AM Best Comment On Essent Credit Ratings
AM Best has commented that the Financial Strength Rating of A [Excellent] and the Long-Term Issuer Credit Ratings of “a” of the operating subsidiaries of Essent Group Ltd., each with a stable outlook, remained unchanged despite the Covid-19 pandemic.
The ratings agency said, “AM Best revised its market segment outlook on the U.S. private mortgage insurance segment to negative from stable on April 7, 2020, owing to the expected increase in losses on mortgages due to higher unemployment and significant contraction in gross domestic product.
“This public comment specifically considers Essent’s current overall capitalization assessment in light of the economic impact of the Covid-19 pandemic under various stress scenarios. These scenarios include increases in realized losses, and other stress test components in the baseline stress test outlined in “Stress Testing Rated Companies for Covid-19,” published by AM Best on May 18, 2020.
“The application of the Covid-19 stresses on Essent’s book of business broadly follows the guidelines in AM Best’s criteria procedure, “Catastrophe Analysis in AM Best Ratings.” The most impactful stresses relate to the assumed claim rates, which range from 4-6% of Essent’s current risk-in-force, which was $41.8 billion as of March 31, 2020. In these stress tests, AM Best assumes that Essent realizes losses over a two-year period [while booking premiums in that timeframe], and that surplus is reduced by tax-affected losses after reinsurance.
“After applying the various stresses to Essent’s book of business, the company’s risk-adjusted capitalization, as determined by Best’s Capital Adequacy Ratio [BCAR], is at the strongest level.
“Essent’s level of capitalization is affected by a multitude of factors including: its level of surplus and contingency reserves; the assumed lag in realized losses, due to forbearance programs and foreclosure moratoriums; and its reinsurance programs through traditional reinsurance and mortgage insurance-linked securities [i.e., Radnor Re transactions].
“Like all private mortgage insurers, Essent’s fortunes are tied to the economy, which has been affected dramatically by the Covid-19 pandemic. Specifically, there remains great uncertainty as to the ultimate peak of the pandemic-induced unemployment rate and the pace of the economic recovery that should follow. AM Best will reassess its views of Essent’s capitalization as it gets more visibility of the pandemic’s economic impact on mortgages.“
