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EX-32.1 - EXHIBIT 32.1 - Essent Group Ltd.a33117ex321.htm
EX-31.2 - EXHIBIT 31.2 - Essent Group Ltd.a33117ex312.htm
EX-31.1 - EXHIBIT 31.1 - Essent Group Ltd.a33117ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the period ended March 31, 2017
 
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 ý  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 ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
x
 
Accelerated filer
o
Non-accelerated filer o
o
 
Smaller reporting company
o
(Do not check if a smaller reporting company)
 
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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 ý
The number of the registrant’s common shares outstanding as of May 1, 2017 was 93,379,636.



Essent Group Ltd. and Subsidiaries
 
Form 10-Q
 
Index
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


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 subsidiaries, Essent Guaranty, Inc. and Essent Reinsurance Ltd., 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 products and services, 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, in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, and in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 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 or the 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;

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

ii



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; 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


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)
 
2017
 
2016
Assets
 
 

 
 

Investments available for sale, at fair value
 
 

 
 

Fixed maturities (amortized cost: 2017 — $1,619,677; 2016 — $1,497,186)
 
$
1,612,153

 
$
1,482,754

Short-term investments (amortized cost: 2017 — $112,381; 2016 — $132,352)
 
112,380

 
132,348

Total investments
 
1,724,533

 
1,615,102

Cash
 
19,713

 
27,531

Accrued investment income
 
10,191

 
9,488

Accounts receivable
 
23,479

 
21,632

Deferred policy acquisition costs
 
13,493

 
13,400

Property and equipment (at cost, less accumulated depreciation of $47,544 in 2017 and $46,543 in 2016)
 
8,205

 
8,119

Prepaid federal income tax
 
180,657

 
181,272

Other assets
 
7,429

 
6,454

Total assets
 
$
1,987,700

 
$
1,882,998

 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Reserve for losses and LAE
 
$
29,468

 
$
28,142

Unearned premium reserve
 
221,262

 
219,616

Net deferred tax liability
 
162,651

 
142,587

Revolving credit facility borrowings
 
125,000

 
100,000

Securities purchases payable
 
17,315

 
14,999

Other accrued liabilities
 
19,252

 
33,881

Total liabilities
 
574,948

 
539,225

Commitments and contingencies (see Note 6)
 


 


Stockholders’ Equity
 
 

 
 

Common shares, $0.015 par value:
 
 

 
 

Authorized - 233,333; issued and outstanding - 93,377 shares in 2017 and 93,105 shares in 2016
 
1,401

 
1,397

Additional paid-in capital
 
915,895

 
918,296

Accumulated other comprehensive loss
 
(7,405
)
 
(12,255
)
Retained earnings
 
502,861

 
436,335

Total stockholders’ equity
 
1,412,752

 
1,343,773

Total liabilities and stockholders’ equity
 
$
1,987,700

 
$
1,882,998

 
See accompanying notes to condensed consolidated financial statements.


1


Essent Group Ltd. and Subsidiaries
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
Three Months Ended March 31,
(In thousands, except per share amounts)
 
2017
 
2016
Revenues:
 
 
 
 
Net premiums written
 
$
119,297

 
$
100,466

Increase in unearned premiums
 
(1,646
)
 
(6,063
)
Net premiums earned
 
117,651

 
94,403

Net investment income
 
8,435

 
6,183

Realized investment gains, net
 
655

 
471

Other income
 
851

 
1,409

Total revenues
 
127,592

 
102,466

 
 
 
 
 
Losses and expenses:
 
 

 
 

Provision for losses and LAE
 
3,693

 
3,731

Other underwriting and operating expenses
 
36,332

 
31,388

Interest expense
 
716

 

Total losses and expenses
 
40,741

 
35,119

 
 
 
 
 
Income before income taxes
 
86,851

 
67,347

Income tax expense
 
20,253

 
19,396

Net income
 
$
66,598

 
$
47,951

 
 
 
 
 
Earnings per share:
 
 

 
 

Basic
 
$
0.73

 
$
0.53

Diluted
 
0.72

 
0.52

 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

Basic
 
91,258

 
90,785

Diluted
 
93,023

 
91,859

 
 
 
 
 
Net income
 
$
66,598

 
$
47,951

 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

Change in unrealized appreciation of investments, net of tax expense of $2,061 in 2017 and $5,714 in 2016
 
4,850

 
13,359

Total other comprehensive income
 
4,850

 
13,359

Comprehensive income
 
$
71,448

 
$
61,310

 
See accompanying notes to condensed consolidated financial statements.


2


Essent Group Ltd. and Subsidiaries
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
 
(In thousands)
 
Common
Shares
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock
 
Total
Stockholders’
Equity
Balance at January 1, 2016
 
$
1,390

 
$
904,221

 
$
(99
)
 
$
213,729

 
$

 
$
1,119,241

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 

 
 

 
 

 
222,606

 
 

 
222,606

Other comprehensive loss
 
 

 
 

 
(12,156
)
 
 

 
 

 
(12,156
)
Issuance of management incentive shares
 
10

 
(10
)
 
 

 
 

 
 

 

Forfeiture of management incentive shares
 

 

 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
16,881

 
 

 
 

 
 

 
16,881

Excess tax benefits from stock-based compensation expense
 
 

 
1,083

 
 

 
 

 
 

 
1,083

Treasury stock acquired
 
 

 
 

 
 

 
 

 
(4,024
)
 
(4,024
)
Cancellation of treasury stock
 
(3
)
 
(4,021
)
 
 

 
 

 
4,024

 

Other equity transactions
 
 
 
142

 
 
 
 
 
 
 
142

Balance at December 31, 2016
 
$
1,397

 
$
918,296

 
$
(12,255
)
 
$
436,335

 
$

 
$
1,343,773

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 

 
 

 
 

 
66,598

 
 

 
66,598

Other comprehensive income
 
 

 
 

 
4,850

 
 

 
 

 
4,850

Issuance of management incentive shares
 
7

 
(7
)
 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
4,619

 
 

 
 

 
 

 
4,619

Cumulative effect of ASU 2016-09 adoption
 
 
 
111

 
 
 
(72
)
 
 
 
39

Treasury stock acquired
 
 

 
 

 
 

 
 

 
(7,127
)
 
(7,127
)
Cancellation of treasury stock
 
(3
)
 
(7,124
)
 
 

 
 

 
7,127

 

Balance at March 31, 2017
 
$
1,401

 
$
915,895

 
$
(7,405
)
 
$
502,861

 
$

 
$
1,412,752

 
See accompanying notes to condensed consolidated financial statements.


3


Essent Group Ltd. and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
Three Months Ended March 31,
(In thousands)
 
2017
 
2016
Operating Activities
 
 

 
 

Net income
 
$
66,598

 
$
47,951

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

 
 

Gain on the sale of investments, net
 
(655
)
 
(471
)
Depreciation and amortization
 
1,001

 
1,000

Stock-based compensation expense
 
4,619

 
3,782

Amortization of premium on investment securities
 
2,983

 
2,680

Deferred income tax provision
 
18,042

 
15,245

Change in:
 
 

 
 

Accrued investment income
 
(703
)
 
(663
)
Accounts receivable
 
(1,887
)
 
(563
)
Deferred policy acquisition costs
 
(93
)
 
(157
)
Prepaid federal income tax
 
615

 
(110
)
Other assets
 
(975
)
 
539

Reserve for losses and LAE
 
1,326

 
2,710

Unearned premium reserve
 
1,646

 
6,063

Other accrued liabilities
 
(14,629
)
 
(9,509
)
Net cash provided by operating activities
 
77,888

 
68,497

 
 
 
 
 
Investing Activities
 
 

 
 

Net change in short-term investments
 
19,968

 
2,508

Purchase of investments available for sale
 
(200,795
)
 
(146,316
)
Proceeds from maturity of investments available for sale
 
18,206

 
1,798

Proceeds from sales of investments available for sale
 
60,129

 
82,167

Purchase of property and equipment
 
(1,087
)
 
(1,211
)
Net cash used in investing activities
 
(103,579
)
 
(61,054
)
 
 
 
 
 
Financing Activities
 
 

 
 

Revolving credit facility borrowings
 
25,000

 

Treasury stock acquired
 
(7,127
)
 
(3,843
)
Net cash provided by (used in) financing activities
 
17,873

 
(3,843
)
 
 
 
 
 
Net (decrease) increase in cash
 
(7,818
)
 
3,600

Cash at beginning of year
 
27,531

 
24,606

Cash at end of period
 
$
19,713

 
$
28,206

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income tax payments
 
$
(1,200
)
 
$
(1,800
)
Interest payments
 
(701
)
 

 
See accompanying notes to condensed consolidated financial statements.

4


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 two government-sponsored enterprises (“GSEs”), Fannie Mae and Freddie Mac.

The primary mortgage insurance operations are conducted through Essent Guaranty, Inc. (“Essent Guaranty”), a wholly-owned subsidiary approved as a qualified mortgage insurer by the GSEs and is licensed to write mortgage insurance in all 50 states and the District of Columbia. Essent Guaranty reinsures 25% of GSE-eligible new insurance written to Essent Reinsurance Ltd. (“Essent Re”), an affiliated Bermuda domiciled Class 3A Insurer licensed pursuant to Section 4 of the Bermuda Insurance Act 1978 that provides insurance and reinsurance coverage of mortgage credit risk. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae. In 2016, Essent Re formed Essent Agency (Bermuda) Ltd., a wholly-owned subsidiary, which provides underwriting services to third-party reinsurers. In accordance with certain state law requirements, Essent Guaranty also reinsures that portion of the risk that is in excess of 25% of the mortgage balance with respect to any loan insured, after consideration of other reinsurance, to Essent Guaranty of PA, Inc. (“Essent PA”), an affiliate.
 
In addition to offering mortgage insurance, we provide contract underwriting services on a limited basis through CUW Solutions, LLC ("CUW Solutions"), a Delaware limited liability company, that provides, among other things, mortgage contract underwriting services to lenders and mortgage insurance underwriting services to affiliates.

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, 2016, 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, 2017 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. Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update is intended to provide a consistent approach in recognizing revenue. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB delayed the effective date for this update to interim and annual periods beginning after December 15, 2017. In December 2016, the FASB clarified that all contracts that are within the scope of Topic 944, Financial Services-Insurance, are excluded from the scope of ASU 2014-09. Accordingly, this update will not impact the recognition of revenue related to insurance premiums or investments, which represent a significant portion of our total revenues. The adoption of this ASU is not expected to have a material effect on the Company's consolidated operating results or financial position.




5

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance will also require additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of this update are effective for annual and interim periods beginning after December 15, 2018. The Company expects a gross-up of its consolidated balance sheets as a result of recognizing lease liabilities and right of use assets. The Company is still evaluating the impact the adoption of this ASU will have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement and treated as discrete items in the reporting period. In addition, excess tax benefits are required to be classified along with other income tax cash flows as an operating activity. Further, the new guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted this ASU on January 1, 2017 and recorded a charge of $0.1 million to retained earnings as of that date representing a cumulative-effect adjustment associated with our election to recognize forfeitures as they occur. The classification of excess tax benefits and tax deficiencies as income tax benefit or expense may result in net income volatility in reporting periods subsequent to 2016. Through December 31, 2016, excess tax benefits were recognized in additional paid-in-capital. In the three months ended March 31, 2017, the Company recorded excess tax benefits of $3.0 million as a reduction of income tax expense. The amount of excess tax benefits or tax deficiencies in future periods will vary based on the market value of the Company’s common stock at the vesting dates of nonvested common share and nonvested common share units.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This update is intended to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected through the use of an allowance for credit losses. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance rather than as a write-down of the amortized cost of the securities. The provisions of this update are effective for annual and interim periods beginning after December 15, 2019. While the Company is still evaluating this ASU, we do not expect it to impact our accounting for insurance losses and loss adjustment expenses ("LAE") as these items are not within the scope of this ASU.

Note 3. Investments Available for Sale
 
Investments available for sale consist of the following:
 
March 31, 2017 (In thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
182,445

 
$
141

 
$
(3,843
)
 
$
178,743

U.S. agency securities
 
26,607

 

 
(323
)
 
26,284

U.S. agency mortgage-backed securities
 
362,585

 
442

 
(7,788
)
 
355,239

Municipal debt securities(1)
 
358,581

 
4,967

 
(2,156
)
 
361,392

Corporate debt securities(2)
 
504,700

 
3,558

 
(2,970
)
 
505,288

Residential and commercial mortgage securities
 
64,768

 
941

 
(421
)
 
65,288

Asset-backed securities
 
134,984

 
345

 
(418
)
 
134,911

Money market funds
 
97,388

 

 

 
97,388

Total investments available for sale
 
$
1,732,058

 
$
10,394

 
$
(17,919
)
 
$
1,724,533



6

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


December 31, 2016 (In thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
195,990

 
$
55

 
$
(4,497
)
 
$
191,548

U.S. agency securities
 
18,785

 

 
(344
)
 
18,441

U.S. agency mortgage-backed securities
 
324,654

 
335

 
(8,495
)
 
316,494

Municipal debt securities(1)
 
334,048

 
3,649

 
(3,373
)
 
334,324

Corporate debt securities(2)
 
457,842

 
2,343

 
(3,828
)
 
456,357

Residential and commercial mortgage securities
 
68,430

 
488

 
(582
)
 
68,336

Asset-backed securities
 
127,359

 
260

 
(447
)
 
127,172

Money market funds
 
102,430

 

 

 
102,430

Total investments available for sale
 
$
1,629,538

 
$
7,130

 
$
(21,566
)
 
$
1,615,102

 

 
 
March 31,
 
December 31,
(1) The following table summarizes municipal debt securities as of :
 
2017
 
2016
Special revenue bonds
 
62.4
%
 
63.6
%
General obligation bonds
 
31.8

 
29.7

Certificate of participation bonds
 
4.5

 
4.9

Tax allocation bonds
 
0.7

 
1.1

Special tax bonds
 
0.6

 
0.7

Total
 
100.0
%
 
100.0
%


 
 
March 31,
 
December 31,
(2) The following table summarizes corporate debt securities as of :
 
2017
 
2016
Financial
 
42.5
%
 
40.6
%
Consumer, non-cyclical
 
16.4

 
18.6

Energy
 
10.6

 
9.3

Communications
 
6.7

 
6.0

Consumer, cyclical
 
5.8

 
6.3

Utilities
 
5.7

 
6.0

Technology
 
5.2

 
4.3

Industrial
 
4.7

 
5.6

Basic materials
 
2.4

 
3.3

Total
 
100.0
%
 
100.0
%


7

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


The amortized cost and fair value of investments available for sale at March 31, 2017, 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 U.S. agency mortgage-backed securities, residential and commercial mortgage 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
 
$
24,778

 
$
24,767

Due after 1 but within 5 years
 
37,896

 
37,684

Due after 5 but within 10 years
 
106,106

 
103,113

Due after 10 years
 
13,665

 
13,179

Subtotal
 
182,445

 
178,743

U.S. agency securities:
 
 

 
 

Due in 1 year
 

 

Due after 1 but within 5 years
 
26,607

 
26,284

Subtotal
 
26,607

 
26,284

Municipal debt securities:
 
 

 
 

Due in 1 year
 
6,280

 
6,290

Due after 1 but within 5 years
 
110,543

 
110,750

Due after 5 but within 10 years
 
137,654

 
139,776

Due after 10 years
 
104,104

 
104,576

Subtotal
 
358,581

 
361,392

Corporate debt securities:
 
 

 
 

Due in 1 year
 
54,233

 
54,253

Due after 1 but within 5 years
 
269,360

 
269,941

Due after 5 but within 10 years
 
176,638

 
176,686

Due after 10 years
 
4,469

 
4,408

Subtotal
 
504,700

 
505,288

U.S. agency mortgage-backed securities
 
362,585

 
355,239

Residential and commercial mortgage securities
 
64,768

 
65,288

Asset-backed securities
 
134,984

 
134,911

Money market funds
 
97,388

 
97,388

Total investments available for sale
 
$
1,732,058

 
$
1,724,533


Gross gains and losses realized on the sale of investments available for sale were as follows:
 
 
 
Three Months Ended March 31,
(In thousands)
 
2017
 
2016
Realized gross gains
 
$
681

 
$
1,148

Realized gross losses
 
26

 
670

 

8

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


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
March 31, 2017 (In thousands)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities
 
$
141,980

 
$
(3,843
)
 
$

 
$

 
$
141,980

 
$
(3,843
)
U.S. agency securities
 
26,284

 
(323
)
 

 

 
26,284

 
(323
)
U.S. agency mortgage-backed securities
 
306,786

 
(7,704
)
 
1,780

 
(84
)
 
308,566

 
(7,788
)
Municipal debt securities
 
116,284

 
(2,124
)
 
6,651

 
(32
)
 
122,935

 
(2,156
)
Corporate debt securities
 
187,801

 
(2,924
)
 
6,098

 
(46
)
 
193,899

 
(2,970
)
Residential and commercial mortgage securities
 
13,822

 
(391
)
 
5,930

 
(30
)
 
19,752

 
(421
)
Asset-backed securities
 
41,891

 
(286
)
 
28,855

 
(132
)
 
70,746

 
(418
)
Total
 
$
834,848

 
$
(17,595
)
 
$
49,314

 
$
(324
)
 
$
884,162

 
$
(17,919
)
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2016 (In thousands)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities
 
$
160,018

 
$
(4,497
)
 
$

 
$

 
$
160,018

 
$
(4,497
)
U.S. agency securities
 
18,441

 
(344
)
 

 

 
18,441

 
(344
)
U.S. agency mortgage-backed securities
 
289,282

 
(8,402
)
 
1,812

 
(93
)
 
291,094

 
(8,495
)
Municipal debt securities
 
149,368

 
(3,351
)
 
6,015

 
(22
)
 
155,383

 
(3,373
)
Corporate debt securities
 
213,965

 
(3,704
)
 
8,344

 
(124
)
 
222,309

 
(3,828
)
Residential and commercial mortgage securities
 
18,026

 
(434
)
 
14,014

 
(148
)
 
32,040

 
(582
)
Asset-backed securities
 
28,294

 
(57
)
 
47,597

 
(390
)
 
75,891

 
(447
)
Total
 
$
877,394

 
$
(20,789
)
 
$
77,782

 
$
(777
)
 
$
955,176

 
$
(21,566
)
 
The gross unrealized losses on these investment securities are principally associated with the changes in market interest rates and credit spreads 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 in the three months ended March 31, 2017. We recorded an other-than-temporary impairment of $7 thousand in the three months ended March 31, 2016 on a security in an unrealized loss position. The impairment resulted from our intent to sell the security subsequent to the reporting date.
 
The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $8.5 million as of March 31, 2017 and December 31, 2016. 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 investments on deposit in these trusts was $406.9 million at March 31, 2017 and $349.6 million at December 31, 2016.

Net investment income consists of: 
 
 
Three Months Ended March 31,
(In thousands)
 
2017
 
2016
Fixed maturities
 
$
9,019

 
$
6,655

Short-term investments
 
59

 
33

Gross investment income
 
9,078

 
6,688

Investment expenses
 
(643
)
 
(505
)
Net investment income
 
$
8,435

 
$
6,183

 

9

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


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)
 
2017
 
2016
Reserve for losses and LAE at beginning of period
 
$
28,142

 
$
17,760

Less: Reinsurance recoverables
 

 

Net reserve for losses and LAE at beginning of period
 
28,142

 
17,760

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

 
 

Current period
 
7,090

 
5,080

Prior years
 
(3,397
)
 
(1,349
)
Net incurred losses during the current period
 
3,693

 
3,731

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

 
 

Current period
 
1

 
1

Prior years
 
2,366

 
1,020

Net loss and LAE payments during the current period
 
2,367

 
1,021

Net reserve for losses and LAE at end of period
 
29,468

 
20,470

Plus: Reinsurance recoverables
 

 

Reserve for losses and LAE at end of period
 
$
29,468

 
$
20,470

 
 
 
 
 
Loans in default at end of period
 
1,777

 
1,060

 
For the three months ended March 31, 2017, $2.4 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $3.4 million favorable prior year development during the three months ended March 31, 2017. Reserves remaining as of March 31, 2017 for prior years are $22.4 million as a result of re-estimation of unpaid losses and loss adjustment expenses. For the three months ended March 31, 2016, $1.0 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There was a $1.3 million favorable prior year development during the three months ended March 31, 2016. Reserves remaining as of March 31, 2016 for prior years were $15.4 million as a result of re-estimation of unpaid losses and loss adjustment expenses. In both periods, the favorable prior years' loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified defaults that cured. Original estimates are increased or decreased as additional information becomes known regarding individual claims.

Note 5. Debt Obligations
 
Revolving Credit Facility

On April 19, 2016, Essent Group and its subsidiaries, Essent Irish Intermediate Holdings Limited and Essent US Holdings, Inc. (collectively, the "Borrowers"), entered into a three-year, secured revolving credit facility with a committed capacity of $200 million (the “Facility”). Borrowings under the Facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to Essent’s insurance and reinsurance subsidiaries. Borrowings accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. A commitment fee is due quarterly on the average daily amount of the undrawn revolving commitment. The applicable margin and the commitment fee are based on the senior unsecured debt rating or long-term issuer rating of Essent Group to the extent available, or the insurer financial strength rating of Essent Guaranty. The current annual commitment fee rate is 0.35%. The obligations under the Facility are secured by certain assets of the Borrowers, excluding the stock and assets of its insurance and reinsurance subsidiaries. The Facility contains several covenants, including financial covenants relating to minimum net worth, capital and liquidity levels, maximum debt to capitalization level and Essent Guaranty's compliance with the PMIERS (see Note 11). This description is not intended to be complete in all respects and is qualified in its entirety by the terms of the Facility, including its covenants. As of March 31, 2017, the Company was in compliance with the covenants and $125 million had been borrowed under the Facility with a weighted average interest rate of 2.96%.


10

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 6. Commitments and Contingencies
 
Obligations under Guarantees
 
Under the terms of CUW Solutions' 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 paid $4,775 and $0 related to remedies for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, management believes any potential claims for indemnification related to contract underwriting services through March 31, 2017 are not material to our consolidated 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, 2017, 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 7. Stock-Based Compensation
 
The following table summarizes nonvested common share and nonvested common share unit activity for the three months ended March 31, 2017:
 
 
 
Time and Performance-
Based Share Awards
 
Time-Based
Share Awards
 
Share Units
(Shares in thousands)
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Share Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of year
 
1,503

 
$
15.41

 
605

 
$
16.32

 
493

 
$
19.24

Granted
 
140

 
36.29

 
91

 
36.29

 
366

 
33.21

Vested
 
(48
)
 
22.48

 
(264
)
 
16.56

 
(253
)
 
18.40

Forfeited
 

 
N/A

 

 
N/A

 
(8
)
 
28.53

Outstanding at March 31, 2017
 
1,595

 
$
17.03

 
432

 
$
20.35

 
598

 
$
28.02


In February 2017, certain members of senior management were granted nonvested common shares under the Essent Group Ltd. 2013 Long-Term Incentive Plan ("2013 Plan") that were subject to time-based and performance-based vesting. The time-based share awards granted in February 2017 vest in three equal installments on March 1, 2018, 2019 and 2020. The performance-based share awards granted in February 2017 vest based upon our compounded annual book value per share growth percentage during a three-year performance period that commenced on January 1, 2017 and vest on March 1, 2020. The portion of the nonvested performance-based share awards that will be earned based upon the achievement of compounded annual book value per share growth is as follows:
 

11

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


Performance level
 
 
Compounded Annual Book Value
Per Share Growth
 
Nonvested Common
Shares Earned
 
 
 
<16
%
 
0
%
Threshold
 
 
16
%
 
25
%
 
 
 
17
%
 
50
%
 
 
 
18
%
 
75
%
Maximum
 
 
≥19
%
 
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 January 2017, time-based share units were issued to all vice president and staff level employees and vest in three equal installments on January 2018, 2019, and 2020. In connection with our incentive program covering bonus awards for performance year 2016, in February 2017, time-based share awards and share units were issued to certain employees that vest in three equal installments on March 1, 2018, 2019 and 2020. In May 2017, 21,021 time-based share units were granted to non-employee directors that vest one year from the date of grant.

Amendments to our 2013 Plan were approved by shareholders and effective as of May 3, 2017. These amendments included a reduction in the maximum number of shares and share units available for issuance to 7.5 million under the Amended and Restated 2013 Plan (inclusive of approximately 2.6 million nonvested shares and share units outstanding as of May 3, 2017), down from the approximately 14.7 million maximum number of shares and share units available for issuance under the 2013 Plan.

The total fair value on the vesting date of nonvested shares or share units that vested was $19.0 million and $11.9 million for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, there was $32.0 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at March 31, 2017 and we expect to recognize the expense over a weighted average period of 2.2 years.
 
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 211,412 in the three months ended March 31, 2017. The tendered shares were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of March 31, 2017.
 
Compensation expense, net of forfeitures, and related tax effects recognized in connection with nonvested shares was as follows:
 
 
 
Three Months Ended March 31,
(In thousands)
 
2017
 
2016
Compensation expense
 
$
4,619

 
$
3,782

Income tax benefit
 
1,483

 
1,212

 

12

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 8. 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:
 
 
 
Three Months Ended 
 March 31,
(In thousands, except per share amounts)
 
2017
 
2016
Net income
 
$
66,598

 
$
47,951

Less: dividends declared
 

 

Net income available to common shareholders
 
$
66,598


$
47,951

Basic earnings per share
 
$
0.73

 
$
0.53

Diluted earnings per share
 
$
0.72

 
$
0.52

Basic weighted average shares outstanding
 
91,258

 
90,785

Dilutive effect of nonvested shares
 
1,765


1,074

Diluted weighted average shares outstanding
 
93,023

 
91,859

 
There were 162,930 and 347,611 antidilutive shares for the three months ended March 31, 2017 and 2016, 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, 2017 and 2016, 100% of the dilutive performance-based share awards would be issuable under the terms of the arrangements at each date if March 31 was the end of the contingency period.

Note 9. Accumulated Other Comprehensive Income (Loss)
 
The following table presents the rollforward of accumulated other comprehensive income (loss) for the three months ended March 31, 2017 and 2016:
 
 
 
Three Months Ended March 31, 2017
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
(14,436
)
 
$
2,181

 
$
(12,255
)
Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding gains arising during the period
 
7,566

 
(2,289
)
 
5,277

Less: Reclassification adjustment for gains included in net income (1)
 
(655
)
 
228

 
(427
)
Net unrealized gains on investments
 
6,911

 
(2,061
)
 
4,850

Other comprehensive income
 
6,911

 
(2,061
)
 
4,850

Balance at end of period
 
$
(7,525
)
 
$
120

 
$
(7,405
)


13

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
 
Three Months Ended March 31, 2016
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
661

 
$
(760
)
 
$
(99
)
Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding gains arising during the period
 
19,551

 
(5,845
)
 
13,706

Less: Reclassification adjustment for gains included in net income (1)
 
(478
)
 
131

 
(347
)
Net unrealized gains on investments
 
19,073

 
(5,714
)
 
13,359

Other comprehensive income
 
19,073

 
(5,714
)
 
13,359

Balance at end of period
 
$
19,734

 
$
(6,474
)
 
$
13,260


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

Note 10. Fair Value of Financial Instruments
 
We carry certain of our financial instruments at fair value. 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.
  
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.
 
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 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. U.S. agency securities, U.S. agency mortgage-backed securities, municipal debt securities, corporate

14

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


debt securities, residential and commercial mortgage 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. U.S. agency securities, U.S. agency residential and commercial mortgage securities, municipal and corporate debt securities are valued by our primary vendor using recently executed transactions and proprietary models based on observable inputs, such as interest rate spreads, yield curves and credit risk. Residential and commercial mortgage securities and asset-backed securities are valued by our primary vendor using proprietary models based on observable inputs, such as interest rate spreads, prepayment speeds and credit risk. As part of our evaluation of investment prices provided by our primary pricing service, we obtained and reviewed their pricing methodologies which include a description of how each security type is evaluated and priced. 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 — Through June 30, 2016, certain of our Freddie Mac Agency Credit Insurance Structure ("ACIS") contracts were accounted for as derivatives. In determining an exit market, we considered the fact that there is not a principal market for these contracts. In the absence of a principal market, we valued these ACIS contracts in a hypothetical market where market participants, and potential counterparties, included other mortgage guaranty insurers or reinsurers with similar credit quality to us. We believed that in the absence of a principal market, this hypothetical market provides the most relevant information with respect to fair value estimates. These ACIS contracts were classified as Level 3 of the fair value hierarchy. During the quarter ended September 30, 2016, these contracts were amended and are now accounted for as insurance contracts rather than derivatives.
 
Through June 30, 2016, we determined the fair value of our derivative instruments primarily using internally-generated models. We utilized market observable inputs, such as the performance of the underlying pool of mortgages, mortgage prepayment speeds and pricing spreads on the reference STACR notes issued by Freddie Mac, whenever they were available. There was a high degree of uncertainty about our fair value estimates since our contracts were not traded or exchanged, which made external validation and corroboration of our estimates difficult. Considerable judgment was required to interpret market data to develop the estimates of fair value. Accordingly, the estimates may not have been indicative of amounts we could have realized in a market exchange or negotiated termination. The use of different market assumptions or estimation methodologies may have had a material effect on the estimated fair value amounts.
 

15

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, 2017 (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
 
 

 
 

 
 

 
 

Financial Assets:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
178,743

 
$

 
$

 
$
178,743

U.S. agency securities
 

 
26,284

 

 
26,284

U.S. agency mortgage-backed securities
 

 
355,239

 

 
355,239

Municipal debt securities
 

 
361,392

 

 
361,392

Corporate debt securities
 

 
505,288

 

 
505,288

Residential and commercial mortgage securities
 

 
65,288

 

 
65,288

Asset-backed securities
 

 
134,911

 

 
134,911

Money market funds
 
97,388

 

 

 
97,388

Total assets at fair value
 
$
276,131

 
$
1,448,402

 
$

 
$
1,724,533

 
December 31, 2016 (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
 
 

 
 

 
 

 
 

Financial Assets:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
191,548

 
$

 
$

 
$
191,548

U.S. agency securities
 

 
18,441

 

 
18,441

U.S. agency mortgage-backed securities
 

 
316,494

 

 
316,494

Municipal debt securities
 

 
334,324

 

 
334,324

Corporate debt securities
 

 
456,357

 

 
456,357

Residential and commercial mortgage securities
 

 
68,336

 

 
68,336

Asset-backed securities
 

 
127,172

 

 
127,172

Money market funds
 
102,430

 

 

 
102,430

Total assets at fair value
 
$
293,978

 
$
1,321,124

 
$

 
$
1,615,102



16

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, 2016 in Level 3 liabilities measured at fair value on a recurring basis, and the net realized and unrealized losses (gains) related to the Level 3 liabilities in the condensed consolidated balance sheets at March 31, 2016. During the three months ended March 31, 2017, and in the year ended December 31, 2016, we had no Level 3 assets.

 
 
Three Months Ended 
 March 31,
(In thousands)
 
2016
Level 3 Liabilities
 
 
Fair value of derivative liabilities at beginning of period
 
$
1,232

Net realized and unrealized losses (gains) included in income
 
(677
)
Other comprehensive (income) loss
 

Purchases, sales, issues and settlements, net
 
343

Gross transfers in
 

Gross transfers out
 

Fair value of derivative liabilities at end of period
 
$
898

 
 
 
Changes in net unrealized losses (gains) included in income on instruments held at end of period
 
$
(677
)


Note 11. 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)
 
2017
 
2016
Essent Guaranty
 
 

 
 

Statutory net income
 
$
60,806

 
$
48,486

Statutory surplus
 
595,102

 
532,199

Contingency reserve liability
 
525,256

 
353,063

 
 
 
 
 
Essent PA
 
 

 
 

Statutory net income
 
$
2,805

 
$
3,516

Statutory surplus
 
43,299

 
44,469

Contingency reserve liability
 
38,219

 
29,898

 
Net income determined in accordance with statutory accounting practices differs from GAAP. In 2017 and 2016, 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

17

Essent Group Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


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, 2017 and 2016, the statutory capital of our U.S. 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.
 
Effective December 31, 2015, Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency ("FHFA"), implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." 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 financial strength requirements incorporating a risk-based framework that 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 apply should an approved insurer fail to comply with these requirements. As of March 31, 2017 and December 31, 2016, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs.
 
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, 2017, Essent Guaranty increased its contingency reserve by $44.4 million and Essent PA increased its contingency reserve by $1.8 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, 2017 or 2016.

Under The Insurance Act 1978, as amended, and related regulations of Bermuda (the "Insurance Act"), Essent Re is required to annually prepare statutory financial statements and a statutory financial return in accordance with the financial reporting provisions of the Insurance Act, which is a basis other than GAAP. The Insurance Act also requires that Essent Re maintain minimum share capital of $1 million and must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margins and enhanced capital requirement pertaining to its general business. At December 31, 2016, all such requirements were met.

Essent Re's statutory capital and surplus was $452.4 million as of March 31, 2017 and $401.1 million as of December 31, 2016. Essent Re's statutory net income was $20.2 million and $9.4 million for the three months ended March 31, 2017 and 2016, respectively. Statutory capital and surplus as of March 31, 2017 and statutory net income in the three months ended March 31, 2017 determined in accordance with statutory accounting practices were not significantly different than the amounts determined under GAAP.


18


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, 2016 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, 2017 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 U.S. 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. We had an estimated 15.7% Market Share for the three months ended March 31, 2017. 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, Inc. ("Essent Guaranty"), our wholly-owned insurance subsidiary, is rated Baa2 with a stable outlook by Moody’s Investor Services (“Moody's”) and BBB+ with a stable outlook by S&P Global Ratings (“S&P”). 
 
We had master policy relationships with approximately 1,370 customers as of March 31, 2017. 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 393 employees as of March 31, 2017. We generated NIW of approximately $8.0 billion and $5.5 billion for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we had approximately $88.0 billion of insurance in force.
 
We also offer mortgage-related insurance and reinsurance through our wholly-owned Bermuda-based subsidiary, Essent Reinsurance, Ltd., which we refer to as "Essent Re." As of March 31, 2017, Essent Re provided insurance or reinsurance relating to the risk in force on loans in reference pools acquired by Freddie Mac and Fannie Mae covering approximately $437.0 million of risk, including in connection with Freddie Mac's Agency Credit Insurance Structure ("ACIS") and Fannie Mae's Credit Insurance Risk Transfer ("CIRT") programs. Essent Re has also reinsured 25% of Essent Guaranty’s GSE-eligible mortgage insurance NIW originated since July 1, 2014 under a quota share reinsurance agreement. The insurer financial strength rating of Essent Re is BBB+ with a stable outlook by S&P.
 
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.
 

19


Effective December 31, 2015, Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency ("FHFA"), implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." 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 financial strength requirements incorporating a risk-based framework that 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 apply should an approved insurer fail to comply with these requirements. As of March 31, 2017, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs. 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 associated with our U.S. mortgage insurance business are based on insurance in force ("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 premium 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 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 claim payments and rescissions;
 
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 ceded any premiums under 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. Monthly premium payments are based on the original mortgage amount rather than the amortized loan balance. 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, 2017 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, 2017, monthly and single premium policies comprised 85.8% and 14.2% of our NIW, respectively.

Premiums associated with our GSE risk share transactions are based on the level of risk in force.
 
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, higher persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 78.2% at March 31, 2017. Generally, higher prepayment speeds lead to lower persistency.
 

20


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 predominantly comprised of investment-grade fixed income securities and money market funds as of March 31, 2017. 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 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. This 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 was automatically extended until November 30, 2017 and provides for two 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. Through June 30, 2016, the insurance and certain of the reinsurance policies issued by Essent Re in connection with the ACIS program were previously accounted for as derivatives under U.S. generally accepted accounting principles ("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 were impacted by changes in market observable factors. These policies were amended in the three months ended September 30, 2016 and are now accounted for as insurance rather than as derivatives. See Note 10 to our condensed consolidated financial statements.
 
Provision for Losses and Loss Adjustment Expenses
 
The provision for losses and loss adjustment expenses reflects 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;


21


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 master policy, 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 70% of our IIF as of March 31, 2017 having been originated since January 1, 2015. 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 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, 2017, 70% of our IIF relates to business written since January 1, 2015 and was 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 64% of other underwriting and operating expenses for the three months ended March 31, 2017, compared to 65% of other underwriting and operating expenses for the three months ended March 31, 2016. Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes. Compensation and benefits expense has steadily increased as we have increased our staffing from 366 employees at January 1, 2016 to 393 at March 31, 2017, 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 for the full year 2017 as compared to 2016.


22


Interest Expense

Interest expense is incurred as a result of borrowings under our three-year, secured revolving credit facility with a committed capacity of $200 million (the “Facility”). Borrowings under the Facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to Essent’s insurance and reinsurance subsidiaries. Borrowings accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin.
 
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. 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.

Essent Group Ltd. and its wholly-owned subsidiary, Essent Re, are domiciled in Bermuda, which does not have a corporate income tax. Effective July 2014, Essent Re began to reinsure 25% of GSE-eligible new insurance written of Essent Guaranty, an affiliate. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae.

The amount of income tax expense or benefit recorded in future periods will be dependent on the jurisdictions in which we operate and the tax laws and regulations in effect.

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, 2017 and 2016 for our U.S. mortgage insurance portfolio. In addition, this table includes our risk in force ("RIF") at the end of each period.
 
 
 
Three Months Ended March 31,
(In thousands)
 
2017
 
2016
IIF, beginning of period
 
$
83,265,522

 
$
65,242,453

NIW - Flow
 
8,034,153

 
5,366,675

NIW - Bulk
 

 
93,054

Cancellations
 
(3,306,448
)
 
(2,985,441
)
IIF, end of period
 
$
87,993,227

 
$
67,716,741

Average IIF during the period
 
$
85,488,081

 
$
66,437,045

RIF, end of period
 
$
21,801,667

 
$
16,745,819

 

23


The following is a summary of our IIF at March 31, 2017 by vintage:
 
($ in thousands)
 
$
 
%
2017 (through March 31)
 
$
7,985,761

 
9.1
%
2016
 
33,018,253

 
37.5

2015
 
20,458,227

 
23.2

2014
 
13,669,734

 
15.5

2013
 
8,758,749