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EX-32.1 - EXHIBIT 32.1 - Essent Group Ltd.a93017ex321.htm
EX-31.2 - EXHIBIT 31.2 - Essent Group Ltd.a93017ex312.htm
EX-31.1 - EXHIBIT 31.1 - Essent Group Ltd.a93017ex311.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 September 30, 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
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company
o
 
 
 
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 November 1, 2017 was 98,434,106.



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)
 
 
 
September 30,
 
December 31,
(In thousands, except per share amounts)
 
2017
 
2016
Assets
 
 

 
 

Investments available for sale, at fair value
 
 

 
 

Fixed maturities (amortized cost: 2017 — $1,819,481; 2016 — $1,497,186)
 
$
1,826,801

 
$
1,482,754

Short-term investments (amortized cost: 2017 — $296,509; 2016 — $132,352)
 
296,513

 
132,348

Total investments
 
2,123,314

 
1,615,102

Cash
 
57,741

 
27,531

Accrued investment income
 
11,839

 
9,488

Accounts receivable
 
29,284

 
21,632

Deferred policy acquisition costs
 
14,831

 
13,400

Property and equipment (at cost, less accumulated depreciation of $49,498 in 2017 and $46,543 in 2016)
 
7,825

 
8,119

Prepaid federal income tax
 
233,457

 
181,272

Other assets
 
7,300

 
6,454

Total assets
 
$
2,485,591

 
$
1,882,998

 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Reserve for losses and LAE
 
$
31,579

 
$
28,142

Unearned premium reserve
 
245,877

 
219,616

Net deferred tax liability
 
198,042

 
142,587

Credit facility borrowings (at carrying value, less unamortized deferred costs of $1,511 in 2017 and $0 in 2016)
 
173,489

 
100,000

Securities purchases payable
 
25,998

 
14,999

Other accrued liabilities
 
30,036

 
33,881

Total liabilities
 
705,021

 
539,225

Commitments and contingencies (see Note 6)
 


 


Stockholders’ Equity
 
 

 
 

Common shares, $0.015 par value:
 
 

 
 

Authorized - 233,333; issued and outstanding - 98,423 shares in 2017 and 93,105 shares in 2016
 
1,476

 
1,397

Additional paid-in capital
 
1,122,679

 
918,296

Accumulated other comprehensive income (loss)
 
3,043

 
(12,255
)
Retained earnings
 
653,372

 
436,335

Total stockholders’ equity
 
1,780,570

 
1,343,773

Total liabilities and stockholders’ equity
 
$
2,485,591

 
$
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 September 30,
 
Nine Months Ended September 30,
(In thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 

 
 

Net premiums written
 
$
155,055

 
$
115,887

 
$
408,415

 
$
324,866

Increase in unearned premiums
 
(17,115
)
 
(5,086
)
 
(26,261
)
 
(18,951
)
Net premiums earned
 
137,940

 
110,801

 
382,154

 
305,915

Net investment income
 
10,626

 
6,781

 
28,461

 
19,665

Realized investment gains, net
 
564

 
435

 
1,763

 
1,489

Other income
 
1,073

 
3,237

 
3,023

 
4,816

Total revenues
 
150,203

 
121,254

 
415,401

 
331,885

 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 

 
 

 
 

 
 

Provision for losses and LAE
 
4,313

 
4,965

 
9,776

 
11,660

Other underwriting and operating expenses
 
37,035

 
32,792

 
109,053

 
95,589

Interest expense
 
1,456

 
56

 
3,361

 
56

Total losses and expenses
 
42,804

 
37,813

 
122,190

 
107,305

 
 
 
 
 
 
 
 
 
Income before income taxes
 
107,399

 
83,441

 
293,211

 
224,580

Income tax expense
 
29,006

 
23,730

 
76,102

 
64,660

Net income
 
$
78,393

 
$
59,711

 
$
217,109

 
$
159,920

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.83

 
$
0.66

 
$
2.35

 
$
1.76

Diluted
 
0.82

 
0.65

 
2.31

 
1.74

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
94,185

 
90,961

 
92,285

 
90,886

Diluted
 
96,094

 
92,399

 
94,104

 
92,133

 
 
 
 
 
 
 
 
 
Net income
 
$
78,393

 
$
59,711

 
$
217,109

 
$
159,920

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Change in unrealized appreciation (depreciation) of investments, net of tax expense (benefit) of $752 and ($897) in the three months ended September 30, 2017 and 2016 and $6,462 and $9,866 in the nine months ended September 30, 2017 and 2016
 
1,978

 
(2,008
)
 
15,298

 
22,053

Total other comprehensive income (loss)
 
1,978

 
(2,008
)
 
15,298

 
22,053

Comprehensive income
 
$
80,371

 
$
57,703

 
$
232,407

 
$
181,973

 
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
 
 

 
 

 
 

 
217,109

 
 

 
217,109

Other comprehensive income
 
 

 
 

 
15,298

 
 

 
 

 
15,298

Issuance of Common Shares, net of issuance cost of $1,800
 
75

 
197,625

 
 
 
 
 
 
 
197,700

Issuance of management incentive shares
 
8

 
(8
)
 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
13,980

 
 

 
 

 
 

 
13,980

Cumulative effect of ASU 2016-09 adoption
 
 
 
111

 
 
 
(72
)
 
 
 
39

Treasury stock acquired
 
 

 
 

 
 

 
 

 
(7,329
)
 
(7,329
)
Cancellation of treasury stock
 
(4
)
 
(7,325
)
 
 

 
 

 
7,329

 

Balance at September 30, 2017
 
$
1,476

 
$
1,122,679

 
$
3,043

 
$
653,372

 
$

 
$
1,780,570

 
See accompanying notes to condensed consolidated financial statements.


3


Essent Group Ltd. and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
Operating Activities
 
 

 
 

Net income
 
$
217,109

 
$
159,920

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

 
 

Gain on the sale of investments, net
 
(1,763
)
 
(1,489
)
Depreciation and amortization
 
2,955

 
3,088

Stock-based compensation expense
 
13,980

 
11,902

Amortization of premium on investment securities
 
8,752

 
8,073

Deferred income tax provision
 
49,032

 
42,811

Change in:
 
 

 
 

Accrued investment income
 
(2,351
)
 
(1,090
)
Accounts receivable
 
(7,657
)
 
(3,616
)
Deferred policy acquisition costs
 
(1,431
)
 
(1,484
)
Prepaid federal income tax
 
(52,185
)
 
(43,610
)
Other assets
 
21

 
118

Reserve for losses and LAE
 
3,437

 
7,971

Unearned premium reserve
 
26,261

 
18,951

Other accrued liabilities
 
(4,139
)
 
(1,656
)
Net cash provided by operating activities
 
252,021

 
199,889

 
 
 
 
 
Investing Activities
 
 

 
 

Net change in short-term investments
 
(164,165
)
 
(64,487
)
Purchase of investments available for sale
 
(567,335
)
 
(451,223
)
Proceeds from maturity of investments available for sale
 
51,440

 
21,868

Proceeds from sales of investments available for sale
 
197,623

 
244,429

Purchase of property and equipment
 
(2,661
)
 
(2,358
)
Net cash used in investing activities
 
(485,098
)
 
(251,771
)
 
 
 
 
 
Financing Activities
 
 

 
 

Issuance of common shares, net of costs
 
198,212

 

Credit facility borrowings
 
250,000

 
50,000

Credit facility repayments
 
(175,000
)
 

Treasury stock acquired
 
(7,329
)
 
(3,963
)
Payment of issuance costs for credit facility
 
(2,596
)
 
(2,425
)
Net cash provided by financing activities
 
263,287

 
43,612

 
 
 
 
 
Net increase (decrease) in cash
 
30,210

 
(8,270
)
Cash at beginning of year
 
27,531

 
24,606

Cash at end of period
 
$
57,741

 
$
16,336

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income tax payments
 
$
(28,300
)
 
$
(22,800
)
Interest payments
 
(3,120
)
 

 
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 September 30, 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 January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This update requires certain equity investments (except those accounted for under the equity method of accounting or result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. This update also requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. In addition, an entity is required to evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale investment securities in combination with the entity’s other deferred tax assets. The provisions of this update are effective for interim and annual periods beginning after December 15, 2017. The adoption of this ASU is not expected to have a material effect on the Company's consolidated operating results or financial position.

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 and nine months ended September 30, 2017, the Company recorded excess tax benefits of $32 thousand and $3.1 million, respectively, 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.


6

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


Note 3. Investments Available for Sale
 
Investments available for sale consist of the following:
 
September 30, 2017 (In thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
262,408

 
$
61

 
$
(2,890
)
 
$
259,579

U.S. agency securities
 
33,675

 
1

 
(254
)
 
33,422

U.S. agency mortgage-backed securities
 
432,820

 
954

 
(5,187
)
 
428,587

Municipal debt securities(1)
 
380,603

 
9,556

 
(656
)
 
389,503

Corporate debt securities(2)
 
579,652

 
6,427

 
(1,580
)
 
584,499

Residential and commercial mortgage securities
 
68,113

 
838

 
(310
)
 
68,641

Asset-backed securities
 
148,753

 
533

 
(171
)
 
149,115

Money market funds
 
209,966

 
2

 

 
209,968

Total investments available for sale
 
$
2,115,990

 
$
18,372

 
$
(11,048
)
 
$
2,123,314


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

 
 
 
September 30,
 
December 31,
(1) The following table summarizes municipal debt securities as of :
 
2017
 
2016
Special revenue bonds
 
63.7
%
 
63.6
%
General obligation bonds
 
30.8

 
29.7

Certificate of participation bonds
 
4.3

 
4.9

Tax allocation bonds
 
0.6

 
1.1

Special tax bonds
 
0.6

 
0.7

Total
 
100.0
%
 
100.0
%
 
 
September 30,
 
December 31,
(2) The following table summarizes corporate debt securities as of :
 
2017
 
2016
Financial
 
44.3
%
 
40.6
%
Consumer, non-cyclical
 
15.2

 
18.6

Energy
 
8.5

 
9.3

Communications
 
7.9

 
6.0

Industrial
 
6.6

 
5.6

Utilities
 
5.9

 
6.0

Consumer, cyclical
 
5.6

 
6.3

Technology
 
3.7

 
4.3

Basic materials
 
2.3

 
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 September 30, 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
 
$
96,464

 
$
96,455

Due after 1 but within 5 years
 
64,707

 
64,464

Due after 5 but within 10 years
 
71,096

 
68,981

Due after 10 years
 
30,141

 
29,679

Subtotal
 
262,408

 
259,579

U.S. agency securities:
 
 

 
 

Due in 1 year
 

 

Due after 1 but within 5 years
 
33,675

 
33,422

Subtotal
 
33,675

 
33,422

Municipal debt securities:
 
 

 
 

Due in 1 year
 
26,294

 
26,352

Due after 1 but within 5 years
 
101,127

 
102,135

Due after 5 but within 10 years
 
143,938

 
149,245

Due after 10 years
 
109,244

 
111,771

Subtotal
 
380,603

 
389,503

Corporate debt securities:
 
 

 
 

Due in 1 year
 
74,323

 
74,401

Due after 1 but within 5 years
 
304,703

 
306,428

Due after 5 but within 10 years
 
197,319

 
200,343

Due after 10 years
 
3,307

 
3,327

Subtotal
 
579,652

 
584,499

U.S. agency mortgage-backed securities
 
432,820

 
428,587

Residential and commercial mortgage securities
 
68,113

 
68,641

Asset-backed securities
 
148,753

 
149,115

Money market funds
 
209,966

 
209,968

Total investments available for sale
 
$
2,115,990

 
$
2,123,314


Gross gains and losses realized on the sale of investments available for sale were as follows:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Realized gross gains
 
$
605

 
$
520

 
$
2,035

 
$
2,292

Realized gross losses
 
41

 
12

 
272

 
723

 

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
September 30, 2017 (In thousands)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities
 
$
177,834

 
$
(1,768
)
 
$
19,126

 
$
(1,122
)
 
$
196,960

 
$
(2,890
)
U.S. agency securities
 
26,708

 
(159
)
 
6,203

 
(95
)
 
32,911

 
(254
)
U.S. agency mortgage-backed securities
 
296,191

 
(3,933
)
 
36,576

 
(1,254
)
 
332,767

 
(5,187
)
Municipal debt securities
 
58,869

 
(459
)
 
13,497

 
(197
)
 
72,366

 
(656
)
Corporate debt securities
 
161,734

 
(1,233
)
 
28,113

 
(347
)
 
189,847

 
(1,580
)
Residential and commercial mortgage securities
 
18,113

 
(193
)
 
3,613

 
(117
)
 
21,726

 
(310
)
Asset-backed securities
 
20,786

 
(97
)
 
13,244

 
(74
)
 
34,030

 
(171
)
Total
 
$
760,235

 
$
(7,842
)
 
$
120,372

 
$
(3,206
)
 
$
880,607

 
$
(11,048
)
 
 
 
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 and nine months ended September 30, 2017. We recorded other-than-temporary impairments of $73 thousand and $80 thousand in the three and nine months ended September 30, 2016, respectively, on securities in an unrealized loss position. The impairments resulted from our intent to sell the securities subsequent to the reporting dates.
 
The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $8.7 million as of September 30, 2017 and $8.5 million as of 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 $550.2 million at September 30, 2017 and $349.6 million at December 31, 2016.

Net investment income consists of: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Fixed maturities
 
$
10,982

 
$
7,296

 
$
29,964

 
$
21,148

Short-term investments
 
330

 
39

 
463

 
102

Gross investment income
 
11,312

 
7,335

 
30,427

 
21,250

Investment expenses
 
(686
)
 
(554
)
 
(1,966
)
 
(1,585
)
Net investment income
 
$
10,626

 
$
6,781

 
$
28,461

 
$
19,665

 

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 nine months ended September 30:
 
($ 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
 
19,266

 
16,387

Prior years
 
(9,490
)
 
(4,727
)
Net incurred losses during the current period
 
9,776

 
11,660

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

 
 

Current period
 
243

 
467

Prior years
 
6,096

 
3,222

Net loss and LAE payments during the current period
 
6,339

 
3,689

Net reserve for losses and LAE at end of period
 
31,579

 
25,731

Plus: Reinsurance recoverables
 

 

Reserve for losses and LAE at end of period
 
$
31,579

 
$
25,731

 
 
 
 
 
Loans in default at end of period
 
2,153

 
1,453

 
For the nine months ended September 30, 2017, $6.1 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $9.5 million favorable prior year development during the nine months ended September 30, 2017. Reserves remaining as of September 30, 2017 for prior years are $12.6 million as a result of re-estimation of unpaid losses and loss adjustment expenses. For the nine months ended September 30, 2016, $3.2 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There was a $4.7 million favorable prior year development during the nine months ended September 30, 2016. Reserves remaining as of September 30, 2016 for prior years were $9.8 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.

During the third quarter of 2017, certain regions of the U.S. experienced hurricanes which we believe could have an impact on our insured portfolio’s performance. Specifically, on August 26, 2017, Hurricane Harvey made landfall in southeastern Texas and on September 10, 2017, Hurricane Irma made landfall in southern Florida and caused property damage in certain counties. We expect to experience increased defaults in these areas beginning in the fourth quarter of 2017. As of September 30, 2017, our risk in force ("RIF") in the affected counties is approximately $2.5 billion, or approximately 9.5%, of our total RIF. It is too early to tell how many claims we ultimately may have to pay associated with any defaults in the hurricane impacted areas. There are many factors contributing to the uncertainty surrounding these insured loans. Under our master policy, loan servicers are not required to notify us of a default until the borrower has missed two consecutive minimum payments. Also, the level of damage being reported in these areas varies significantly from region to region. Further, under our master policy, our exposure may be limited on hurricane-related claims. For example, we are permitted to exclude a claim entirely where damage to the property underlying a mortgage was the proximate cause of the default and adjust a claim where the property underlying a mortgage in default is subject to unrestored physical damage. These events have not materially affected our reserves as of September 30, 2017. Loans in default increased from 2,153 as of September 30, 2017 to 3,051 as of October 31, 2017. Defaulted loans in the hurricane impacted areas represented 733 of the 898 increase in October. As of October 31, 2017, 1,055 loans are in default in the affected counties representing 0.22% of our insured portfolio. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers and our expectations for the amount of ultimate losses on these delinquencies.



10

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


Note 5. Debt Obligations
 
Revolving Credit Facility

On May 17, 2017, Essent Group and its subsidiaries, Essent Irish Intermediate Holdings Limited and Essent US Holdings, Inc. (collectively, the "Borrowers"), entered into an amended and restated four-year, secured credit facility with a committed capacity of $375 million (the “Credit Facility”). The Credit Facility amends and restates the three-year, secured revolving credit facility entered into on April 19, 2016, and provides for (i) an increase in the revolving credit facility from $200 million to $250 million, (ii) the issuance of term loans of $125 million, the proceeds of which were used at closing to pay down borrowings outstanding under the revolving credit facility, and (iii) a $75 million uncommitted line that may be exercised at the Borrowers’ option so long as the Borrowers receive commitments from the lenders. Borrowings under the Credit 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 Credit Facility are secured by certain assets of the Borrowers, excluding the stock and assets of its insurance and reinsurance subsidiaries. The Credit 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 12). The $125 million term loans contractually mature on May 17, 2021. This description is not intended to be complete in all respects and is qualified in its entirety by the terms of the Credit Facility, including its covenants. As of September 30, 2017, the Company was in compliance with the covenants and $175 million had been borrowed under the Credit Facility with a weighted average interest rate of 3.24%.

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 $0.1 million related to remedies for each of the nine months ended September 30, 2017 and 2016. As of September 30, 2017, management believes any potential claims for indemnification related to contract underwriting services through September 30, 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 September 30, 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.
 

11

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


Note 7. Capital Stock

Our authorized share capital consists of 233.3 million shares of a single class of common shares (the "Common Shares"). The Common Shares have no pre-emptive rights or other rights to subscribe for additional shares, and no rights of redemption, conversion or exchange. Under certain circumstances and subject to the provisions of Bermuda law and our bye-laws, we may be required to make an offer to repurchase shares held by members. The Common Shares rank pari passu with one another in all respects as to rights of payment and distribution. In general, holders of Common Shares will have one vote for each Common Share held by them and will be entitled to vote, on a non-cumulative basis, at all meetings of shareholders. In the event that a shareholder is considered a 9.5% Shareholder under our bye-laws, such shareholder's votes will be reduced by whatever amount is necessary so that after any such reduction the votes of such shareholder will not result in any other person being treated as a 9.5% Shareholder with respect to the vote on such matter. Under these provisions certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share.

In August 2017, Essent Group completed the sale of 5.0 million Common Shares in a public offering at a price of $39.90 per share. The total net proceeds from this offering were approximately $197.7 million after deducting underwriting discounts, commissions and other offering expenses.

Note 8. Stock-Based Compensation
 
The following table summarizes nonvested common share and nonvested common share unit activity for the nine months ended September 30, 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

 
387

 
33.40

Vested
 
(48
)
 
22.48

 
(284
)
 
15.84

 
(305
)
 
18.69

Forfeited
 

 
N/A

 

 
N/A

 
(22
)
 
30.46

Outstanding at September 30, 2017
 
1,595

 
$
17.03

 
412

 
$
21.03

 
553

 
$
28.99


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 these nonvested performance-based share awards 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
 
 
 
<16
%
 
0
%
Threshold
 
 
16
%
 
25
%
 
 
 
17
%
 
50
%
 
 
 
18
%
 
75
%
Maximum
 
 
≥19
%
 
100
%
 
 
 
 
 
 
 

12

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


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 that vest in three equal installments in 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, 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 shares and share units originally available for issuance under the 2013 Plan.

The total fair value on the vesting date of nonvested shares or share units that vested was $21.6 million and $14.8 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was $23.1 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at September 30, 2017 and we expect to recognize the expense over a weighted average period of 1.9 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 216,912 in the nine months ended September 30, 2017. The tendered shares were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of September 30, 2017.
 
Compensation expense, net of forfeitures, and related tax effects recognized in connection with nonvested shares was as follows:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Compensation expense
 
$
4,692

 
$
3,953

 
$
13,980

 
$
11,902

Income tax benefit
 
1,513

 
1,270

 
4,498

 
3,828

 
Note 9. 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 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
78,393

 
$
59,711

 
$
217,109

 
$
159,920

Less: dividends declared
 

 

 

 

Net income available to common shareholders
 
$
78,393


$
59,711


$
217,109


$
159,920

Basic earnings per share
 
$
0.83

 
$
0.66

 
$
2.35

 
$
1.76

Diluted earnings per share
 
$
0.82

 
$
0.65

 
$
2.31

 
$
1.74

Basic weighted average shares outstanding
 
94,185

 
90,961

 
92,285

 
90,886

Dilutive effect of nonvested shares
 
1,909


1,438


1,819


1,247

Diluted weighted average shares outstanding
 
96,094

 
92,399

 
94,104

 
92,133

 
There were 956 and 1,574 antidilutive shares for the three months ended September 30, 2017 and 2016, respectively, and 59,534 and 128,569 antidilutive shares for the nine months ended September 30, 2017 and 2016, respectively.
 

13

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


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 September 30, 2017 and 2016, 100% of the dilutive performance-based share awards would be issuable under the terms of the arrangements at each date if September 30 was the end of the contingency period.

Note 10. Accumulated Other Comprehensive Income (Loss)
 
The following table presents the rollforward of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016
 
 
Three Months Ended September 30, 2017
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
4,594

 
$
(3,529
)
 
$
1,065

Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding gains arising during the period
 
3,294

 
(949
)
 
2,345

Less: Reclassification adjustment for gains included in net income (1)
 
(564
)
 
197

 
(367
)
Net unrealized gains on investments
 
2,730

 
(752
)
 
1,978

Other comprehensive income
 
2,730

 
(752
)
 
1,978

Balance at end of period
 
$
7,324

 
$
(4,281
)
 
$
3,043

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of year
 
$
(14,436
)
 
$
2,181

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

 
 

 
 

Unrealized holding gains arising during the period
 
23,523

 
(7,071
)
 
16,452

Less: Reclassification adjustment for gains included in net income (1)
 
(1,763
)
 
609

 
(1,154
)
Net unrealized gains on investments
 
21,760

 
(6,462
)
 
15,298

Other comprehensive income
 
21,760

 
(6,462
)
 
15,298

Balance at end of period
 
$
7,324

 
$
(4,281
)
 
$
3,043



14

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


 
 
Three Months Ended September 30, 2016
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
35,485

 
$
(11,523
)
 
$
23,962

Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding losses arising during the period
 
(2,470
)
 
752

 
(1,718
)
Less: Reclassification adjustment for gains included in net income (1)
 
(435
)
 
145

 
(290
)
Net unrealized losses on investments
 
(2,905
)
 
897

 
(2,008
)
Other comprehensive loss
 
(2,905
)
 
897

 
(2,008
)
Balance at end of period
 
$
32,580

 
$
(10,626
)
 
$
21,954

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of year
 
$
661

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

 
 

 
 

Unrealized holding gains arising during the period
 
33,415

 
(10,278
)
 
23,137

Less: Reclassification adjustment for gains included in net income (1)
 
(1,496
)
 
412

 
(1,084
)
Net unrealized gains on investments
 
31,919

 
(9,866
)
 
22,053

Other comprehensive income
 
31,919

 
(9,866
)
 
22,053

Balance at end of period
 
$
32,580

 
$
(10,626
)
 
$
21,954

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

Note 11. 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.
 

15

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


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 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.
 

16

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.
 
September 30, 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
 
$
259,579

 
$

 
$

 
$
259,579

U.S. agency securities
 

 
33,422

 

 
33,422

U.S. agency mortgage-backed securities
 

 
428,587

 

 
428,587

Municipal debt securities
 

 
389,503

 

 
389,503

Corporate debt securities
 

 
584,499

 

 
584,499

Residential and commercial mortgage securities
 

 
68,641

 

 
68,641

Asset-backed securities
 

 
149,115

 

 
149,115

Money market funds
 
209,968

 

 

 
209,968

Total assets at fair value
 
$
469,547

 
$
1,653,767

 
$

 
$
2,123,314

 
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