayment of the underlying loan and the premium is non-refundable, the remaining unearned premium balance is immediately recognized as earned premium revenue. Substantially all of our single premium policies in force as of March 31, 2015 were non-refundable. Premiums collected on annual policies are recognized as net premiums earned on a straight-line basis over the year of coverage. For the three months ended March 31, 2015, monthly and single premium policies comprised 76.3% and 23.7% of our NIW, respectively.

 

Persistency and Business Mix

 

The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, changes in persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 82.8% at March 31, 2015. Generally, higher prepayment speeds lead to lower persistency.

 

Prepayment speeds and the relative mix of business between single premium policies and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages. Because premiums are paid at origination on single premium policies, assuming all other factors remain constant, if loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, our premium earned with respect to those loans and therefore our profitability declines. Currently, the expected return on single premium policies is less than the expected return on monthly policies.

 

Net Investment Income

 

Our investment portfolio was comprised entirely of investment-grade fixed income securities and money market funds as of March 31, 2015. The principal factors that influence investment income are the size of the investment portfolio and the yield on individual securities. As measured by amortized cost (which excludes changes in fair market value, such as from changes in interest

 

18



Table of Contents

 

rates), the size of our investment portfolio is mainly a function of increases in capital and cash generated from or used in operations which is impacted by net premiums received, investment earnings, net claim payments and expenses. Realized gains and losses are a function of the difference between the amount received on the sale of a security and the security’s amortized cost, as well as any “other-than-temporary” impairments recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.

 

Other Income

 

In connection with the acquisition of our mortgage insurance platform, we entered into a services agreement with Triad Guaranty Inc. and its wholly-owned subsidiary, Triad Guaranty Insurance Corporation, which we refer to collectively as “Triad,” to provide certain information technology maintenance and development and customer support-related services. In return for these services, we receive a fee which is recorded in other income. From the period from December 1, 2009 to November 30, 2010, this fee was based on a fixed amount. Effective December 1, 2010, the fee is adjusted monthly based on the number of Triad’s mortgage insurance policies in force and, accordingly, will decrease over time as Triad’s existing policies are cancelled. The services agreement provides for a minimum monthly fee of $150,000 for the duration of the services agreement. The services agreement was automatically extended until November 30, 2015 and provides for four subsequent one-year renewals at Triad’s option.

 

Other income also includes revenues associated with contract underwriting services and changes in the fair value of derivative instruments. The level of contract underwriting revenue is dependent upon the number of customers who have engaged us for this service and the number of loans underwritten for these customers. The insurance and reinsurance policies issued by Essent Re in connection with the ACIS program are accounted for as derivatives under GAAP with the fair value of these policies reported as an asset or liability and changes in the fair value of these policies reported in earnings. Changes in the fair value of these policies are impacted by changes in market observable factors.

 

Provision for Losses and Loss Adjustment Expenses

 

The provision for losses and loss adjustment expenses reflect the current expense that is recorded within a particular period to reflect actual and estimated loss payments that we believe will ultimately be made as a result of insured loans that are in default.

 

Losses incurred are generally affected by:

 

·                  the overall state of the economy, which broadly affects the likelihood that borrowers may default on their loans and have the ability to cure such defaults;

 

·                  changes in housing values, which affect our ability to mitigate our losses through the sale of properties with loans in default as well as borrower willingness to continue to make mortgage payments when the value of the home is below or perceived to be below the mortgage balance;

 

·                  the product mix of IIF, with loans having higher risk characteristics generally resulting in higher defaults and claims;

 

·                  the size of loans insured, with higher average loan amounts tending to increase losses incurred;

 

·                  the loan-to-value ratio, with higher average loan-to-value ratios tending to increase losses incurred;

 

·                  the percentage of coverage on insured loans, with deeper average coverage tending to increase losses incurred;

 

·                  credit quality of borrowers, including higher debt-to-income ratios and lower FICO scores, which tend to increase incurred losses;

 

·                  the rate at which we rescind policies. Because of tighter underwriting standards generally in the mortgage lending industry and terms set forth in our Clarity of Coverage® master policy endorsement, we expect that our level of rescission activity will be lower than rescission activity seen in the mortgage insurance industry for vintages originated prior to the financial crisis; and

 

·                  the distribution of claims over the life of a book. The average age of our insurance portfolio is young with 84% of our IIF as of March 31, 2015 having been originated since January 1, 2013. As a result, based on historical industry performance, we expect the number of defaults and claims we experience, as well as our provision for losses and loss

 

19



Table of Contents

 

adjustment expenses, to increase as our portfolio further seasons. See “— Mortgage Insurance Earnings and Cash Flow Cycle” below.

 

We establish loss reserves for delinquent loans when we are notified that a borrower has missed at least two consecutive monthly payments (“Case Reserves”), as well as estimated reserves for defaults that may have occurred but not yet been reported to us (“IBNR Reserves”). We also establish reserves for the associated loss adjustment expenses (“LAE”), consisting of the estimated cost of the claims administration process, including legal and other fees. Using both internal and external information, we establish our reserves based on the likelihood that a default will reach claim status and estimated claim severity. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” included in our Annual Report for further information.

 

We believe, based upon our experience and industry data, that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. As of March 31, 2015, 84% of our IIF relates to business written since January 1, 2013 and substantially all of our policies in force are less than three years old. Although the claims experience on new insurance written by us to date has been favorable, we expect incurred losses and claims to increase as a greater amount of this book of insurance reaches its anticipated period of highest claim frequency. The actual default rate and the average reserve per default that we experience as our portfolio matures is difficult to predict and is dependent on the specific characteristics of our current in-force book (including the credit score of the borrower, the loan-to-value ratio of the mortgage, geographic concentrations, etc.), as well as the profile of new business we write in the future. In addition, the default rate and the average reserve per default will be affected by future macroeconomic factors such as housing prices, interest rates and employment.

 

Other Underwriting and Operating Expenses

 

Our other underwriting and operating expenses include components that are substantially fixed, as well as expenses that generally increase or decrease in line with the level of NIW.

 

Our most significant expense is compensation and benefits for our employees, which represented 66% and 67% of other underwriting and operating expenses for the three months ended March 31, 2015 and 2014, respectively.  Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes.  Compensation and benefits expense has increased as we have increased our staffing from 289 employees at January 1, 2014 to 339 at March 31, 2015, primarily in our business development and operations functions to support the growth of our business.  The growth in our sales organization contributed to the growth of our active customers and NIW.  We also expanded our underwriting and customer service teams to support this new business.

 

Underwriting and other expenses include legal, consulting, other professional fees, premium taxes, travel, entertainment, marketing, licensing, supplies, hardware, software, rent, utilities, depreciation and amortization and other expenses.

 

We anticipate that as we continue to add customers and increase our IIF, our expenses will also continue to increase. In addition, as a result of the increase in our IIF, we expect that our net premiums earned will grow faster than our underwriting and other expenses resulting in a decline in our expense ratio.

 

Income Taxes

 

Income taxes are incurred based on the amount of earnings or losses generated in the jurisdictions in which we operate and the applicable tax rates and regulations in those jurisdictions. Through December 31, 2014, substantially all of our business activity had been conducted in the United States where we are subject to corporate level Federal income taxes. Our U.S. insurance subsidiaries are generally not subject to income taxes in the states in which we operate; however, our non-insurance subsidiaries are subject to state income taxes. In lieu of state income taxes, our insurance subsidiaries pay premium taxes that are recorded in other underwriting and operating expenses. In 2014, Essent Re entered into insurance and reinsurance transactions with Freddie Mac and entered into a quota share reinsurance agreement with Essent Guaranty, an affiliate, to reinsure 25% of Essent Guaranty’s GSE-eligible NIW effective July 1, 2014. During 2014, since substantially all of our earnings were generated in the United States, our effective tax rate approximated the federal statutory tax rate. In 2015 and future periods, the amount of income tax expense or benefit will be dependent on the jurisdictions in which we operate and the tax laws and regulations in effect, as well as the amount of earnings or losses generated in those jurisdictions.

 

20



Table of Contents

 

Mortgage Insurance Earnings and Cash Flow Cycle

 

In general, the majority of any underwriting profit (premium revenue minus losses) that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year. Subsequent years of a book generally result in modest underwriting profit or underwriting losses. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses.

 

Key Performance Indicators

 

Insurance In Force

 

As discussed above, premiums we collect and earn are generated based on our IIF, which is a function of our NIW and cancellations. The following table includes a summary of the change in our IIF for the three months ended March 31, 2015 and 2014.  In addition, this table includes our risk in force, or RIF, at the end of each period.

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

2014

 

IIF, beginning of period

 

$

50,762,594

 

$

32,028,196

 

NIW

 

5,346,820

 

3,630,573

 

Cancellations

 

(2,855,782

)

(880,712

)

IIF, end of period

 

$

53,253,632

 

$

34,778,057

 

Average IIF during the period

 

$

51,975,527

 

$

33,349,576

 

RIF, end of period

 

$

12,891,462

 

$

8,493,862

 

 

Our cancellation activity has been relatively low to date because the average age of our insurance portfolio is young. The following is a summary of our IIF at March 31, 2015 by vintage:

 

($ in thousands)

 

$

 

%

 

2015 (through March 31)

 

$

5,318,322

 

10.0

%

2014

 

22,714,231

 

42.7

 

2013

 

16,775,870

 

31.5

 

2012

 

7,189,946

 

13.5

 

2011

 

1,183,725

 

2.2

 

2010

 

71,538

 

0.1

 

 

 

$

53,253,632

 

100.0

%

 

Average Premium Rate

 

Our average premium rate is dependent on a number of factors, including: (1) the risk characteristics and average coverage on the mortgages we insure; (2) the mix of monthly premiums compared to single premiums in our portfolio; (3) cancellations of non-refundable single premiums during the period; and (4) changes to our pricing.

 

The following table outlines our average premium rate, which reflects net premiums earned as a percentage of average IIF, for the periods presented:

 

 

 

Three Months Ended March 31,

 

($ in thousands)

 

2015

 

2014

 

Net premiums earned

 

$

75,038

 

$

44,750

 

Average IIF during the period

 

$

51,975,527

 

$

33,349,576

 

Average premium rate (annualized)