AM Best Affirms Credit Ratings Of Essent

September 14, 2019

AM Best has affirmed the Financial Strength Rating of A [Excellent] and a Long-Term Issuer Credit Rating of “a” of the operating subsidiaries of Essent Group Ltd., which are Essent Guaranty, Inc., Essent Guaranty of PA, Inc. [both domiciled in Radnor, PA] and Essent Reinsurance Ltd. [Bermuda] [collectively referred to as Essent]. The outlook of these Credit Ratings [ratings] is stable.

The ratings agency said, “The ratings reflect Essent’s balance sheet strength, which AM Best categorizes as strongest, as well as its strong operating performance, limited business profile and appropriate enterprise risk management [ERM].

“Essent’s risk-adjusted capital, as measured by the Best Capital Adequacy Ratio [BCAR], is at the strongest level on a stressed and unstressed basis. Shareholder equity at Essent has increased in the past five years, and AM Best expects further increases in the near term.

“The company’s strong liquidity position, conservative investment portfolio and financial flexibility, continued transfer of mortgage exposures to the capital market through the use of mortgage insurance-linked securities, as well as Essent’s compliance with the Private Mortgage Insurer Eligibility Requirements [PMIERs 2.0] support the balance sheet assessment of strongest.

“Essent’s operating performance is assessed as strong based on positive underwriting performance results as reflected in the loss and combined ratios over the past five years. Since Essent is a relatively new company, its mortgage portfolio is unencumbered by the legacy business that has hampered other mortgage insurers in operation prior to the most-recent credit crisis.

“The company’s expense ratio has declined significantly over the past four years as it continued to scale up its production and achieve scale. Essent’s overall operating performance from its formation through the present time has been fueled by favorable macroeconomic conditions that greatly impact the quality of mortgage originations and the credit profile of borrowers.

“Essent’s business profile is assessed as limited, as the company is a monoline [re]insurer. Furthermore, it faces stiff competition, not only from other private mortgage insurers and governmental agencies [i.e., Federal Housing Administration and Veterans Affairs] providing mortgage insurance, but also from products that effectively reduce the demand for private mortgage insurance. In addition, the product risk is considered high because the performance of the mortgage insurance industry is linked to the macroeconomic environment and the policies of the government-sponsored enterprises [i.e., Fannie Mae and Freddie Mac].

“Essent’s overall ERM assessment is appropriate, as the company employs a robust ERM framework and infrastructure embedded across the company. Essent’s ERM framework is commensurate with the size, nature and complexity of its mortgage insurance business. AM Best considers Essent’s risk assessment capabilities to be aligned appropriately with its risk profile.”

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