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EX-32.1 - EXHIBIT 32.1 - Essent Group Ltd.a93018ex321.htm
EX-31.2 - EXHIBIT 31.2 - Essent Group Ltd.a93018ex312.htm
EX-31.1 - EXHIBIT 31.1 - Essent Group Ltd.a93018ex311.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, 2018
 
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 every Interactive Data File required to be submitted 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 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
 
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 2, 2018 was 98,139,176.



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, 2017 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 on the basis of price, terms and conditions or otherwise, 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 impact of recently enacted U.S. Federal tax reform on us, our shareholders and our operations;

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;


ii


fluctuations in interest rates;

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

dependence on management team and qualified personnel;

disturbance to our information technology systems;

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

declines in the value of borrowers’ homes;

limited availability of capital;

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

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

disruption in mortgage loan servicing;

risk of future legal proceedings;

customers’ technological demands;

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

becoming considered a passive foreign investment company for U.S. Federal income tax purposes; 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)
 
2018
 
2017
Assets
 
 

 
 

Investments
 
 

 
 

Fixed maturities available for sale, at fair value (amortized cost: 2018 — $2,527,850; 2017 — $1,994,200)
 
$
2,473,840

 
$
1,992,371

Short-term investments available for sale, at fair value (amortized cost: 2018 — $191,911; 2017 — $312,714)
 
191,912

 
312,694

Total investments available for sale
 
2,665,752

 
2,305,065

Other invested assets
 
24,865

 
500

Total investments
 
2,690,617

 
2,305,565

Cash
 
29,797

 
43,524

Accrued investment income
 
17,125

 
12,807

Accounts receivable
 
35,597

 
29,752

Deferred policy acquisition costs
 
16,159

 
15,354

Property and equipment (at cost, less accumulated depreciation of $53,005 in 2018 and $50,466 in 2017)
 
7,387

 
6,979

Prepaid federal income tax
 
185,935

 
252,157

Other assets
 
10,806

 
8,230

Total assets
 
$
2,993,423

 
$
2,674,368

 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Reserve for losses and LAE
 
$
53,355

 
$
46,850

Unearned premium reserve
 
292,331

 
259,672

Net deferred tax liability
 
155,349

 
127,636

Credit facility borrowings (at carrying value, less unamortized deferred costs of $1,513 in 2018 and $1,409 in 2017)
 
223,487

 
248,591

Securities purchases payable
 
21,741

 
14,999

Other accrued liabilities
 
32,021

 
36,184

Total liabilities
 
778,284

 
733,932

Commitments and contingencies (see Note 7)
 


 


Stockholders’ Equity
 
 

 
 

Common shares, $0.015 par value:
 
 

 
 

Authorized - 233,333; issued and outstanding - 98,128 shares in 2018 and 98,434 shares in 2017
 
1,472

 
1,476

Additional paid-in capital
 
1,107,206

 
1,127,137

Accumulated other comprehensive loss
 
(47,449
)
 
(3,252
)
Retained earnings
 
1,153,910

 
815,075

Total stockholders’ equity
 
2,215,139

 
1,940,436

Total liabilities and stockholders’ equity
 
$
2,993,423

 
$
2,674,368

 
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)
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 

 
 

Net premiums written
 
$
175,221

 
$
155,055

 
$
508,850

 
$
408,415

Increase in unearned premiums
 
(8,546
)
 
(17,115
)
 
(32,659
)
 
(26,261
)
Net premiums earned
 
166,675

 
137,940

 
476,191

 
382,154

Net investment income
 
16,646

 
10,626

 
45,494

 
28,461

Realized investment gains, net
 
524

 
564

 
1,160

 
1,763

Other income
 
1,153

 
1,073

 
3,384

 
3,023

Total revenues
 
184,998

 
150,203

 
526,229

 
415,401

 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 

 
 

 
 

 
 

Provision for losses and LAE
 
5,452

 
4,313

 
12,574

 
9,776

Other underwriting and operating expenses
 
36,899

 
37,035

 
111,451

 
109,053

Interest expense
 
2,500

 
1,456

 
7,568

 
3,361

Total losses and expenses
 
44,851

 
42,804

 
131,593

 
122,190

 
 
 
 
 
 
 
 
 
Income before income taxes
 
140,147

 
107,399

 
394,636

 
293,211

Income tax expense
 
24,136

 
29,006

 
55,801

 
76,102

Net income
 
$
116,011

 
$
78,393

 
$
338,835

 
$
217,109

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.19

 
$
0.83

 
$
3.48

 
$
2.35

Diluted
 
1.18

 
0.82

 
3.46

 
2.31

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
97,438

 
94,185

 
97,388

 
92,285

Diluted
 
98,013

 
96,094

 
97,944

 
94,104

 
 
 
 
 
 
 
 
 
Net income
 
$
116,011

 
$
78,393

 
$
338,835

 
$
217,109

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Change in unrealized (depreciation) appreciation of investments, net of tax (benefit) expense of ($1,352) and $752 in the three months ended September 30, 2018 and 2017 and ($7,963) and $6,462 in the nine months ended September 30, 2018 and 2017
 
(8,201
)
 
1,978

 
(44,197
)
 
15,298

Total other comprehensive (loss) income
 
(8,201
)
 
1,978

 
(44,197
)
 
15,298

Comprehensive income
 
$
107,810

 
$
80,371

 
$
294,638

 
$
232,407

 
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, 2017
 
$
1,397

 
$
918,296

 
$
(12,255
)
 
$
436,335

 
$

 
$
1,343,773

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 

 
 

 
 

 
379,747

 
 

 
379,747

Other comprehensive income
 
 

 
 

 
8,068

 
 

 
 

 
8,068

Issuance of common shares, net of issuance cost of $1,802
 
75

 
197,623

 
 
 
 
 
 
 
197,698

Issuance of management incentive shares
 
8

 
(8
)
 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
18,688

 
 

 
 

 
 

 
18,688

Cumulative effect of ASU 2016-09 adoption
 
 
 
111

 
 
 
(72
)
 
 
 
39

Treasury stock acquired
 
 

 
 

 
 

 
 

 
(7,577
)
 
(7,577
)
Cancellation of treasury stock
 
(4
)
 
(7,573
)
 
 

 
 

 
7,577

 

Reclassification of certain income tax effects resulting from tax reform
 
 
 
 
 
935

 
(935
)
 
 
 

Balance at December 31, 2017
 
$
1,476

 
$
1,127,137

 
$
(3,252
)
 
$
815,075

 
$

 
$
1,940,436

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 

 
 

 
 

 
338,835

 
 

 
338,835

Other comprehensive loss
 
 

 
 

 
(44,197
)
 
 

 
 

 
(44,197
)
Issuance of management incentive shares
 
6

 
(6
)
 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
11,269

 
 

 
 

 
 

 
11,269

Treasury stock acquired
 
 

 
 

 
 

 
 

 
(31,204
)
 
(31,204
)
Cancellation of treasury stock
 
(10
)
 
(31,194
)
 
 

 
 

 
31,204

 

Balance at September 30, 2018
 
$
1,472

 
$
1,107,206

 
$
(47,449
)
 
$
1,153,910

 
$

 
$
2,215,139

 
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)
 
2018
 
2017
Operating Activities
 
 

 
 

Net income
 
$
338,835

 
$
217,109

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

 
 

Gain on the sale of investments, net
 
(1,160
)
 
(1,763
)
Depreciation and amortization
 
2,539

 
2,955

Stock-based compensation expense
 
11,269

 
13,980

Amortization of premium on investment securities
 
10,701

 
8,752

Deferred income tax provision
 
35,676

 
49,032

Change in:
 
 

 
 

Accrued investment income
 
(4,318
)
 
(2,351
)
Accounts receivable
 
(5,842
)
 
(7,657
)
Deferred policy acquisition costs
 
(805
)
 
(1,431
)
Prepaid federal income tax
 
66,222

 
(52,185
)
Other assets
 
(2,439
)
 
21

Reserve for losses and LAE
 
6,505

 
3,437

Unearned premium reserve
 
32,659

 
26,261

Other accrued liabilities
 
(3,888
)
 
(4,139
)
Net cash provided by operating activities
 
485,954

 
252,021

 
 
 
 
 
Investing Activities
 
 

 
 

Net change in short-term investments
 
120,782

 
(164,165
)
Purchase of investments available for sale
 
(861,042
)
 
(567,335
)
Proceeds from maturity of investments available for sale
 
82,746

 
51,440

Proceeds from sales of investments available for sale
 
241,865

 
197,623

Purchase of other invested assets
 
(24,751
)
 

Distributions from other invested assets
 
386

 

Purchase of property and equipment
 
(2,947
)
 
(2,661
)
Net cash used in investing activities
 
(442,961
)
 
(485,098
)
 
 
 
 
 
Financing Activities
 
 

 
 

Issuance of common shares, net of costs
 

 
198,212

Credit facility borrowings
 
15,000

 
125,000

Credit facility repayments
 
(40,000
)
 
(50,000
)
Treasury stock acquired
 
(31,204
)
 
(7,329
)
Payment of issuance costs for credit facility
 
(516
)
 
(2,596
)
Net cash (used in) provided by financing activities
 
(56,720
)
 
263,287

 
 
 
 
 
Net (decrease) increase in cash
 
(13,727
)
 
30,210

Cash at beginning of year
 
43,524

 
27,531

Cash at end of period
 
$
29,797

 
$
57,741

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income tax payments
 
$
(18,600
)
 
$
(28,300
)
Interest payments
 
(7,051
)
 
(3,120
)
 
 
 
 
 
Noncash Transactions
 
 
 
 
Repayment of borrowings with term loan proceeds (see Note 6)
 
$
(100,000
)
 
$
(125,000
)
 
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. A significant portion of our premium revenue relates to master policies with certain lending institutions. For the nine months ended September 30, 2018 one lender represented 10% of our total revenue. The loss of this customer could have a significant impact on our revenues and results of operations.

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, 2017, 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, 2018 prior to the issuance of these condensed consolidated financial statements.

Within the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017, the financing activities were revised to reflect the repayment of credit facility borrowings with term loan proceeds of $125 million as a non-cash transaction to be consistent with the December 31, 2017 presentation. The term loan proceeds were directly applied at closing to pay down credit facility borrowings. This revision did not impact net cash provided by financing activities or the net increase in cash or any other financial statements or disclosures for the nine months ended September 30, 2017.

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,

5

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


and uncertainty of revenue and cash flows arising from contracts with customers. 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. The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not have a material effect on the Company's consolidated operating results or financial position.

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 Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not 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. We anticipate adopting this standard on January 1, 2019 using the retrospective adoption approach as of the adoption date and electing certain practical expedients allowed under the standard. The adoption of this ASU is not expected to have a material effect on the Company's consolidated operating results or financial position.

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.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The provisions of this update are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for the removed disclosures. The Company is evaluating the impact the adoption of this ASU will have on the consolidated financial statements and related disclosures.


6

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


Note 3. Investments
 
Investments available for sale consist of the following:
September 30, 2018 (In thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
275,423

 
$

 
$
(10,190
)
 
$
265,233

U.S. agency securities
 
33,651

 

 
(974
)
 
32,677

U.S. agency mortgage-backed securities
 
588,499

 
117

 
(21,990
)
 
566,626

Municipal debt securities(1)
 
462,546

 
2,096

 
(7,136
)
 
457,506

Non-U.S. government securities
 
44,964

 
87

 
(253
)
 
44,798

Corporate debt securities(2)
 
720,722

 
295

 
(14,687
)
 
706,330

Residential and commercial mortgage securities
 
102,093

 
547

 
(991
)
 
101,649

Asset-backed securities
 
299,952

 
280

 
(1,211
)
 
299,021

Money market funds
 
191,911

 
1

 

 
191,912

Total investments available for sale
 
$
2,719,761

 
$
3,423

 
$
(57,432
)
 
$
2,665,752

December 31, 2017 (In thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
231,905

 
$
2

 
$
(4,102
)
 
$
227,805

U.S. agency securities
 
33,669

 

 
(555
)
 
33,114

U.S. agency mortgage-backed securities
 
462,986

 
567

 
(7,516
)
 
456,037

Municipal debt securities(1)
 
457,418

 
9,098

 
(1,261
)
 
465,255

Corporate debt securities(2)
 
610,516

 
4,249

 
(3,037
)
 
611,728

Residential and commercial mortgage securities
 
78,974

 
791

 
(358
)
 
79,407

Asset-backed securities
 
167,638

 
467

 
(183
)
 
167,922

Money market funds
 
263,808

 

 
(11
)
 
263,797

Total investments available for sale
 
$
2,306,914

 
$
15,174

 
$
(17,023
)
 
$
2,305,065

 
 
 
September 30,
 
December 31,
(1) The following table summarizes municipal debt securities as of :
 
2018
 
2017
Special revenue bonds
 
66.3
%
 
63.6
%
General obligation bonds
 
28.6

 
30.7

Certificate of participation bonds
 
3.7

 
4.4

Tax allocation bonds
 
0.9

 
0.8

Special tax bonds
 
0.5

 
0.5

Total
 
100.0
%
 
100.0
%
 
 
September 30,
 
December 31,
(2) The following table summarizes corporate debt securities as of :
 
2018
 
2017
Financial
 
37.7
%
 
45.9
%
Consumer, non-cyclical
 
21.4

 
16.2

Communications
 
12.4

 
7.3

Energy
 
6.9

 
7.8

Consumer, cyclical
 
5.5

 
5.3

Industrial
 
5.4

 
6.3

Utilities
 
4.7

 
5.3

Technology
 
3.5

 
3.9

Basic materials
 
2.5

 
2.0

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, 2018, 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
 
$
1,995

 
$
1,977

Due after 1 but within 5 years
 
173,681

 
170,686

Due after 5 but within 10 years
 
70,168

 
65,030

Due after 10 years
 
29,579

 
27,540

Subtotal
 
275,423

 
265,233

U.S. agency securities:
 
 

 
 

Due in 1 year
 

 

Due after 1 but within 5 years
 
33,651

 
32,677

Subtotal
 
33,651

 
32,677

Municipal debt securities:
 
 

 
 

Due in 1 year
 
27,808

 
27,768

Due after 1 but within 5 years
 
91,977

 
91,050

Due after 5 but within 10 years
 
174,111

 
172,250

Due after 10 years
 
168,650

 
166,438

Subtotal
 
462,546

 
457,506

Non-U.S. government securities:
 
 
 
 
Due in 1 year
 

 

Due after 1 but within 5 years
 
19,770

 
19,790

Due after 5 but within 10 years
 
25,194

 
25,008

Subtotal
 
44,964

 
44,798

Corporate debt securities:
 
 

 
 

Due in 1 year
 
76,859

 
76,455

Due after 1 but within 5 years
 
375,792

 
369,276

Due after 5 but within 10 years
 
259,457

 
252,293

Due after 10 years
 
8,614

 
8,306

Subtotal
 
720,722

 
706,330

U.S. agency mortgage-backed securities
 
588,499

 
566,626

Residential and commercial mortgage securities
 
102,093

 
101,649

Asset-backed securities
 
299,952

 
299,021

Money market funds
 
191,911

 
191,912

Total investments available for sale
 
$
2,719,761

 
$
2,665,752


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)
 
2018
 
2017
 
2018
 
2017
Realized gross gains
 
$
574

 
$
605

 
$
1,883

 
$
2,035

Realized gross losses
 
50

 
41

 
723

 
272

 

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, 2018 (In thousands)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities
 
$
122,842

 
$
(1,525
)
 
$
142,391

 
$
(8,665
)
 
$
265,233

 
$
(10,190
)
U.S. agency securities
 
500

 
(15
)
 
32,177

 
(959
)
 
32,677

 
(974
)
U.S. agency mortgage-backed securities
 
266,952

 
(5,822
)
 
277,959

 
(16,168
)
 
544,911

 
(21,990
)
Municipal debt securities
 
277,700

 
(5,196
)
 
55,770

 
(1,940
)
 
333,470

 
(7,136
)
Non-U.S. government securities
 
23,316

 
(253
)
 

 

 
23,316

 
(253
)
Corporate debt securities
 
518,678

 
(10,146
)
 
139,222

 
(4,541
)
 
657,900

 
(14,687
)
Residential and commercial mortgage securities
 
50,881

 
(473
)
 
10,095

 
(518
)
 
60,976

 
(991
)
Asset-backed securities
 
214,400

 
(1,099
)
 
6,281

 
(112
)
 
220,681

 
(1,211
)
Total
 
$
1,475,269

 
$
(24,529
)
 
$
663,895

 
$
(32,903
)
 
$
2,139,164

 
$
(57,432
)
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2017 (In thousands)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities
 
$
151,119

 
$
(1,240
)
 
$
69,454

 
$
(2,862
)
 
$
220,573

 
$
(4,102
)
U.S. agency securities
 
17,320

 
(190
)
 
15,794

 
(365
)
 
33,114

 
(555
)
U.S. agency mortgage-backed securities
 
180,443

 
(1,394
)
 
217,944

 
(6,122
)
 
398,387

 
(7,516
)
Municipal debt securities
 
124,171

 
(817
)
 
23,492

 
(444
)
 
147,663

 
(1,261
)
Corporate debt securities
 
214,371

 
(1,213
)
 
94,261

 
(1,824
)
 
308,632

 
(3,037
)
Residential and commercial mortgage securities
 
29,842

 
(179
)
 
5,988

 
(179
)
 
35,830

 
(358
)
Asset-backed securities
 
58,798

 
(133
)
 
5,828

 
(50
)
 
64,626

 
(183
)
Money market funds
 
59,489

 
(11
)
 

 

 
59,489

 
(11
)
Total
 
$
835,553

 
$
(5,177
)
 
$
432,761

 
$
(11,846
)
 
$
1,268,314

 
$
(17,023
)
 
The gross unrealized losses on these investment securities are principally associated with the changes in market interest rates as well as changes in 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 each of the three and nine months ended September 30, 2018 and 2017.

The Company's other invested assets at September 30, 2018 and December 31, 2017 totaled $24.9 million and $0.5 million, respectively. Other invested assets are comprised of limited partnership interests which are accounted for under the equity method of accounting. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the partnership. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.

The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $8.5 million as of September 30, 2018 and $8.6 million as of December 31, 2017. 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 $714.4 million at September 30, 2018 and $615.8 million at December 31, 2017. In connection with an excess-of-loss reinsurance agreement (see Note 4), Essent Guaranty is required to maintain assets on deposit for the benefit of the reinsurer. The fair value of the assets on deposit was $3.4 million at September 30, 2018. Essent Guaranty is also required to maintain assets on deposit for the benefit of the sponsor of a fixed income investment commitment. The fair value of the assets on deposit was $6.3 million at September 30, 2018.

9

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



Net investment income consists of: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Fixed maturities
 
$
16,476

 
$
10,982

 
$
44,615

 
$
29,964

Short-term investments
 
910

 
330

 
2,959

 
463

Gross investment income
 
17,386

 
11,312

 
47,574

 
30,427

Investment expenses
 
(740
)
 
(686
)
 
(2,080
)
 
(1,966
)
Net investment income
 
$
16,646

 
$
10,626

 
$
45,494

 
$
28,461

 
Note 4. Reinsurance
 
In the ordinary course of business, our insurance subsidiaries may use reinsurance to provide protection against adverse loss experience and to expand our capital sources. Reinsurance recoverables are recorded as assets, predicated on a reinsurer's ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, our insurance subsidiaries would be liable for such defaulted amounts.

On March 22, 2018, Essent Guaranty entered into a fully collateralized reinsurance agreement with Radnor Re 2018-1 Ltd. ("Radnor Re"), an unaffiliated special purpose insurer domiciled in Bermuda, that provides for up to $424.4 million of aggregate excess-of-loss reinsurance coverage at inception for new defaults on a portfolio of mortgage insurance policies issued between January 1, 2017 and December 31, 2017. For the reinsurance coverage period, Essent Guaranty and its affiliates will retain the first layer of $224.7 million of aggregate losses, and Radnor Re will then provide second layer coverage up to the outstanding reinsurance coverage amount. Essent Guaranty and its affiliates retain losses in excess of the outstanding reinsurance coverage amount. The reinsurance premium due to Radnor Re is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR plus a risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during that period. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate the reinsurance agreement, which includes an option to terminate after five years from issuance. If the reinsurance agreement is not terminated after five years from issuance, the risk margin component of the reinsurance premium payable to Radnor Re increases by 50%. Radnor Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $424.4 million to unaffiliated investors. The notes have ten-year legal maturities and are non-recourse to any assets of Essent Guaranty or its affiliates. The proceeds of the notes were deposited into a reinsurance trust for the benefit of Essent Guaranty that will be the source of reinsurance claim payments to Essent Guaranty and principal repayments on the mortgage insurance-linked notes.

The effect of reinsurance on net premiums written and earned is as follows:
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Net premiums written:
 
 
 
 
 
 
 
 
Direct
 
$
178,379

 
$
155,055

 
$
515,887

 
$
408,415

Ceded
 
(3,158
)
 

 
(7,037
)
 

Net premiums written
 
$
175,221

 
$
155,055

 
$
508,850

 
$
408,415

 
 
 
 
 
 
 
 
 
Net premiums earned:
 
 
 
 
 
 
 
 
Direct
 
$
169,833

 
$
137,940

 
$
483,228

 
$
382,154

Ceded
 
(3,158
)
 

 
(7,037
)
 

Net premiums earned
 
$
166,675

 
$
137,940

 
$
476,191

 
$
382,154



10

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


The amount of monthly reinsurance premium ceded will fluctuate due to changes in one-month LIBOR and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreement contains an embedded derivative that will be accounted for separately like a freestanding derivative. The fair value of this derivative at September 30, 2018 and the change in its fair value from inception of the reinsurance agreement to September 30, 2018 was not material.

In connection with entering the reinsurance agreement with Radnor Re, we concluded that the risk transfer requirements for reinsurance accounting were met as Radnor Re is assuming significant insurance risk and a reasonable possibility of a significant loss. In addition, we assessed whether Radnor Re was a variable interest entity ("VIE") and the appropriate accounting for Radnor Re if it was a VIE. A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity. A VIE is consolidated by its primary beneficiary. The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of the decision-making ability and ability to influence activities that significantly affect the economic performance of the VIE. We concluded that Radnor Re is a VIE. However, given that Essent Guaranty (1) does not have the unilateral power to direct the activities that most significantly affect Radnor Re’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits that could be potentially significant to Radnor Re, Radnor Re is not consolidated in these financial statements.

The following table presents total assets of Radnor Re as well as our maximum exposure to loss associated with Radnor Re, representing the estimated net present value of investment earnings on the assets in the reinsurance trust, each as of September 30, 2018:

 
 
 
 
Maximum Exposure to Loss
(In thousands)
 
Total VIE Assets
 
On - Balance Sheet
 
Off - Balance Sheet
 
Total
Radnor Re 2018-1 Ltd.
 
$
424,412

 
$

 
$
20,958

 
$
20,958

Total
 
$
424,412

 
$

 
$
20,958

 
$
20,958



11

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


Note 5. 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)
 
2018
 
2017
Reserve for losses and LAE at beginning of period
 
$
46,850

 
$
28,142

Less: Reinsurance recoverables
 

 

Net reserve for losses and LAE at beginning of period
 
46,850

 
28,142

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

 
 

Current period
 
25,199

 
19,266

Prior years
 
(12,625
)
 
(9,490
)
Net incurred losses and LAE during the current period
 
12,574

 
9,776

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

 
 

Current period
 
620

 
243

Prior years
 
5,449

 
6,096

Net loss and LAE payments during the current period
 
6,069

 
6,339

Net reserve for losses and LAE at end of period
 
53,355

 
31,579

Plus: Reinsurance recoverables
 

 

Reserve for losses and LAE at end of period
 
$
53,355

 
$
31,579

 
 
 
 
 
Loans in default at end of period
 
3,538

 
2,153

 
For the nine months ended September 30, 2018, $5.4 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $12.6 million favorable prior year development during the nine months ended September 30, 2018. Reserves remaining as of September 30, 2018 for prior years are $28.8 million as a result of re-estimation of unpaid losses and loss adjustment expenses. 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 was 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 were $12.6 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 have impacted 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. Loans in default identified as hurricane-related defaults totaled 2,288 as of December 31, 2017. The number of hurricane-related defaults declined to 301 as of September 30, 2018 primarily due to hurricane-related loans in default that cured. Based on prior industry experience, we expect the ultimate number of hurricane-related defaults that result in claims will be less than the default-to-claim experience of non-hurricane-related defaults. In addition, 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. The reserve for losses and LAE on hurricane-related defaults was $11.1 million at September 30, 2018 and December 31, 2017. The impact on our reserves in future periods will be dependent upon the performance of the hurricane-related defaults and our expectations for the amount of ultimate losses on these delinquencies.

Note 6. Debt Obligations
 
Credit Facility

Essent Group and its subsidiaries, Essent Irish Intermediate Holdings Limited and Essent US Holdings, Inc. (collectively, the "Borrowers"), are parties to a secured credit facility (the “Credit Facility”) which provides for a revolving

12

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


credit facility, term loans and an 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 borrowings under the Credit Facility 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.

On May 2, 2018, the Credit Facility was amended to increase the committed capacity by $125 million to $500 million and to increase the uncommitted line by $25 million to $100 million. The revolving component of the Credit Facility was increased from $250 million to $275 million, and the Borrowers issued $100 million of additional term loans, resulting in $225 million of term loans outstanding. The proceeds of $100 million of additional term loans were used to pay down borrowings outstanding under the revolving component of the Credit Facility. The interest rate, contractual maturity and other terms of the Credit Facility are otherwise unchanged from those described above. As of September 30, 2018, the Company was in compliance with the covenants and $225 million had been borrowed under the Credit Facility with a weighted average interest rate of 4.15%. As of December 31, 2017, $250 million had been borrowed with a weighted average interest rate of 3.49%.


Note 7. 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, 2018 and 2017. As of September 30, 2018, management believes any potential claims for indemnification related to contract underwriting services through September 30, 2018 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, 2018, 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.
 

13

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


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, 2018:
 
 
 
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
 
1,595

 
$
17.03

 
410

 
$
21.12

 
536

 
$
29.13

Granted
 
113

 
45.02

 
73

 
45.02

 
161

 
42.19

Vested
 
(1,226
)
 
14.71

 
(276
)
 
18.67

 
(222
)
 
28.27

Forfeited
 

 
N/A

 

 
N/A

 
(7
)
 
31.31

Outstanding at September 30, 2018
 
482

 
$
29.49

 
207

 
$
32.82

 
468

 
$
34.00


In February 2018, 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 2018 vest in three equal installments on March 1, 2019, 2020 and 2021. The performance-based share awards granted in February 2018 vest based upon our compounded annual book value per share growth percentage during a three-year performance period that commenced on January 1, 2018 and vest on March 1, 2021. 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
 
 
 
<15
%
 
0
%
Threshold
 
 
15
%
 
25
%
 
 
 
16
%
 
50
%
 
 
 
17
%
 
75
%
Maximum
 
 
≥18
%
 
100
%
 
 
 
 
 
 
 
In the event that the compounded annual book value per share growth falls between the performance levels shown above, the nonvested common shares earned will be determined on a straight-line basis between the respective levels shown.
 
In connection with our incentive program covering bonus awards for performance year 2017, in February 2018, time-based share awards and share units were issued to certain employees that vest in three equal installments on March 1, 2019, 2020 and 2021. In May 2018, time-based share units were granted to non-employee directors that vest one year from the date of grant.

The total fair value on the vesting date of nonvested shares or share units that vested was $75.2 million and $21.6 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there was $22.0 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at September 30, 2018 and we expect to recognize the expense over a weighted average period of 2.0 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 713,932 in the nine months ended September 30, 2018. The tendered shares were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of September 30, 2018.
 

14

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


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)
 
2018
 
2017
 
2018
 
2017
Compensation expense
 
$
3,837

 
$
4,692

 
$
11,269

 
$
13,980

Income tax benefit
 
713

 
1,513

 
2,098

 
4,498

 
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)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
116,011

 
$
78,393

 
$
338,835

 
$
217,109

Less: dividends declared
 

 

 

 

Net income available to common shareholders
 
$
116,011


$
78,393


$
338,835


$
217,109

Basic earnings per share
 
$
1.19

 
$
0.83

 
$
3.48

 
$
2.35

Diluted earnings per share
 
$
1.18

 
$
0.82

 
$
3.46

 
$
2.31

Basic weighted average shares outstanding
 
97,438

 
94,185

 
97,388

 
92,285

Dilutive effect of nonvested shares
 
575


1,909


556


1,819

Diluted weighted average shares outstanding
 
98,013

 
96,094

 
97,944

 
94,104

 
There were 11,445 and 956 antidilutive shares for the three months ended September 30, 2018 and 2017, respectively and 164,874 and 59,534 antidilutive shares for the nine months ended September 30, 2018 and 2017, 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 September 30, 2018 and 2017, 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.


15

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


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, 2018 and 2017
 
 
Three Months Ended September 30, 2018
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
(44,456
)
 
$
5,208

 
$
(39,248
)
Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding gains (losses) on investments:
 
 
 
 
 
 
Unrealized holding losses arising during the period
 
(9,029
)
 
1,241

 
(7,788
)
Less: Reclassification adjustment for gains included in net income (1)
 
(524
)
 
111

 
(413
)
Net unrealized losses on investments
 
(9,553
)
 
1,352

 
(8,201
)
Other comprehensive loss
 
(9,553
)
 
1,352

 
(8,201
)
Balance at end of period
 
$
(54,009
)
 
$
6,560

 
$
(47,449
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of year
 
$
(1,849
)
 
$
(1,403
)
 
$
(3,252
)
Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding gains (losses) on investments:
 
 
 
 
 
 
Unrealized holding losses arising during the period
 
(51,000
)
 
7,686

 
(43,314
)
Less: Reclassification adjustment for gains included in net income (1)
 
(1,160
)
 
277

 
(883
)
Net unrealized losses on investments
 
(52,160
)
 
7,963

 
(44,197
)
Other comprehensive loss
 
(52,160
)
 
7,963

 
(44,197
)
Balance at end of period
 
$
(54,009
)
 
$
6,560

 
$
(47,449
)

16

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


 
 
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 (losses) on investments:
 
 
 
 
 
 
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 (losses) on investments:
 
 
 
 
 
 
Unrealized holding gains arising during the period
 
23,523

 
(7,071