UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended ~~June 30, 2020~~March 31, 2021

☐ 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~~
Bermuda		Not Applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Clarendon House

2 Church Street

HamiltonHM11,, Bermuda

(Address of principal executive offices and zip code)

(~~441~~) (441) 297-9901

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, $0.015 par value	ESNT	New York Stock Exchange

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 ☒ No ☐

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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of the registrant’s common shares outstanding as of ~~August~~May 3, ~~2020~~2021 was ~~112,423,304.~~112,850,813.

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Essent Group Ltd. and Subsidiaries

Form 10-Q

Index

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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, ~~2019~~2020 filed with the Securities and Exchange Commission. These factors include, without limitation, the following:

•the duration, spread and severity of the outbreak of novel coronavirus disease 2019 ("COVID-19"), which is currently ongoing and still evolving; the actions taken to contain the virus or treat its impact, including government and GSE actions to mitigate the economic impact of the outbreak; the nature and extent of the forbearance and modification options available to borrowers affected by the outbreak on mortgages we insure; reserve and other accounting estimates relating to the impact of the COVID-19 outbreak; borrower behavior in response to the outbreak and its economic impact; how quickly and to what extent normal economic and operating conditions can resume, including whether any future outbreaks interrupt economic recovery; how quickly and to what extent affected borrowers can recover from the negative economic impact of the outbreak; and whether and to what extent the outbreak and related economic conditions will exacerbate other risks and uncertainties facing our business, financial condition and business strategy;

•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;

•recently enacted U.S. Federal tax reform and its impact on us, our shareholders and our operations;

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•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;

•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 or reinsurance;

•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, as a result of COVID-19 or otherwise;

•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 restrictions on the ability 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

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Essent Group Ltd. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)


	June 30,		December 31,			March 31,		December 31,
(In thousands, except per share amounts)	2020		2019		(In thousands, except per share amounts)	2021		2020
Assets					Assets
Investments					Investments
Fixed maturities available for sale, at fair value (amortized cost: 2020 — $3,078,843; 2019 — $2,967,225)	$	3,221,149	$	3,035,385
Short-term investments available for sale, at fair value (amortized cost: 2020 — $1,130,963; 2019 — $315,360)	1,130,954		315,362
Fixed maturities available for sale, at fair value (amortized cost: 2021 — $4,167,570; 2020 — $3,677,815)					Fixed maturities available for sale, at fair value (amortized cost: 2021 — $4,167,570; 2020 — $3,677,815)	$	4,252,144	$	3,838,513
Short-term investments available for sale, at fair value (amortized cost: 2021 — $449,328; 2020 — $726,875)					Short-term investments available for sale, at fair value (amortized cost: 2021 — $449,328; 2020 — $726,875)	449,332		726,860
Total investments available for sale	4,352,103		3,350,747		Total investments available for sale	4,701,476		4,565,373
Other invested assets	78,536		78,873		Other invested assets	100,393		88,904
Total investments	4,430,639		3,429,620		Total investments	4,801,869		4,654,277
Cash	72,787		71,350		Cash	81,022		102,830
Accrued investment income	18,711		18,535		Accrued investment income	23,600		19,948
Accounts receivable	39,750		40,655		Accounts receivable	45,618		50,140
Deferred policy acquisition costs	15,856		15,705		Deferred policy acquisition costs	14,723		17,005
Property and equipment (at cost, less accumulated depreciation of $59,374 in 2020 and $57,639 in 2019)	15,458		17,308
Property and equipment (at cost, less accumulated depreciation of $61,830 in 2021 and $60,967 in 2020)					Property and equipment (at cost, less accumulated depreciation of $61,830 in 2021 and $60,967 in 2020)	14,258		15,095
Prepaid federal income tax	279,136		261,885		Prepaid federal income tax	302,636		302,636
Other assets	27,611		18,367		Other assets	48,120		40,793
Total assets	$	4,899,948	$	3,873,425	Total assets	$	5,331,846	$	5,202,724

Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Liabilities					Liabilities
Reserve for losses and LAE	$	250,890	$	69,362	Reserve for losses and LAE	$	411,123	$	374,941
Unearned premium reserve	258,567		278,887		Unearned premium reserve	235,730		250,436
Net deferred tax liability	272,746		249,620		Net deferred tax liability	318,622		305,109
Credit facility borrowings (at carrying value, less unamortized deferred costs of $477 in 2020 and $763 in 2019)	424,523		224,237
Credit facility borrowings (at carrying value, less unamortized deferred costs of $2,982 in 2021 and $3,280 in 2020)					Credit facility borrowings (at carrying value, less unamortized deferred costs of $2,982 in 2021 and $3,280 in 2020)	322,018		321,720
Other accrued liabilities	69,893		66,474		Other accrued liabilities	123,416		87,885
Total liabilities	1,276,619		888,580		Total liabilities	1,410,909		1,340,091
Commitments and contingencies (see Note 7)					Commitments and contingencies (see Note 7)	0		0
Stockholders’ Equity					Stockholders’ Equity
Common shares, $0.015 par value:					Common shares, $0.015 par value:
Authorized - 233,333; issued and outstanding - 112,423 shares in 2020 and 98,394 shares in 2019	1,686		1,476
Authorized - 233,333; issued and outstanding - 112,847 shares in 2021 and 112,423 shares in 2020					Authorized - 233,333; issued and outstanding - 112,847 shares in 2021 and 112,423 shares in 2020	1,693		1,686
Additional paid-in capital	1,561,737		1,118,655		Additional paid-in capital	1,571,134		1,571,163
Accumulated other comprehensive income	120,398		56,187		Accumulated other comprehensive income	79,071		138,274
Retained earnings	1,939,508		1,808,527		Retained earnings	2,269,039		2,151,510
Total stockholders’ equity	3,623,329		2,984,845		Total stockholders’ equity	3,920,937		3,862,633
Total liabilities and stockholders’ equity	$	4,899,948	$	3,873,425	Total liabilities and stockholders’ equity	$	5,331,846	$	5,202,724

See accompanying notes to condensed consolidated financial statements.

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Essent Group Ltd. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended March 31,
(In thousands, except per share amounts)	2020			2019		2020		2019		(In thousands, except per share amounts)		2021		2020
Revenues:										Revenues:
Net premiums written	$	205,904		$	188,404	$	397,647	$	366,048	Net premiums written		$	204,361	$	191,743
Decrease in unearned premiums	5,567			86		20,320		233		Decrease in unearned premiums		14,706		14,753
Net premiums earned	211,471			188,490		417,967		366,281		Net premiums earned		219,067		206,496
Net investment income	19,866			20,581		40,499		40,461		Net investment income		21,788		20,633
Realized investment gains (losses), net	(1,269		)	583		1,866		1,243
Other income	6,009			2,238		4,585		4,433
Realized investment gains, net										Realized investment gains, net		641		3,135
Other income (loss)										Other income (loss)		3,301		(1,424)
Total revenues	236,077			211,892		464,917		412,418		Total revenues		244,797		228,840

Losses and expenses:										Losses and expenses:
Provision for losses and LAE	175,877			4,960		183,940		12,067		Provision for losses and LAE		32,322		8,063
Other underwriting and operating expenses	38,819			41,520		80,766		82,550		Other underwriting and operating expenses		42,239		41,947
Interest expense	2,566			2,679		4,698		5,349		Interest expense		2,051		2,132
Total losses and expenses	217,262			49,159		269,404		99,966		Total losses and expenses		76,612		52,142

Income before income taxes	18,815			162,733		195,513		312,452		Income before income taxes		168,185		176,698
Income tax expense	3,435			26,328		30,610		48,327		Income tax expense		32,537		27,175
Net income	$	15,380		$	136,405	$	164,903	$	264,125	Net income		$	135,648	$	149,523

Earnings per share:										Earnings per share:
Basic	$	0.15		$	1.39	$	1.65	$	2.70	Basic		$	1.21	$	1.53
Diluted	0.15			1.39		1.64		2.69		Diluted		1.21		1.52

Weighted average shares outstanding:										Weighted average shares outstanding:
Basic	102,500			97,798		100,224		97,697		Basic		112,016		97,949
Diluted	102,605			98,170		100,466		98,137		Diluted		112,378		98,326

Net income	$	15,380		$	136,405	$	164,903	$	264,125	Net income		$	135,648	$	149,523

Other comprehensive income (loss):										Other comprehensive income (loss):
Change in unrealized appreciation of investments, net of tax expense of $17,592 and $7,094 in the three months ended June 30, 2020 and 2019 and $10,613 and $15,045 in the six months ended June 30, 2020 and 2019	74,285			35,987		64,211		74,353
Total other comprehensive income	74,285			35,987		64,211		74,353
Change in unrealized depreciation of investments, net of tax benefit of $(10,201) and $(6,979) in the three months ended March 31, 2021 and 2020										Change in unrealized depreciation of investments, net of tax benefit of $(10,201) and $(6,979) in the three months ended March 31, 2021 and 2020		(59,203)		(10,074)
Total other comprehensive loss										Total other comprehensive loss		(59,203)		(10,074)
Comprehensive income	$	89,665		$	172,392	$	229,114	$	338,478	Comprehensive income		$	76,445	$	139,449

See accompanying notes to condensed consolidated financial statements.

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Essent Group Ltd. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


	Three Months Ended March 31,
(In thousands)		2021		2020
Common Shares
Balance, beginning of period		$	1,686	$	1,476

Issuance of management incentive shares		8		5
Cancellation of treasury stock		(1)		(2)
Balance, end of period		1,693		1,479

Additional Paid-In Capital
Balance, beginning of period		1,571,163		1,118,655

Dividends and dividend equivalents declared		176		160
Issuance of management incentive shares		(8)		(5)
Stock-based compensation expense		5,179		4,780
Cancellation of treasury stock		(5,376)		(6,304)
Balance, end of period		1,571,134		1,117,286

Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period		138,274		56,187
Other comprehensive loss		(59,203)		(10,074)
Balance, end of period		79,071		46,113

Retained Earnings
Balance, beginning of period		2,151,510		1,808,527
Net income		135,648		149,523
Dividends and dividend equivalents declared		(18,119)		(15,854)
Balance, end of period		2,269,039		1,942,196

Treasury Stock
Balance, beginning of period		0		0
Treasury stock acquired		(5,377)		(6,306)
Cancellation of treasury stock		5,377		6,306
Balance, end of period		0		0

Total Stockholders' Equity		$	3,920,937	$	3,107,074

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Common Shares

Balance, beginning of period $ 1,479
$ 1,475
$ 1,476
$ 1,472
Issuance of common shares 207
—
207
—
Issuance of management incentive shares —
1
5
7
Cancellation of treasury stock —
—
(2 ) (3 )
Balance, end of period 1,686
1,476
1,686
1,476

Additional Paid-In Capital
Balance, beginning of period 1,117,286
1,106,797
1,118,655
1,110,800
Issuance of common shares, net of issuance costs of $18,875 439,768
—
439,768
—
Dividends and dividend equivalents declared 163
—
323
—
Issuance of management incentive shares —
(1 ) (5 ) (7 )
Stock-based compensation expense 4,568
4,222
9,348
8,322
Cancellation of treasury stock (48 ) (125 ) (6,352 ) (8,222 )
Balance, end of period 1,561,737
1,110,893
1,561,737
1,110,893

Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period 46,113
9,373
56,187
(28,993 )
Other comprehensive income 74,285
35,987
64,211
74,353
Balance, end of period 120,398
45,360
120,398
45,360

Retained Earnings
Balance, beginning of period 1,942,196
1,410,158
1,808,527
1,282,438
Net income 15,380
136,405
164,903
264,125
Dividends and dividend equivalents declared (18,068 ) —
(33,922 ) —
Balance, end of period 1,939,508
1,546,563
1,939,508
1,546,563

Treasury Stock
Balance, beginning of period —
—
—
—
Treasury stock acquired (48 ) (125 ) (6,354 ) (8,225 )
Cancellation of treasury stock 48
125
6,354
8,225
Balance, end of period —
—
—
—

Total Stockholders' Equity $ 3,623,329
$ 2,704,292
$ 3,623,329
$ 2,704,292

See accompanying notes to condensed consolidated financial statements.

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Essent Group Ltd. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,							Three Months Ended March 31,
(In thousands)	2020			2019			(In thousands)	2021		2020
Operating Activities							Operating Activities
Net income	$	164,903		$	264,125		Net income	$	135,648	$	149,523
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Gain on the sale of investments, net	(1,866		)	(1,243		)	Gain on the sale of investments, net	(641)		(3,135)
Equity in net loss (income) of other invested assets	(228		)	291
Equity in net (income) loss of other invested assets							Equity in net (income) loss of other invested assets	(526)		96
Distribution of income from other invested assets	794			—			Distribution of income from other invested assets	428		339
Depreciation and amortization	1,735			1,826			Depreciation and amortization	863		878
Stock-based compensation expense	9,348			8,322			Stock-based compensation expense	5,179		4,780
Amortization of premium on investment securities	11,548			7,455			Amortization of premium on investment securities	6,468		5,840
Deferred income tax provision	12,513			28,973			Deferred income tax provision	23,714		17,047
Change in:							Change in:
Accrued investment income	(176		)	(760		)	Accrued investment income	(3,652)		(37)
Accounts receivable	1,238			(1,508		)	Accounts receivable	3,867		805
Deferred policy acquisition costs	(151		)	219			Deferred policy acquisition costs	2,282		558
Prepaid federal income tax	(17,251		)	(28,000		)

Other assets	(7,622		)	(7,832		)	Other assets	(6,874)		(2,877)
Reserve for losses and LAE	181,528			5,674			Reserve for losses and LAE	36,182		3,979
Unearned premium reserve	(20,320		)	(233		)	Unearned premium reserve	(14,706)		(14,753)
Other accrued liabilities	9,792			(11,825		)	Other accrued liabilities	(461)		88
Net cash provided by operating activities	345,785			265,484			Net cash provided by operating activities	187,771		163,131

Investing Activities							Investing Activities
Net change in short-term investments	(815,592		)	(97,068		)	Net change in short-term investments	277,528		(279,803)
Purchase of investments available for sale	(541,193		)	(498,210		)	Purchase of investments available for sale	(681,516)		(294,746)
Proceeds from maturity of investments available for sale	113,217			39,527			Proceeds from maturity of investments available for sale	56,603		29,472
Proceeds from sales of investments available for sale	299,149			299,443			Proceeds from sales of investments available for sale	166,390		159,127
Purchase of other invested assets	(6,618		)	(39,408		)	Purchase of other invested assets	(11,150)		(2,310)
Return of investment from other invested assets	7,078			556			Return of investment from other invested assets	6,460		7,300
Purchase of property and equipment	(934		)	(1,775		)	Purchase of property and equipment	(574)		(466)
Net cash used in investing activities	(944,893		)	(296,935		)	Net cash used in investing activities	(186,259)		(381,426)

Financing Activities							Financing Activities
Issuance of common shares, net of costs	440,498			—

Credit facility borrowings	200,000			—			Credit facility borrowings	0		200,000

Treasury stock acquired	(6,354		)	(8,225		)	Treasury stock acquired	(5,377)		(6,306)
Payment of issuance costs for credit facility	—			(15		)

Dividends paid	(33,599		)	—			Dividends paid	(17,943)		(15,694)
Net cash provided by (used in) financing activities	600,545			(8,240		)

Net increase (decrease) in cash	1,437			(39,691		)
Net cash (used in) provided by financing activities							Net cash (used in) provided by financing activities	(23,320)		178,000

Net decrease in cash							Net decrease in cash	(21,808)		(40,295)
Cash at beginning of year	71,350			64,946			Cash at beginning of year	102,830		71,350
Cash at end of period	$	72,787		$	25,255		Cash at end of period	$	81,022	$	31,055

Supplemental Disclosure of Cash Flow Information							Supplemental Disclosure of Cash Flow Information
Income tax payments	$	(10,000	)	$	(21,005	)

Interest payments	(4,283		)	(5,179		)	Interest payments	(1,762)		(1,641)

Noncash Transactions
Lease liabilities arising from obtaining right-of-use assets	$	—		$	18

See accompanying notes to condensed consolidated financial statements.

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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 new insurance written ("NIW") 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. In April 2021, Essent Guaranty and Essent Re agreed to increase the quota share reinsurance coverage of Essent Guaranty’s NIW provided by Essent Re to 35% effective January 1, 2021. The quota share reinsurance coverage provided by Essent Re for Essent Guaranty’s NIW prior to January 1, 2021 will continue to be 25%, the quota share percentage in effect at the time NIW was first ceded. 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 consulting services to third-party reinsurers. In accordance with certain state law requirements then in effect, Essent Guaranty also reinsures that portion of the risk that is in excess of 25% of the mortgage balance with respect to loans insured prior to April 1, 2019, 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, ~~2019,~~2020, 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 ~~June 30, 2020~~March 31, 2021 prior to the issuance of these condensed consolidated financial statements.

Note 2.2. Recently Issued Accounting Standards

~~Accounting Standards Adopted During 2020~~

~~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 accounting for insurance losses and loss adjustment expenses ("LAE") are not within the scope of this ASU. The provisions of this update were effective for annual and interim periods beginning after December 15, 2019 and we adopted this standard on January 1, 2020 using the modified retrospective approach. The adoption of this ASU did not have a material effect on the Company's consolidated operating results or financial position.

~~Table of Contents~~

~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~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 were effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for the removed disclosures. We adopted this standard on January 1, 2020. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In March 2020, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. It provides optional expedients and exceptions for applying generally accepted accounting principles to contract, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ~~The amendments in this update are effective as of~~This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, ~~2022.~~2022 as reference rate reform activities occur. The ~~Company is evaluating~~adoption of, and future elections under, this ASU are not expected to have a material impact on our consolidated financial statements as the ASU will ease, if warranted, the requirements for accounting for the future effects of the rate reform. We continue to monitor the impact the ~~adoption~~discontinuance of ~~this ASU~~LIBOR or another reference rate will have on our ~~consolidated operating results~~contracts and ~~financial position.~~other transactions.

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 3.3. Investments

Investments available for sale consist of the following:


March 31, 2021 (In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury securities	$	257,401	$	5,854	$	(946)	$	262,309
U.S. agency securities	16,028		110		0		16,138
U.S. agency mortgage-backed securities	1,005,599		24,083		(6,691)		1,022,991
Municipal debt securities (1)	543,742		30,021		(1,500)		572,263
Non-U.S. government securities	77,440		3,818		(1,978)		79,280
Corporate debt securities (2)	1,391,881		38,183		(15,126)		1,414,938
Residential and commercial mortgage securities	439,583		12,379		(5,754)		446,208
Asset-backed securities	471,677		3,000		(873)		473,804
Money market funds	413,547		0		(2)		413,545
Total investments available for sale	$	4,616,898	$	117,448	$	(32,870)	$	4,701,476


June 30, 2020 (In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
December 31, 2020 (In thousands)										December 31, 2020 (In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Treasury securities	$	248,140	$	11,120	$	(1	)	$	259,259	U.S. Treasury securities	$	259,378	$	9,088	$	(22)	$	268,444
U.S. agency securities	14,435		247		—			14,682		U.S. agency securities	17,930		155		0		18,085
U.S. agency mortgage-backed securities	791,142		39,048		(66		)	830,124		U.S. agency mortgage-backed securities	963,670		33,205		(970)		995,905
Municipal debt securities (1)	436,386		29,068		(391		)	465,063		Municipal debt securities (1)	513,870		37,662		(15)		551,517
Non-U.S. government securities	50,710		4,069		(142		)	54,637		Non-U.S. government securities	56,045		5,562		0		61,607
Corporate debt securities (2)	862,027		50,939		(829		)	912,137		Corporate debt securities (2)	1,070,027		56,864		(379)		1,126,512
Residential and commercial mortgage securities	300,021		15,170		(2,680		)	312,511		Residential and commercial mortgage securities	391,921		18,641		(1,280)		409,282
Asset-backed securities	388,732		2,410		(5,656		)	385,486		Asset-backed securities	452,527		3,246		(1,056)		454,717
Money market funds	1,118,213		1		(10		)	1,118,204		Money market funds	679,322		0		(18)		679,304
Total investments available for sale	$	4,209,806	$	152,072	$	(9,775	)	$	4,352,103	Total investments available for sale	$	4,404,690	$	164,423	$	(3,740)	$	4,565,373

December 31, 2019 (In thousands)
Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value
U.S. Treasury securities $ 239,087
$ 3,526
$ (407 ) $ 242,206
U.S. agency securities 33,620
36
(51 ) 33,605
U.S. agency mortgage-backed securities 836,710
13,956
(2,332 ) 848,334
Municipal debt securities (1) 339,511
22,245
(118 ) 361,638
Non-U.S. government securities 52,230
2,812
(47 ) 54,995
Corporate debt securities (2) 856,638
24,255
(592 ) 880,301
Residential and commercial mortgage securities 282,840
6,542
(1,101 ) 288,281
Asset-backed securities 326,589
857
(1,421 ) 326,025
Money market funds 315,360
2
—
315,362
Total investments available for sale $ 3,282,585
$ 74,231
$ (6,069 ) $ 3,350,747


	March 31,		December 31,
(1) The following table summarizes municipal debt securities as of :	2021		2020
Special revenue bonds	76.9	%	76.8	%
General obligation bonds	20.3		20.3
Certificate of participation bonds	2.1		2.3
Tax allocation bonds	0.6		0.6
Special tax bonds	0.1		0
Total	100.0	%	100.0	%

June 30, December 31,
(1) The following table summarizes municipal debt securities as of : 2020 2019
Special revenue bonds 74.3 % 74.5 %
General obligation bonds 22.2
21.3
Certificate of participation bonds 2.8
3.4
Tax allocation bonds 0.7
0.8
Total 100.0 % 100.0 %

June 30, December 31,
(2) The following table summarizes corporate debt securities as of : 2020 2019
Financial 35.0 % 34.4 %
Consumer, non-cyclical 20.8
20.1
Communications 10.9
10.3
Energy 7.6
8.3
Consumer, cyclical 7.2
7.6
Utilities 6.2
6.2
Technology 5.5
4.8
Industrial 3.5
4.2
Basic materials 3.3
4.1
Total 100.0 % 100.0 %

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)


	March 31,		December 31,
(2) The following table summarizes corporate debt securities as of :	2021		2020
Financial	32.8	%	34.9	%
Consumer, non-cyclical	19.2		19.1
Communications	11.6		9.3
Consumer, cyclical	7.6		8.0
Industrial	7.3		5.3
Energy	6.6		8.2
Utilities	5.9		5.9
Technology	5.4		6.1
Basic materials	3.5		3.1
Government	0.1		0.1
Total	100.0	%	100.0	%

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The amortized cost and fair value of investments available for sale at ~~June 30, 2020,~~March 31, 2021, 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	$	51,984	$	52,264
Due after 1 but within 5 years	155,396		158,188
Due after 5 but within 10 years	49,036		50,890
Due after 10 years	985		967
Subtotal	257,401		262,309
U.S. agency securities:
Due in 1 year	12,530		12,638
Due after 1 but within 5 years	3,498		3,500
Subtotal	16,028		16,138
Municipal debt securities:
Due in 1 year	7,495		7,519
Due after 1 but within 5 years	98,704		103,013
Due after 5 but within 10 years	229,338		243,858
Due after 10 years	208,205		217,873
Subtotal	543,742		572,263
Non-U.S. government securities:
Due in 1 year	4,360		4,473
Due after 1 but within 5 years	18,348		19,499
Due after 5 but within 10 years	26,603		29,045
Due after 10 years	28,129		26,263
Subtotal	77,440		79,280
Corporate debt securities:
Due in 1 year	147,203		148,503
Due after 1 but within 5 years	648,697		667,465
Due after 5 but within 10 years	378,395		386,311
Due after 10 years	217,586		212,659
Subtotal	1,391,881		1,414,938
U.S. agency mortgage-backed securities	1,005,599		1,022,991
Residential and commercial mortgage securities	439,583		446,208
Asset-backed securities	471,677		473,804
Money market funds	413,547		413,545
Total investments available for sale	$	4,616,898	$	4,701,476

(In thousands)
Amortized
Cost

Fair
Value
U.S. Treasury securities:

Due in 1 year $ 83,842
$ 84,360
Due after 1 but within 5 years 101,678
106,198
Due after 5 but within 10 years 61,636
67,516
Due after 10 years 984
1,185
Subtotal 248,140
259,259
U.S. agency securities:

Due in 1 year 1,897
1,914
Due after 1 but within 5 years 12,538
12,768
Subtotal 14,435
14,682
Municipal debt securities:

Due in 1 year 212
213
Due after 1 but within 5 years 39,539
41,489
Due after 5 but within 10 years 228,199
244,273
Due after 10 years 168,436
179,088
Subtotal 436,386
465,063
Non-U.S. government securities:
Due in 1 year —
—
Due after 1 but within 5 years 22,258
23,589
Due after 5 but within 10 years 24,235
26,769
Due after 10 years 4,217
4,279
Subtotal 50,710
54,637
Corporate debt securities:

Due in 1 year 119,423
120,451
Due after 1 but within 5 years 456,301
479,892
Due after 5 but within 10 years 260,406
284,702
Due after 10 years 25,897
27,092
Subtotal 862,027
912,137
U.S. agency mortgage-backed securities 791,142
830,124
Residential and commercial mortgage securities 300,021
312,511
Asset-backed securities 388,732
385,486
Money market funds 1,118,213
1,118,204
Total investments available for sale $ 4,209,806
$ 4,352,103

Gross gains and losses realized on the sale of investments available for sale were as follows:

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Realized gross gains $ 1,263
$ 1,923
$ 4,525
$ 2,594
Realized gross losses 2,103
1,225
2,230
1,236


	Three Months Ended March 31,
(In thousands)		2021		2020
Realized gross gains		$	750	$	3,262
Realized gross losses		109		127

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The fair value of investments available for sale in an unrealized loss position and the related unrealized losses for which no allowance for credit loss has been recorded were as follows:


																	Less than 12 months				12 months or more				Total
March 31, 2021 (In thousands)																March 31, 2021 (In thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. Treasury securities																U.S. Treasury securities	$	88,240	$	(946)	$	0	$	0	$	88,240	$	(946)
	Less than 12 months					12 months or more					Total
June 30, 2020 (In thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Treasury securities	$	15,983	$	(1	)	$	—	$	—		$	15,983	$	(1	)
U.S. agency mortgage-backed securities	5,057		(30		)	1,677		(36		)	6,734		(66		)	U.S. agency mortgage-backed securities	411,509		(6,667)		1,044		(24)		412,553		(6,691)
Municipal debt securities	32,488		(391		)	—		—			32,488		(391		)	Municipal debt securities	94,305		(1,500)		0		0		94,305		(1,500)
Non-U.S. government securities	3,903		(142		)	—		—			3,903		(142		)	Non-U.S. government securities	28,820		(1,978)		0		0		28,820		(1,978)
Corporate debt securities	14,953		(829		)	—		—			14,953		(829		)	Corporate debt securities	560,659		(15,112)		235		(14)		560,894		(15,126)
Residential and commercial mortgage securities	50,165		(2,016		)	10,535		(664		)	60,700		(2,680		)	Residential and commercial mortgage securities	191,043		(5,013)		17,628		(741)		208,671		(5,754)
Asset-backed securities	155,022		(2,974		)	74,305		(2,682		)	229,327		(5,656		)	Asset-backed securities	131,675		(630)		39,360		(243)		171,035		(873)
Money market funds	65,010		(10		)	—		—			65,010		(10		)	Money market funds	22,502		(2)		0		0		22,502		(2)
Total	$	342,581	$	(6,393	)	$	86,517	$	(3,382	)	$	429,098	$	(9,775	)	Total	$	1,528,753	$	(31,848)	$	58,267	$	(1,022)	$	1,587,020	$	(32,870)

Less than 12 months 12 months or more Total
December 31, 2019 (In thousands) Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses
U.S. Treasury securities $ 29,013
$ (331 ) $ 42,981
$ (76 ) $ 71,994
$ (407 )
U.S. agency securities —
—
25,605
(51 ) 25,605
(51 )
U.S. agency mortgage-backed securities 101,684
(1,042 ) 113,866
(1,290 ) 215,550
(2,332 )
Municipal debt securities 10,651
(112 ) 624
(6 ) 11,275
(118 )
Non-U.S. government securities 9,664
(47 ) —
—
9,664
(47 )
Corporate debt securities 83,013
(576 ) 14,531
(16 ) 97,544
(592 )
Residential and commercial mortgage securities 59,341
(1,059 ) 3,442
(42 ) 62,783
(1,101 )
Asset-backed securities 78,813
(202 ) 109,536
(1,219 ) 188,349
(1,421 )
Total $ 372,179
$ (3,369 ) $ 310,585
$ (2,700 ) $ 682,764
$ (6,069 )


	Less than 12 months				12 months or more				Total
December 31, 2020 (In thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. Treasury securities	$	28,776	$	(22)	$	0	$	0	$	28,776	$	(22)

U.S. agency mortgage-backed securities	152,671		(924)		3,007		(46)		155,678		(970)
Municipal debt securities	3,838		(15)		0		0		3,838		(15)

Corporate debt securities	141,803		(379)		0		0		141,803		(379)
Residential and commercial mortgage securities	63,203		(777)		9,516		(503)		72,719		(1,280)
Asset-backed securities	124,165		(483)		65,897		(573)		190,062		(1,056)
Money market funds	99,995		(18)		0		0		99,995		(18)
Total	$	614,451	$	(2,618)	$	78,420	$	(1,122)	$	692,871	$	(3,740)

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, we held ~~274~~802 and ~~365~~363 individual investment securities, respectively, that were in an unrealized loss position. 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 to record an impairment on the securities in an unrealized loss position. In assessing whether the decline in the fair value at ~~June 30, 2020~~March 31, 2021 of any of these securities resulted from a credit loss or other factors, we made inquiries of our investment managers to determine that each issuer was current on its scheduled interest and principal payments. We reviewed the credit rating of these securities noting that over 98% of the securities at ~~June 30, 2020~~March 31, 2021 had investment-grade ratings. We concluded that gross unrealized losses noted above are principally associated with the changes in ~~credit spreads~~interest rates subsequent to purchase rather than due to credit impairment. ~~We recorded~~There were 0 impairments ~~of $0.4 million~~ in the three ~~and six~~ months ended June 30, 2020 and other-than-temporary impairments of $0.1 million in the three and six months ended June 30, 2019 on securities in an unrealized loss position. The impairments resulted from our intent to sell the securities subsequent to the reporting date.March 31, 2021 or March 31, 2020.

The Company's other invested assets at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 totaled ~~$78.5~~$100.4 million and ~~$78.9~~$88.9 million, respectively. Other invested assets are comprised of limited partnership interests which are generally accounted for under the equity method of accounting with changes in value reported in other income. 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 ~~$9.9~~$9.4 million at ~~June 30, 2020~~March 31, 2021 and ~~$9.4~~$9.7 million at December 31, ~~2019.~~2020. In connection with its insurance and reinsurance activities,

~~Table of Contents~~

~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

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 ~~$979.8 million~~$1.2 billion at ~~June 30, 2020~~March 31, 2021 and ~~$805.5 million~~$1.1 billion at December 31, ~~2019.~~2020. Essent Guaranty is required to maintain assets on deposit in connection with its fully collateralized reinsurance agreements (see

Table of Contents

Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 4)4). The fair value of the assets on deposit was $8.5 million at ~~June 30, 2020~~March 31, 2021 and ~~$6.4~~$8.5 million at December 31, ~~2019.~~2020. 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 $12.0 million at ~~June 30, 2020~~March 31, 2021 and ~~$6.4~~$12.0 million at December 31, ~~2019.~~2020.

Net investment income consists of:

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Fixed maturities $ 20,569
$ 20,180
$ 41,183
$ 39,923
Short-term investments 358
1,310
1,480
2,368
Gross investment income 20,927
21,490
42,663
42,291
Investment expenses (1,061 ) (909 ) (2,164 ) (1,830 )
Net investment income $ 19,866
$ 20,581
$ 40,499
$ 40,461


	Three Months Ended March 31,
(In thousands)		2021		2020
Fixed maturities		$	23,024	$	20,614
Short-term investments		81		1,122
Gross investment income		23,105		21,736
Investment expenses		(1,317)		(1,103)
Net investment income		$	21,788	$	20,633

Note 4.4. 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 and included in other assets on our condensed consolidated balance sheets, 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.

The effect of reinsurance on net premiums written and earned is as follows:

Three Months Ended
June 30, Six Months Ended
June 30,
(In thousands) 2020 2019 2020 2019
Net premiums written:
Direct $ 228,044
$ 196,832
$ 434,024
$ 380,514
Ceded (1) (22,140 ) (8,428 ) (36,377 ) (14,466 )
Net premiums written $ 205,904
$ 188,404
$ 397,647
$ 366,048

Net premiums earned:
Direct $ 233,611
$ 196,918
$ 454,344
$ 380,747
Ceded (1) (22,140 ) (8,428 ) (36,377 ) (14,466 )
Net premiums earned $ 211,471
$ 188,490
$ 417,967
$ 366,281


	Three Months Ended March 31,
(In thousands)		2021		2020
Net premiums written:
Direct		$	235,257	$	205,980
Ceded (1)		(30,896)		(14,237)
Net premiums written		$	204,361	$	191,743

Net premiums earned:
Direct		$	249,963	$	220,733
Ceded (1)		(30,896)		(14,237)
Net premiums earned		$	219,067	$	206,496


~~(1)~~	~~Net of profit commission.~~

(1)Net of profit commission.

Quota Share Reinsurance

Effective September 1, 2019, Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers (the "QSR Agreement"). Each of the third-party reinsurers has an insurer financial strength rating of A or better by S&P Global Ratings, A.M. Best or both. Under the QSR Agreement, Essent Guaranty will cede premiums earned related to 40% of risk on eligible single premium policies and 20% of risk on all other eligible policies written September 1, 2019 through December 31, 2020, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims. The QSR Agreement is scheduled to terminate on December 31, 2030. Essent Guaranty has certain termination rights under the QSR Agreement, including the option to terminate the QSR Agreement with no termination fee on December 31, 2021, and the option, subject to

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a termination fee, to terminate the QSR Agreement on December 31, 2022, or annually thereafter. Should Essent Guaranty not exercise its option to terminate the QSR Agreement on December 31, 2021, the maximum profit commission that Essent

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Notes to Condensed Consolidated Financial Statements (Unaudited)

Guaranty could earn would increase to 63% in 2022 and thereafter. RIF ceded under the QSR Agreement was ~~$3.3~~$5.8 billion as of ~~June 30, 2020.~~March 31, 2021.

Excess of Loss Reinsurance

Essent Guaranty has entered into fully collateralized reinsurance agreements ("Radnor Re Transactions") with unaffiliated special purpose insurers domiciled in Bermuda. For the reinsurance coverage periods, Essent Guaranty and its affiliates retain the first layer of the respective aggregate losses, and a Radnor Re special purpose insurer 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 each Radnor Re special purpose insurer 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 related 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 Radnor Re Transactions. The Radnor Re entities collateralized the coverage by issuing mortgage insurance-linked notes ("ILNs") in an aggregate amount equal to the initial coverage 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 reinsurance trusts for the benefit of Essent Guaranty and will be the source of reinsurance claim payments to Essent Guaranty and principal repayments on the ILNs.

Essent Guaranty has also entered into reinsurance agreements with panels of reinsurers that provide aggregate excess of loss coverage immediately above or pari-passu to the coverage provided by the Radnor Re Transactions. 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 these reinsurance agreements.

The following table summarizes Essent Guaranty's excess of loss reinsurance agreements as of ~~June 30, 2020:~~March 31, 2021:

Vintage Year Reinsurer Effective Date Optional Termination Date
2015 & 2016 Radnor Re 2019-2 Ltd. June 20, 2019 June 25, 2024
2017 Radnor Re 2018-1 Ltd. March 22, 2018 March 25, 2023 (1)
2017 Panel of Reinsurers November 1, 2018 October 1, 2023 (2)
2018 Radnor Re 2019-1 Ltd. February 28, 2019 February 25, 2026
2018 Panel of Reinsurers February 28, 2019 February 25, 2026
2019 Radnor Re 2020-1 Ltd. January 30, 2020 January 25, 2027
2019 Panel of Reinsurers January 30, 2020 January 25, 2027

Vintage Year

Reinsurer

Effective Date

Optional Termination Date

2015 & 2016

Radnor Re 2019-2 Ltd.

June 20, 2019

June 25, 2024

2017

Radnor Re 2018-1 Ltd.

March 22, 2018

March 25, 2023

(1)

2017

Panel of Reinsurers

November 1, 2018

October 1, 2023

(2)

2018

Radnor Re 2019-1 Ltd.

February 28, 2019

February 25, 2026

2018

Panel of Reinsurers

February 28, 2019

February 25, 2026

2019

Radnor Re 2020-1 Ltd.

January 30, 2020

January 25, 2027

2019

Panel of Reinsurers

January 30, 2020

January 25, 2027

2019 & 2020

Radnor Re 2020-2 Ltd.

October 8, 2020

October 25, 2027


~~(1)~~	~~If the reinsurance agreement is not terminated at the optional termination date, the risk margin component of the reinsurance premium increases by 50%.~~


~~(2)~~	~~If the reinsurance agreement is not terminated at the optional termination date, the reinsurance premium increases by 50%.~~

(1)If the reinsurance agreement is not terminated at the optional termination date, the risk margin component of the reinsurance premium increases by 50%.

(2)If the reinsurance agreement is not terminated at the optional termination date, the reinsurance premium increases by 50%.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes Essent Guaranty's excess of loss reinsurance coverages and retentions as of ~~June 30, 2020:~~March 31, 2021:

(In thousands)
Remaining
Reinsurance in Force

Vintage Year
Remaining
Insurance
in Force

Remaining
Risk
in Force
ILN Other Reinsurance Total Remaining
First Layer
Retention
2015 & 2016 $ 22,315,283
$ 6,025,734
$ 216,480
$ —
$ 216,480
$ 207,849
2017 22,597,869
5,742,641
242,123
165,167
(4) 407,290
220,308
2018 26,393,162
6,676,437
325,537
76,144
(5) 401,681
252,392
2019 (3)
30,475,038
7,724,225
495,889
55,102
(6) 550,991
215,605
Total $ 101,781,352
$ 26,169,037
$ 1,280,029
$ 296,413
$ 1,576,442
$ 896,154


(In thousands)					Remaining Reinsurance in Force
Vintage Year	Remaining Insurance in Force		Remaining Risk in Force		ILN		Other Reinsurance			Total		Remaining First Layer Retention
2015 & 2016	$	13,987,747	$	3,777,142	$	216,480	$	0		$	216,480	$	207,588
2017	13,285,965		3,404,783		242,123		165,167		(5)	407,290		218,262
2018	15,328,438		3,897,423		325,537		76,144		(6)	401,681		250,350
2019 (3)	18,493,963		4,724,213		495,889		55,102		(7)	550,991		215,481
2019 & 2020 (4)	43,365,923		10,872,860		399,159		0			399,159		465,690
Total	$	104,462,036	$	26,676,421	$	1,679,188	$	296,413		$	1,975,601	$	1,357,371


~~(3)~~	~~Reinsurance coverage on new insurance written from January 1, 2019 through August 31, 2019.~~


~~(4)~~	~~Coverage provided immediately above the coverage provided by Radnor Re 2018-1 Ltd.~~


~~(5)~~	~~Coverage provided pari-passu to the coverage provided by Radnor Re 2019-1 Ltd.~~


~~(6)~~	~~Coverage provided pari-passu to the coverage provided by Radnor Re 2020-1 Ltd.~~

(3)Reinsurance coverage on new insurance written from January 1, 2019 through August 31, 2019.

(4)Reinsurance coverage on new insurance written from September 1, 2019 through July 31, 2020.

(5)Coverage provided immediately above the coverage provided by Radnor Re 2018-1 Ltd.

(6)Coverage provided pari-passu to the coverage provided by Radnor Re 2019-1 Ltd.

(7)Coverage provided pari-passu to the coverage provided by Radnor Re 2020-1 Ltd.

Based on the level of delinquencies reported to us, the ILN transactions ~~listed above~~entered into prior to March 31, 2020 became subject to a "trigger event" as of June 25, 2020. The amortization of principal of the notes issued by the unaffiliated special purpose insurers in connection with the ILNs is suspended and the aggregate excess of loss reinsurance coverage will not amortize during the continuation of a trigger event.

The amount of monthly reinsurance premium ceded to the Radnor Re entities 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 trusts. As the reinsurance premium will vary based on changes in these rates, we concluded that the Radnor Re Transactions contain embedded derivatives that will be accounted for separately like freestanding derivatives.

In connection with the Radnor Re Transactions, we concluded that the risk transfer requirements for reinsurance accounting were met as each Radnor Re entity is assuming significant insurance risk and a reasonable possibility of a significant loss. In addition, we assessed whether each Radnor Re entity was a variable interest entity ("VIE") and the appropriate accounting for the Radnor Re entities if they were VIEs. 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 the Radnor Re entities are VIEs. However, given that Essent Guaranty (1) does not have the unilateral power to direct the activities that most significantly affect their economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits that could be potentially significant to these entities, the Radnor Re entities are not consolidated in these financial statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents total assets of each Radnor Re special purpose insurer as well as our maximum exposure to loss associated with each Radnor Re entity, representing the fair value of the embedded derivative, using observable inputs in active markets (Level 2), included in other assets (other accrued liabilities) on our condensed consolidated balance sheet and the estimated net present value of investment earnings on the assets in the reinsurance trust, each as of ~~June 30, 2020:~~March 31, 2021:


			Maximum Exposure to Loss
(In thousands)	Total VIE Assets		On - Balance Sheet		Off - Balance Sheet		Total
Radnor Re 2018-1 Ltd.	$	242,123	$	367	$	40	$	407
Radnor Re 2019-1 Ltd.	325,537		(2,183)		67		(2,116)
Radnor Re 2019-2 Ltd.	216,480		(1,603)		31		(1,572)
Radnor Re 2020-1 Ltd.	495,889		(1,202)		126		(1,076)
Radnor Re 2020-2 Ltd.	399,159		(330)		93		(237)
Total	$	1,679,188	$	(4,951)	$	357	$	(4,594)

Maximum Exposure to Loss
(In thousands) Total VIE Assets On - Balance Sheet Off - Balance Sheet Total
Radnor Re 2018-1 Ltd. $ 242,123
$ 573
$ 132
$ 705
Radnor Re 2019-1 Ltd. 325,537
(1,858 ) 307
(1,551 )
Radnor Re 2019-2 Ltd. 216,480
(1,409 ) 172
(1,237 )
Radnor Re 2020-1 Ltd. 495,889
(765 ) 503
(262 )
Total $ 1,280,029
$ (3,459 ) $ 1,114
$ (2,345 )

Note 5.5. 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 ~~six~~three months ended ~~June 30:~~March 31:

($ in thousands) 2020 2019
Reserve for losses and LAE at beginning of period $ 69,362
$ 49,464
Less: Reinsurance recoverables 71
—
Net reserve for losses and LAE at beginning of period 69,291
49,464
Add provision for losses and LAE, net of reinsurance, occurring in:

Current period 197,195
23,182
Prior years (13,255 ) (11,115 )
Net incurred losses and LAE during the current period 183,940
12,067
Deduct payments for losses and LAE, net of reinsurance, occurring in:

Current period 289
245
Prior years 9,813
6,148
Net loss and LAE payments during the current period 10,102
6,393
Net reserve for losses and LAE at end of period 243,129
55,138
Plus: Reinsurance recoverables 7,761
—
Reserve for losses and LAE at end of period $ 250,890
$ 55,138

Loans in default at end of period 38,068
4,405


(In thousands)	2021		2020
Reserve for losses and LAE at beginning of period	$	374,941	$	69,362
Less: Reinsurance recoverables	19,061		71
Net reserve for losses and LAE at beginning of period	355,880		69,291
Add provision for losses and LAE, net of reinsurance, occurring in:
Current period	47,989		15,419
Prior years	(15,667)		(7,356)
Net incurred losses and LAE during the current period	32,322		8,063
Deduct payments for losses and LAE, net of reinsurance, occurring in:
Current period	114		1
Prior years	1,872		4,110
Net loss and LAE payments during the current period	1,986		4,111
Net reserve for losses and LAE at end of period	386,216		73,243
Plus: Reinsurance recoverables	24,907		98
Reserve for losses and LAE at end of period	$	411,123	$	73,341

For the ~~six~~three months ended ~~June 30, 2020, $9.8~~March 31, 2021, $1.9 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a ~~$13.3~~$15.7 million favorable prior year development during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021. Reserves remaining as of ~~June 30, 2020~~March 31, 2021 for prior years are ~~$46.2~~$338.3 million as a result of re-estimation of unpaid losses and loss adjustment expenses. For the ~~six~~three months ended ~~June 30, 2019, $6.1~~March 31, 2020, $4.1 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There was a ~~$11.1~~$7.4 million favorable prior year development during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. Reserves remaining as of ~~June 30, 2019~~March 31, 2020 for prior years were ~~$32.2~~$57.8 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.

Due to business restrictions, stay-at-home orders and travel restrictions initially implemented in March 2020 as a result of COVID-19, unemployment in the United States ~~has~~ increased ~~significantly.~~significantly in the second quarter of 2020 and remained elevated at March 31, 2021. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment has increased the number of delinquencies on

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the mortgages that we insure and has the potential to increase claim frequencies on defaults. As of ~~June 30, 2020,~~March 31, 2021, insured loans in default totaled ~~38,068~~29,080 and included ~~34,352~~ 26,874

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Notes to Condensed Consolidated Financial Statements (Unaudited)

defaults classified as COVID-19 defaults. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status. We believe that the forbearance process could have a favorable effect on the frequency of claims that we ultimately pay. Based on the forbearance programs in place and the credit characteristics of the ~~COVID-19~~ defaulted loans, we expect the ultimate number of COVID-19-related defaults notices received in April 2020 through September 2020 ("Early COVID Defaults") that result in claims will be less than our historical default-to-claim experience. Accordingly, we recorded a reserve equal to approximately 7% of the risk in force for the ~~COVID-19~~Early COVID Defaults. We have not adjusted the loss reserves associated with the Early COVID Defaults as we continue to believe that these reserves represent the best estimate of the ultimate loss. The credit characteristics of defaults reported in October 2020 through March 2021 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default ~~notices received~~patterns during this period. In addition, beginning in the ~~three months ended June~~fourth quarter of 2020 we observed a normalization of the proportion of unemployment claims related to permanent layoffs as compared to a higher proportion of temporary layoffs during the second and third quarters of 2020. We believe that while defaults in October 2020 through March 2021 were impacted by the pandemic's effect on the economy, the underlying credit performance of these defaults may not be the same as the expected performance for the Early COVID Defaults that occurred following the onset of the pandemic and defaults after September 30, 2020 ~~compared~~are more likely to ~~approximately a 9% reserve estimate~~transition like pre-pandemic defaults. Accordingly, beginning in the fourth quarter of 2020, we resumed establishing reserves for defaults ~~that had missed three payments or less as of December 31, 2019.~~reported after September 30, 2020 using our normal reserve methodology. The reserve for losses and LAE on COVID-19 defaults was ~~$189.0~~$362.9 million at ~~June 30, 2020.~~March 31, 2021 and includes $244.8 million of reserves for Early COVID Defaults. It is reasonably possible that our estimate of the losses for the COVID-19 defaults could change in the near term as a result of the continued impact of the pandemic on the economic environment, the results of existing and future governmental programs designed to assist individuals and businesses impacted by the virus and the performance of the COVID-19 defaults in the forbearance programs. A 100 basis point increase or decrease in the reserve rate applied to ~~COVID-19 new default notices~~Early COVID Defaults would result in a corresponding increase or decrease in our reserve for ~~loss~~losses and LAE of approximately ~~$26~~$35 million as of ~~June 30, 2020.~~March 31, 2021. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers, the performance of COVID-19 defaults and our expectations for the amount of ultimate losses on these delinquencies.

Note 6.6. 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”) with committed capacity of ~~$500~~$625 million. The Credit Facility provides for a ~~$275~~$300 million revolving credit facility ~~$225~~and $325 million of term ~~loans and a $100 million uncommitted line that may be exercised at~~loans. The Credit Facility also provides an option to increase the ~~Borrowers’ option so long as the Borrowers receive commitments from the lenders.~~capacity to $775 million. 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 annual commitment fee rate at ~~June 30, 2020~~March 31, 2021 was ~~0.25%~~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 15)14). The borrowings under the Credit Facility contractually mature on ~~May 17, 2021.~~October 16, 2023. As of ~~June 30, 2020,~~March 31, 2021, the Company was in compliance with the covenants and ~~$425~~$325 million had been borrowed under the Credit Facility with a weighted average interest rate of ~~1.93%~~2.13%. As of December 31, ~~2019, $225~~2020, $325 million had been borrowed with a weighted average interest rate of ~~3.51%~~2.19%.

Note 7.7. 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 less than $0.1 million related to

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

remedies for each of the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019, respectively.~~2020. As of ~~June 30, 2020,~~March 31, 2021, management believes any potential claims for indemnification related to contract underwriting services through ~~June 30, 2020~~March 31, 2021 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

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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 ~~June 30, 2020,~~March 31, 2021, 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.

~~Commitments~~

We lease office space for use in our operations under leases accounted for as operating leases. These leases generally include options to extend them for periods of up to ten years. Our option to extend the term of our primary office locations at the greater of existing or prevailing market rates was not recognized in our right-of-use asset and lease liability. When establishing the value of our right-of-use asset and lease liability, we determine the discount rate for the underlying leases using the prevailing market interest rate for a borrowing of the same duration of the lease plus the risk premium inherent in the borrowings under our Credit Facility. Operating lease right-of-use assets of $9.0 million and $10.0 million as of June 30, 2020 and December 31, 2019, respectively, are reported on our condensed consolidated balance sheet as property and equipment. Operating lease liabilities of $11.3 million and $12.6 million as of June 30, 2020 and December 31, 2019, respectively, are reported on our condensed consolidated balance sheet as other accrued liabilities. Total rent expense was $0.6 million for each of the three months ended June 30, 2020 and 2019 and $1.2 million for each of the six months ended June 30, 2020 and 2019.

~~The following table presents lease cost for the three and six months ended June 30, 2020 and 2019 and other lease information at June 30, 2020 and 2019:~~

Three Months Ended
June 30, Six Months Ended
June 30,
($ in thousands) 2020 2019 2020 2019
Lease cost:
Operating lease cost $ 601
$ 606
$ 1,301
$ 1,197
Short-term lease cost 5
39
10
81
Sublease income (33 ) (32 ) (66 ) (64 )
Total lease cost $ 573
$ 613
$ 1,245
$ 1,214

Other information:
Weighted average remaining lease term - operating leases 4.3 years
5.3 years
Weighted average discount rate - operating leases 4.0 % 4.1 %

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~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~The following table presents a maturity analysis of our lease liabilities as follows at June 30, 2020:~~

(In thousands)
2020 (July 1 through December 31) $ 1,490
2021 2,999
2022 3,003
2023 2,752
2024 1,334
2025 and thereafter 793
Total lease payments to be paid 12,371
Less: Future interest expense (1,055 )
Present value of lease liabilities $ 11,316

Note 8. Capital Stock

Our authorized share capital consists of 233.3 million shares of a single class of 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 1 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 1 vote per share.

In June 2020, Essent Group completed the sale of 13.8 million common shares in a public offering at a price of $33.25 per share. The total net proceeds from this offering were approximately $440.0 million after deducting underwriting discounts, commissions and other offering expenses.

Dividends

The following table presents the amounts declared and paid per common share each quarter:


Quarter Ended	2020
March 31	$	0.16
June 30	0.16
September 30	0.16
December 31	0.16

Total dividends per common share declared and paid	$	0.64

Quarter Ended	2021
March 31	$	0.16




Total dividends per common share declared and paid	$	0.16

In ~~February 2020,~~May 2021, the Board of Directors declared a quarterly cash dividend of $0.16 per common share which was paid on March 20, 2020. In May 2020, the Board of Directors declared a quarterly cash dividend of $0.16 per common share which was paid on June 12, 2020. In August 2020, the Board of Directors declared a quarterly cash dividend of $0.16$0.17 per common share payable on ~~September~~June 10, ~~2020,~~2021, to shareholders of record on ~~August 31, 2020.~~June 1, 2021. In May 2021, the Board of Directors approved a share repurchase plan that authorized the Company to repurchase $250 million of its common shares in the open market by the end of 2022.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 9.9. Stock-Based Compensation

In connection with the IPO in 2013, Essent Group's Board of Directors adopted, and Essent Group's shareholders approved, the Essent Group Ltd. 2013 Long-Term Incentive Plan (the "2013 Plan"), which was effective upon completion of the initial public offering. The types of awards available under the 2013 Plan include nonvested shares, nonvested share units, non-qualified share options, incentive stock options, share appreciation rights, and other share-based or cash-based awards. Nonvested shares and nonvested share units granted under the 2013 Plan have rights to dividends, which entitle holders to the same dividend value per share as holders of common shares in the form of dividend equivalent units ("DEUs"). DEUs are subject to the same vesting and other terms and conditions as the corresponding nonvested shares and nonvested share units. DEUs vest when the underlying shares or share units vest and are forfeited if the underlying share or share units forfeit prior to vesting.

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~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

The following table summarizes nonvested common share, nonvested common share unit and DEU activity for the ~~six~~three months ended ~~June 30, 2020:~~March 31, 2021:


	Time and Performance- Based Share Awards			Time-Based Share Awards			Share Units			DEUs
(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		Dividend Equivalent Units	Weighted Average Grant Date Fair Value
Outstanding at beginning of year	363	$	47.09	153	$	46.34	492	$	46.59	21	$	37.66
Granted	281	15.64		93	43.67		87	43.65		4	43.50
Vested	(113)	45.02		(77)	45.36		(164)	48.01		(8)	38.14
Forfeited	0	N/A		0	N/A		(6)	50.43		0	36.11
Outstanding at March 31, 2021	531	$	30.89	169	$	45.31	409	$	45.34	17	$	38.85

Time and Performance-
Based Share Awards

Time-Based
Share Awards
Share Units DEUs
(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 Dividend Equivalent Units Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of year 394
$ 42.02
169
$ 41.31
351
$ 39.78
5
$ 51.11
Granted 109
51.52
69
51.52
350
48.75
10
31.38
Vested (140 ) 36.29
(85 ) 40.47
(192 ) 37.76
(2 ) 49.79
Forfeited —
N/A
—
N/A
(12 ) 49.70
—
34.46
Outstanding at June 30, 2020 363
$ 47.09
153
$ 46.34
497
$ 46.64
13
$ 35.83

In February ~~2020,~~2021, 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 ~~2020~~2021 vest in three equal installments on March 1, ~~2021,~~ 2022, 2023 and ~~2023.~~2024. The performance-based share awards granted in February ~~2020~~2021 vest based upon our compounded annual book value per share growth percentage and relative total shareholder return during a three-year performance period that commenced on January 1, ~~2020~~2021 and vest on March 1, ~~2023.~~2024. Shares were issued at the maximum 200% of target. 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
<13 % 0 %
Threshold 13 % 10 %
14 % 35 %
15 % 60 %
16 % 85 %
Maximum ≥17 % 100 %


		Relative Total Shareholder Return vs. S&P 1500 Financial Services Index
		≤25th percentile		50th percentile "Target"		≥75th percentile
Three-Year Book Value Per Share CAGR	14% "Target"	100	%	150	%	200	%
	12%	75	%	125	%	175	%
	10%	50	%	100	%	150	%
	8%	25	%	75	%	125	%
	6%	0	%	50	%	100	%

In the event that the compounded annual book value per share growth or the relative total shareholder return 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 2020, time-based share units were issued to all vice president and staff level employees and vest in three equal installments on January 2021, 2022 and 2023.~~ In connection with our incentive program covering bonus awards for performance year ~~2019,~~2020, in February ~~2020,~~2021, time-based share units were issued to certain employees that vest in three equal installments on March 1, 2022, 2023 and 2024.

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Quoted market prices are used for the valuation of common shares granted that do not contain a market condition under ASC 718. The performance-based share awards granted in February 2021 contain a market condition and were valued based on analysis provided by a third-party valuation firm using a risk neutral simulation taking into effect the vesting conditions of the grant.

In February 2021, the performance-based share awards granted in 2019 and 2020 to certain members of senior management were amended to provide that such awards will no longer be subject to the achievement of the compounded annual book value per share growth metrics and will be subject to only service-based vesting. As a result, the unvested shares subject to the amended 2019 and 2020 awards will vest on March 1, 2022 and ~~2023. In May 2020, time-based share units were granted~~March 1, 2023, respectively, subject to ~~non-employee directors that vest one year from~~ the ~~date~~continued service requirements and other terms and conditions set forth in the applicable award agreements, without taking into consideration any performance metrics. Incremental compensation expense related to amending these awards of ~~grant.~~$4.0 million will be recognized over a weighted average period of 1.6 years.

The total fair value on the vesting date of nonvested shares, share units or DEUs that vested was ~~$18.5~~$16.0 million and ~~$23.6~~$17.8 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. As of ~~June 30, 2020,~~March 31, 2021, there was ~~$33.6~~$35.1 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at ~~June 30, 2020~~March 31, 2021 and we expect to recognize the expense over a weighted average period of ~~2.2~~2.1 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 ~~141,801~~122,033 in the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021. The tendered shares were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of ~~June 30, 2020.~~

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~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

March 31, 2021.

Compensation expense, net of forfeitures, and related tax effects recognized in connection with nonvested shares was as follows:

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Compensation expense $ 4,568
$ 4,222
$ 9,348
$ 8,322
Income tax benefit 868
790
1,786
1,555


	Three Months Ended March 31,
(In thousands)		2021		2020
Compensation expense		$	5,179	$	4,780
Income tax benefit		986		918

Note 10. Dividends Restrictions

Our U.S. insurance subsidiaries are subject to certain capital and dividend rules and regulations as prescribed by jurisdictions in which they are authorized to operate. Under the insurance laws of the Commonwealth of Pennsylvania, Essent Guaranty and Essent PA may pay dividends during any 12-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. The Pennsylvania statute also specifies that dividends and other distributions can be paid out of positive unassigned surplus without prior approval. At ~~June 30, 2020,~~March 31, 2021, Essent Guaranty had unassigned surplus of approximately ~~$298.5~~$385.9 million. Essent Guaranty did not pay dividends to Essent Group or any intermediate holding companies in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 or ~~2019.~~2020. As a result of PMIERs guidance issued by the GSEs, effective June 30, 2020 through March 31, 2021, Essent Guaranty is required to obtain GSE written approval before paying a dividend. Essent PA had unassigned surplus of approximately ~~$14.4~~$16.0 million as of ~~June 30, 2020.~~March 31, 2021. Essent PA did not pay a dividend in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 or ~~2019.~~2020. On May 5, 2021, Essent Guaranty paid to its parent, Essent US Holdings, Inc., a $100 million dividend.

Essent Re is subject to certain dividend restrictions as prescribed by the Bermuda Monetary Authority and under certain agreements with counterparties. In connection with the quota share reinsurance agreement with Essent Guaranty, Essent Re has agreed to maintain a minimum total equity of $100 million. As of ~~June 30, 2020,~~March 31, 2021, Essent Re had total equity of ~~$1.0~~$1.1 billion.

At ~~June 30, 2020,~~March 31, 2021, our insurance subsidiaries were in compliance with these rules, regulations and agreements.

~~Note 11. Income Taxes~~

As of June 30, 2020, the statutory income tax rates of the countries where the Company does business are 21% in the United States and 0.0% in Bermuda. The statutory income tax rate of each country is applied against the taxable income from each country to calculate the income tax expense. For the three and six months ended June 30, 2020, our provision for income taxes was not based on an estimated annual effective rate due to uncertainty regarding the potential impacts of COVID-19 on our results of operations. Due to that uncertainty, we were unable to make a reliable estimate of pretax income and the annual effective tax rate for the full year 2020. Accordingly, the provision for income taxes for the three and six months ended June 30, 2020 was based on the actual effective tax rate for the year to date period.

~~Income tax expense consists of the following components:~~

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Current $ 7,969
$ 12,801
$ 18,097
$ 19,354
Deferred (4,534 ) 13,527
12,513
28,973
Total income tax expense $ 3,435
$ 26,328
$ 30,610
$ 48,327

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Income tax expense is different from that which would be obtained by applying the applicable statutory income tax rates to income before taxes by jurisdiction (i.e. U.S. 21%; Bermuda 0.0%). The reconciliation of the difference between income tax expense and the expected tax provision at the weighted average tax rate was as follows:

Three Months Ended June 30,
2020 2019
($ in thousands) $
% of pretax
income
$
% of pretax
income
Tax provision at weighted average statutory rates $ 2,750
14.6 % $ 25,795
15.9 %
Non-deductible expenses 707
3.8
439
0.3
Tax exempt interest, net of proration (358 ) (1.9 ) (418 ) (0.3 )
Excess tax benefits from stock-based compensation 21
0.1
(22 ) 0.0
Other 315
1.7
534
0.3
Total income tax expense $ 3,435
18.3 % $ 26,328
16.2 %

Six Months Ended June 30,
2020 2019
($ in thousands) $
% of pretax
income
$
% of pretax
income
Tax provision at weighted average statutory rates $ 30,126
15.4 % $ 49,733
15.9 %
Non-deductible expenses 1,421
0.7
763
0.3
Tax exempt interest, net of proration (700 ) (0.4 ) (861 ) (0.3 )
Excess tax benefits from stock-based compensation (599 ) (0.3 ) (1,978 ) (0.6 )
Other 362
0.3
670
0.2
Total income tax expense $ 30,610
15.7 % $ 48,327
15.5 %

We provide deferred taxes to reflect the estimated future tax effects of the differences between the financial statement and tax bases of assets and liabilities using currently enacted tax laws. The net deferred tax liability was comprised of the following:

June 30, December 31,
(In thousands) 2020 2019
Deferred tax assets $ 28,124
$ 29,392
Deferred tax liabilities (300,870 ) (279,012 )
Net deferred tax liability $ (272,746 ) $ (249,620 )

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~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~The components of the net deferred tax liability were as follows:~~

June 30, December 31,
(In thousands) 2020 2019
Contingency reserves $ (273,077 ) $ (261,855 )
Unrealized (gain) loss on investments (23,828 ) (13,214 )
Unearned premium reserve 15,233
16,641
Accrued expenses 4,279
3,391
Deferred policy acquisition costs (3,330 ) (3,298 )
Unearned ceding commissions 3,021
3,227
Loss reserves 1,493
416
Start-up expenditures, net 1,274
1,410
Fixed assets 1,260
1,502
Nonvested shares 830
2,426
Change in fair market value of derivatives 726
370
Investments in limited partnerships (400 ) (400 )
Prepaid expenses (131 ) (132 )
Loss reserves - TCJA transition adjustment (104 ) (113 )
Organizational expenditures 8
9
Net deferred tax liability $ (272,746 ) $ (249,620 )

As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, under Section 832(e) of the IRC for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is allowed only to the extent that we purchase non-interest-bearing United States Mortgage Guaranty Tax and Loss Bonds ("T&L Bonds") issued by the Treasury Department in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. During the six months ended June 30, 2020, we had purchases of T&L Bonds in the amount of $17.3 million and for the year ended December 31, 2019, we had net purchases of T&L Bonds in the amount of $59.5 million. As of June 30, 2020 and December 31, 2019, we held $279.1 million and $261.9 million of T&L Bonds, respectively.

In evaluating our ability to realize the benefit of our deferred tax assets, we consider the relevant impact of all available positive and negative evidence including our past operating results and our forecasts of future taxable income. At June 30, 2020 and December 31, 2019, after weighing all the evidence, management concluded that it was more likely than not that our deferred tax assets would be realized.

Note 12.11. 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
June 30, Six Months Ended
June 30,
(In thousands, except per share amounts) 2020 2019 2020 2019
Net income $ 15,380
$ 136,405
$ 164,903
$ 264,125

Basic weighted average shares outstanding 102,500
97,798
100,224
97,697
Dilutive effect of nonvested shares 105
372
242
440
Diluted weighted average shares outstanding 102,605
98,170
100,466
98,137

Basic earnings per share $ 0.15
$ 1.39
$ 1.65
$ 2.70
Diluted earnings per share $ 0.15
$ 1.39
$ 1.64
$ 2.69

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~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~


	Three Months Ended March 31,
(In thousands, except per share amounts)		2021		2020
Net income		$	135,648	$	149,523

Basic weighted average shares outstanding		112,016		97,949
Dilutive effect of nonvested shares		362		377
Diluted weighted average shares outstanding		112,378		98,326

Basic earnings per share		$	1.21	$	1.53
Diluted earnings per share		$	1.21	$	1.52

There were ~~578,659~~352,623 and ~~17,018~~353,230 antidilutive shares for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and 465,945 and 79,483 antidilutive shares for the six months ended June 30, 2020 and 2019,~~ 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 and relative total shareholder return as of ~~June 30, 2020,~~March 31, 2021, the ~~following percentages of the~~2021 performance-based share awards would be issuable at 100% of target under the terms of the arrangements if ~~June 30, 2020~~March 31, 2021 was the end of the contingency ~~period:~~period, which is 50% of the shares issued.



~~2018 Performance-Based Grants~~	~~100~~	%
~~2019 Performance-Based Grants~~	~~100~~	%
~~2020 Performance-Based Grants~~	—	%

Based on the compounded annual book value per share growth as of ~~June 30, 2019,~~March 31, 2020, 100% of all performance-based share awards would have been issuable under the terms of the arrangements if ~~June 30, 2019~~March 31, 2020 was the end of the contingency period.

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~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Note ~~13.~~12. Accumulated Other Comprehensive Income (Loss)

The following table presents the rollforward of accumulated other comprehensive income (loss) for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Three Months Ended June 30,
2020 2019
(In thousands) Before Tax Tax Effect Net of Tax Before Tax Tax Effect Net of Tax
Balance at beginning of period $ 52,348
$ (6,235 ) $ 46,113
$ 13,041
$ (3,668 ) $ 9,373
Other comprehensive income (loss):

Unrealized holding gains (losses) on investments:
Unrealized holding gains arising during the period 90,608
(17,344 ) 73,264
43,664
(7,211 ) 36,453
Less: Reclassification adjustment for losses (gains) included in net income (1) 1,269
(248 ) 1,021
(583 ) 117
(466 )
Net unrealized gains on investments 91,877
(17,592 ) 74,285
43,081
(7,094 ) 35,987
Other comprehensive income 91,877
(17,592 ) 74,285
43,081
(7,094 ) 35,987
Balance at end of period $ 144,225
$ (23,827 ) $ 120,398
$ 56,122
$ (10,762 ) $ 45,360

Six Months Ended June 30,
2020 2019
(In thousands) Before Tax Tax Effect Net of Tax Before Tax Tax Effect Net of Tax
Balance at beginning of year $ 69,401
$ (13,214 ) $ 56,187
$ (33,276 ) $ 4,283
$ (28,993 )
Other comprehensive income (loss):

Unrealized holding gains (losses) on investments:
Unrealized holding gains arising during the period 76,690
(10,941 ) 65,749
90,641
(15,282 ) 75,359
Less: Reclassification adjustment for gains included in net income (1) (1,866 ) 328
(1,538 ) (1,243 ) 237
(1,006 )
Net unrealized gains on investments 74,824
(10,613 ) 64,211
89,398
(15,045 ) 74,353
Other comprehensive income 74,824
(10,613 ) 64,211
89,398
(15,045 ) 74,353
Balance at end of period $ 144,225
$ (23,827 ) $ 120,398
$ 56,122
$ (10,762 ) $ 45,360


	Three Months Ended March 31,
	2021						2020
(In thousands)	Before Tax		Tax Effect		Net of Tax		Before Tax		Tax Effect		Net of Tax
Balance at beginning of period	$	168,324	$	(30,050)	$	138,274	$	69,401	$	(13,214)	$	56,187
Other comprehensive income (loss):
Unrealized holding gains (losses) on investments:
Unrealized holding losses arising during the period	(68,763)		10,201		(58,562)		(13,918)		6,403		(7,515)
Less: Reclassification adjustment for gains included in net income (1)	(641)		0		(641)		(3,135)		576		(2,559)
Net unrealized losses on investments	(69,404)		10,201		(59,203)		(17,053)		6,979		(10,074)
Other comprehensive loss	(69,404)		10,201		(59,203)		(17,053)		6,979		(10,074)
Balance at end of period	$	98,920	$	(19,849)	$	79,071	$	52,348	$	(6,235)	$	46,113


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

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

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 14.13. 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.

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~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and valuations in which all significant inputs are observable in active markets. Inputs are observable for substantially the full term of the financial instrument.

•Level 3 — Valuations derived from one or more significant inputs that are unobservable.

Determination of Fair Value

When available, we generally use quoted market prices to determine fair value and classify the financial instrument in Level 1. In cases where quoted market prices for similar financial instruments are available, we utilize these inputs for valuation techniques and classify the financial instrument in Level 2. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flows, present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows and we classify the financial instrument in Level 3. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

We used the following methods and assumptions in estimating fair values of financial instruments:

•Investments available for sale — Investments available for sale are valued using quoted market prices in active markets, when available, and those investments are classified as Level 1 of the fair value hierarchy. Level 1 investments available for sale include investments such as U.S. Treasury securities and money market funds. Investments available for sale are classified as Level 2 of the fair value hierarchy if quoted market prices are not available and fair values are estimated using quoted prices of similar securities or recently executed transactions for the securities. U.S. agency securities, U.S. agency mortgage-backed securities, municipal debt securities, non-U.S. government 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 mortgage-backed securities, municipal debt securities, non-U.S. government securities 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

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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.

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~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Assets and Liabilities Measured at Fair Value

All assets measured at fair value are categorized in the table below based upon the lowest level of significant input to the valuations. All fair value measurements at the reporting date were on a recurring basis.


March 31, 2021 (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	$	262,309	$	0	$	0	$	262,309
U.S. agency securities	0		16,138		0		16,138
U.S. agency mortgage-backed securities	0		1,022,991		0		1,022,991
Municipal debt securities	0		572,263		0		572,263
Non-U.S. government securities	0		79,280		0		79,280
Corporate debt securities	0		1,414,938		0		1,414,938
Residential and commercial mortgage securities	0		446,208		0		446,208
Asset-backed securities	0		473,804		0		473,804
Money market funds	413,545		0		0		413,545
Total assets at fair value (1)	$	675,854	$	4,025,622	$	0	$	4,701,476

June 30, 2020 (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 $ 259,259
$ —
$ —
$ 259,259
U.S. agency securities —
14,682
—
14,682
U.S. agency mortgage-backed securities —
830,124
—
830,124
Municipal debt securities —
465,063
—
465,063
Non-U.S. government securities —
54,637
—
54,637
Corporate debt securities —
912,137
—
912,137
Residential and commercial mortgage securities —
312,511
—
312,511
Asset-backed securities —
385,486
—
385,486
Money market funds 1,118,204
—
—
1,118,204
Total assets at fair value (1) $ 1,377,463
$ 2,974,640
$ —
$ 4,352,103


December 31, 2020 (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	$	268,444	$	0	$	0	$	268,444
U.S. agency securities	0		18,085		0		18,085
U.S. agency mortgage-backed securities	0		995,905		0		995,905
Municipal debt securities	0		551,517		0		551,517
Non-U.S. government securities	0		61,607		0		61,607
Corporate debt securities	0		1,126,512		0		1,126,512
Residential and commercial mortgage securities	0		409,282		0		409,282
Asset-backed securities	0		454,717		0		454,717
Money market funds	679,304		0		0		679,304
Total assets at fair value (1)	$	947,748	$	3,617,625	$	0	$	4,565,373


~~(1)~~	(1)Does not include the fair value of embedded derivatives, which we have accounted for separately as freestanding derivatives and included in other assets or other accrued liabilities in our condensed consolidated balance sheet. See Note 4 for more information.

December 31, 2019 (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 $ 242,206
$ —
$ —
$ 242,206
U.S. agency securities —
33,605
—
33,605
U.S. agency mortgage-backed securities —
848,334
—
848,334
Municipal debt securities —
361,638
—
361,638
Non-U.S. government securities —
54,995
—
54,995
Corporate debt securities —
880,301
—
880,301
Residential and commercial mortgage securities —
288,281
—
288,281
Asset-backed securities —
326,025
—
326,025
Money market funds 315,362
—
—
315,362
Total assets at fair value (1) $ 557,568
$ 2,793,179
$ —
$ 3,350,747


~~(1)~~	Does not include the fair value of embedded derivatives, which we have accounted for separately as freestanding derivatives and included in other assets or other accrued liabilities in our condensed consolidated balance sheet. See ~~Note 4~~ ~~for more information.~~

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 15.14. Statutory Accounting

Our U.S. insurance subsidiaries prepare statutory-basis financial statements in accordance with the accounting practices prescribed or permitted by their respective state’s department of insurance, which is a comprehensive basis of accounting other than GAAP. We did not use any prescribed or permitted statutory accounting practices (individually or in the aggregate) that resulted in reported statutory surplus or capital that was significantly different from the statutory surplus or capital that would have been reported had National Association of Insurance Commissioners’ statutory accounting practices been followed. The following table presents Essent Guaranty’s and Essent PA’s statutory net income, statutory surplus and contingency reserve liability as of and for the ~~six~~three months ended ~~June 30:~~March 31:

(In thousands) 2020 2019
Essent Guaranty

Statutory net income $ 120,883
$ 208,268
Statutory surplus 1,003,812
940,290
Contingency reserve liability 1,345,263
1,049,236

Essent PA

Statutory net income $ 2,258
$ 4,216
Statutory surplus 53,432
51,151
Contingency reserve liability 54,685
50,915


(In thousands)	2021		2020
Essent Guaranty
Statutory net income	$	112,401	$	122,644
Statutory surplus	1,091,217		1,074,153
Contingency reserve liability	1,575,323		1,270,864

Essent PA
Statutory net income	$	1,129	$	1,627
Statutory surplus	54,964		53,648
Contingency reserve liability	56,535		53,854

Net income determined in accordance with statutory accounting practices differs from GAAP. In ~~2020~~2021 and ~~2019,~~2020, the more significant differences between net income determined under statutory accounting practices and GAAP for Essent Guaranty and Essent PA relate to policy acquisition costs and income taxes. Under statutory accounting practices, policy acquisition costs are expensed as incurred while such costs are capitalized and amortized to expense over the life of the policy under GAAP. We are eligible for a tax deduction, subject to certain limitations for amounts required by state law or regulation to be set aside in statutory contingency reserves when we purchase non-interest-bearing United States Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the Treasury Department. Under statutory accounting practices, this deduction reduces the tax provision recorded by Essent Guaranty and Essent PA and, as a result, increases statutory net income and surplus as compared to net income and equity determined in accordance with GAAP.

At ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the statutory capital of our U.S. insurance subsidiaries, which is defined as the total of statutory surplus and contingency reserves, was in excess of the statutory capital necessary to satisfy their regulatory requirements.

Effective December 31, 2015, Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency, implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include financial strength requirements incorporating a risk-based framework that require approved insurers to have a sufficient level of liquid assets from which to pay claims. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0") which became effective on March 31, 2019. As of ~~June 30, 2020,~~March 31, 2021, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0.

Statement of Statutory Accounting Principles No. 58, Mortgage Guaranty Insurance, requires mortgage insurers to establish a special contingency reserve for statutory accounting purposes included in total liabilities equal to 50% of earned premium for that year. During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, Essent Guaranty increased its contingency reserve by ~~$148.0~~$75.5 million and Essent PA increased its contingency reserve by ~~$1.7~~$0.5 million. This reserve is required to be maintained for a period of 120 months to protect against the effects of adverse economic cycles. After 120 months, the reserve is released to unassigned funds. In the event an insurer’s loss ratio in any calendar year exceeds 35%, however, the insurer may, after regulatory approval, release from its contingency reserves an amount equal to the excess portion of such losses. During the three months ended March 31, 2021, Essent Guaranty and Essent PA released contingency reserves of $0.6 million and less

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Essent Group Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

than $0.1 million, respectively, to unassigned funds upon completion of the 120 month holding period. Essent Guaranty and Essent PA did not release any amounts from their contingency reserves in the ~~six~~three months ended ~~June 30, 2020 or 2019.~~March 31, 2020.

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~~Essent Group Ltd. and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Under The Insurance Act 1978, as amended, and related regulations of Bermuda (the "Insurance Act"), Essent Re is required to annually prepare statutory financial statements and a statutory financial return in accordance with the financial reporting provisions of the Insurance Act, which is a basis other than GAAP. The Insurance Act also requires that Essent Re maintain minimum share capital of $1 million and must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margins and enhanced capital requirement pertaining to its general business. At December 31, ~~2019,~~2020, all such requirements were met.

Essent Re's statutory capital and surplus was ~~$1.0~~$1.1 billion as of ~~June 30, 2020~~March 31, 2021 and ~~$939.2 million~~$1.1 billion as of December 31, ~~2019.~~2020. Essent Re's statutory net income was ~~$59.0~~$48.4 million and ~~$82.7~~$49.5 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. Statutory capital and surplus as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 and statutory net income in the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ determined in accordance with statutory accounting practices were not significantly different than the amounts determined under GAAP.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with the “Selected Financial Data” and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K as of and for the year ended December 31, ~~2019~~2020 as filed with the Securities and Exchange Commission and referred to herein as the “Annual Report,” and our condensed consolidated financial statements and related notes as of and for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we refer to as the “Quarterly Report.” In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report and Part I, Item 1A “Risk Factors” in our Annual Report and Part II, Item 1A “Risk Factors” in this Quarterly Report. We are not undertaking any obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.

Overview

We are an established and growing private mortgage insurance company. Essent Guaranty, Inc., our wholly-owned insurance subsidiary which we refer to as "Essent Guaranty," is licensed to write coverage in all 50 states and the District of Columbia. The financial strength ratings of Essent Guaranty are A3 with a stable outlook by Moody’s Investors Service (“Moody's”), BBB+ with a negative outlook by S&P Global Ratings (“S&P”) and A (Excellent) with a stable outlook by A.M. Best. On April 28, 2021, S&P revised its outlook of Essent ~~Guaranty's financial strength rating was reaffirmed by A.M. Best on June 4, 2020 and by Moody's on July 21, 2020.~~Guaranty from negative to stable.

Our holding company is domiciled in Bermuda and our U.S. insurance business is headquartered in Radnor, Pennsylvania. We operate additional underwriting and service centers in Winston-Salem, North Carolina and Irvine, California. We have a highly experienced, talented team with ~~389~~365 employees as of ~~June 30, 2020.~~March 31, 2021. We generated new insurance written, or NIW, of approximately ~~$28.2~~$19.3 billion and ~~$41.7~~$13.5 billion for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, compared to approximately $18.0 billion and $29.0 billion for the three and six months ended June 30, 2019,~~ respectively. As of ~~June 30, 2020,~~March 31, 2021, we had approximately ~~$174.6~~$197.1 billion of insurance in ~~force.~~force, due to our NIW which was offset by cancellations as the persistency rate on our portfolio was 56.1% at March 31, 2021 compared to 60.1% at December 31, 2020.

We also offer mortgage-related insurance and reinsurance through our wholly-owned Bermuda-based subsidiary, Essent Reinsurance Ltd., which we refer to as "Essent Re." As of ~~June 30, 2020,~~March 31, 2021, Essent Re provided insurance or reinsurance relating to GSE risk share and other reinsurance transactions covering approximately ~~$1.0~~$1.5 billion of risk. Essent Re also reinsures 25% of Essent Guaranty’s NIW under a quota share reinsurance agreement. In April 2021, Essent Guaranty and Essent Re agreed to increase the quota share reinsurance coverage of Essent Guaranty’s NIW provided by Essent Re to 35% effective January 1, 2021. The quota share reinsurance coverage provided by Essent Re for Essent Guaranty’s NIW prior to January 1, 2021 will continue to be 25%, the quota share percentage in effect at the time NIW was first ceded. The insurer financial strength rating of Essent Re is BBB+ with a negative outlook by S&P and A (Excellent) with a stable outlook by A.M. Best. ~~On June 4, 2020 A.M. Best reaffirmed its rating of Essent Re.~~

COVID-19

~~The novel coronavirus disease 2019 ("COVID-19") was first identified in December 2019 in Wuhan China. On March 11, 2020 the outbreak had spread~~ Due to be declared a pandemic by the World Health Organization (“WHO”). Within a week of the WHO's declaration, most major economies had announced significant and increasing restrictions on the movement and interaction of people. By the end of March 2020, it was estimated that a quarter of the world’s population was under some form of lockdown or stay-at-home order. Most state governments in the United States implemented some form of travel and/or business restrictions to slow the spread of COVID-19. Business restrictions, stay-at-home orders and travel restrictions have resulted inCOVID-19, we experienced a significant increase in ~~unemployment~~the amount of new defaults reported, especially during the second and third quarters of 2020. We segmented these two quarters’ defaults as specifically COVID-19 related (“Early COVID Defaults”) and provided losses for these two cohorts differently as compared to our normal loss reserving methodology. Beginning in the ~~United States, which has increased~~fourth quarter of 2020, the ~~number~~credit characteristics of ~~delinquencies and has the potential to increase claim frequencies on the mortgages we insure.~~

In response to the impact of COVID-19, the federal government has implemented unprecedented measures to assist borrowers in avoiding foreclosures and allow families to remain in their homes. Most notably, under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), consumers with federally backed mortgages were granted two financial protections: (1) a temporary moratorium on foreclosures, and (2) mortgage forbearance, either in the form of a lower monthly payment or temporarily suspending payments. Under the new ~~law, borrowers have the right to request forbearance for up to 360 days due to hardship caused by COVID-19. We believe that these measures will likely increase the overall duration~~defaults trended towards those of the ~~default resolution process and reduce~~pre-pandemic periods. As a result, for new defaults reported after September 30, 2020, we have reverted to our normal loss reserving methodology. It is our belief that the ~~number~~default-to-claim transition patterns of ~~defaults that result in claims~~the Early COVID Defaults will be different as compared to our historical defaults. We believe that the borrowers associated with the Early COVID Defaults will be able to take advantage of foreclosure moratoriums and mortgage forbearance programs instituted by Federal legislation along with actions taken by the Federal Housing Finance Agency (“FHFA”), Fannie Mae and Freddie Mac (collectively the “GSEs”) which may extend traditional default-to-claim ~~experience. However,~~timelines. As a result of these programs, along with Federal stimulus, these borrowers associated with the ~~increase in~~Early COVID Defaults will have more resources and an extended time period to address the issues that triggered the default, ~~resolution process may result~~resulting in ~~increases in~~a higher cure rate, and correspondingly lower claim ~~severities for loans that proceed to claim.~~payments than historical defaults.

Over ~~95%~~90% of loans insured by Essent are federally backed by Fannie Mae or Freddie Mac. As a mortgage loan in forbearance is considered delinquent, we will provide loss reserves as loans in forbearance are reported to us as delinquent once the borrower has missed two consecutive payments. However, we believe providing borrowers time to recover from the adverse

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financial impact of the COVID-19 event may allow some families to be able to remain in their homes and avoid foreclosure. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status.

Essent has had a Pandemic Plan in place as part of its comprehensive Business Continuity Program for a number of years and invoked the Pandemic Plan in light of the COVID-19 event. Our workforce has been working in "full remote" mode since March 16, 2020. Through the use of technology, our national and regional account managers and customer service team have been in contact with our policyholders and their servicers, and we have made several COVID-19-related announcements which have been posted on our mortgage insurance website.

~~As of March 31, 2020, COVID-19 had not had a significant impact on our financial position or results of operations. During~~ In the three months ended ~~June 30, 2020, the number and percentage of mortgage loans we insure that were~~March 31, 2021, new defaults remained elevated although at lower levels than those reported ~~to have missed at least two consecutive payments of principal and interest had increased as a result of COVID-19, which has resulted in an increase in our provision for losses~~ in the ~~three and six months ended June 30,~~second through fourth quarters of 2020. 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. As noted in “— Liquidity and Capital Resources,” Essent had substantial liquidity and had Available Assets in excess of Minimum Required Assets under PMIERs 2.0 as of ~~June 30, 2020.~~March 31, 2021. In order to maintain continuous MI coverage, mortgage servicers are required to advance MI premiums to us even if borrowers are in a forbearance plan. Future increases in defaults may result in an increase in our provisions for loss and loss adjustment expenses compared to prior periods, reduced profit commission under our quota share reinsurance agreement with a panel of third-party reinsurers ("the QSR Agreement") and an increase in our Minimum Required Assets.

Legislative and Regulatory Developments

Our results are significantly impacted by, and our future success may be affected by, legislative and regulatory developments affecting the housing finance industry. See Part I, Item 1 “Business—Regulation” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legislative and Regulatory Developments” in our Annual Report for a discussion of the laws and regulations to which we are subject as well as legislative and regulatory developments affecting the housing finance industry.

The U.S. Internal Revenue Service and Department of the Treasury ~~issued~~published both final and newly proposed regulations ~~on July 10, 2019~~in January 2021 relating to the tax treatment of passive foreign investment companies ("PFICs"). The ~~proposed~~final regulations provide guidance on various PFIC rules, including changes resulting from the 2017 Tax Cuts and Jobs Act. ~~The~~In addition, the Company is evaluating the potential impact of ~~these~~the newly proposed PFIC regulations to its shareholders and business operations. The newly proposed regulations, among other provisions, set a limit on the amount of assets that may be deemed “good assets” within the PFIC asset test of a foreign holding company.

Factors Affecting Our Results of Operations

Net Premiums Written and Earned

Premiums associated with our U.S. mortgage insurance business are based on insurance in force ("IIF") during all or a portion of a period. A change in the average IIF during a period causes premiums to increase or decrease as compared to prior periods. Average net premium rates in effect during a given period will also cause premiums to differ when compared to earlier periods. IIF at the end of a reporting period is a function of the IIF at the beginning of such reporting period plus NIW less policy cancellations (including claims paid) during the period. As a result, premiums are generally influenced by:

•NIW, which is the aggregate principal amount of the new mortgages that are insured during a period. Many factors affect NIW, including, among others, the volume of low down payment home mortgage originations, the competition to provide credit enhancement on those mortgages, the number of customers who have approved us to provide mortgage insurance and changes in our NIW from certain customers;

•Cancellations of our insurance policies, which are impacted by payments on mortgages, home price appreciation, or refinancings, which in turn are affected by mortgage interest rates. Cancellations are also impacted by the levels of claim payments and rescissions;

•Premium rates, which represent the amount of the premium due as a percentage of IIF. Premium rates are based on the risk characteristics of the loans insured, the percentage of coverage on the loans, competition from other mortgage insurers and general industry conditions; and


•	•Premiums ceded or assumed under reinsurance arrangements. See Note 4 to our condensed consolidated financial statements.

Premiums are paid either on a monthly installment basis (“monthly premiums”), in a single payment at origination (“single premiums”), or in some cases as an annual premium. For monthly premiums, we receive a monthly premium payment which is recorded as net premiums earned in the month the coverage is provided. Monthly premium payments are based on the original mortgage amount rather than the amortized loan balance. Net premiums written may be in excess of net premiums

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earned due to single premium policies. For single premiums, we receive a single premium payment at origination, which is recorded as “unearned premium” and earned over the estimated life of the policy, which ranges from 36 to 156 months depending on the term of the underlying mortgage and loan-to-value ratio at date of origination. If single premium policies are cancelled due to repayment of the underlying loan and the premium is non-refundable, the remaining unearned premium balance is immediately recognized as earned premium revenue. Substantially all of our single premium policies in force as of ~~June 30, 2020~~March 31, 2021 were non-refundable. Premiums collected on annual policies are recognized as net premiums earned on a straight-line basis over the year of coverage. For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ monthly premium policies comprised ~~90%~~93% and ~~88%~~90% of our NIW, respectively.

Premiums associated with our GSE and other risk share transactions are based on the level of risk in force and premium rates on the transactions.

Persistency and Business Mix

The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was ~~67.9%~~56.1% at ~~June 30, 2020.~~March 31, 2021. Generally, higher prepayment speeds lead to lower persistency.

Prepayment speeds and the relative mix of business between single premium policies and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages. Because premiums are paid at origination on single premium policies, assuming all other factors remain constant, if loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, our premium earned with respect to those loans and therefore our profitability declines. Currently, the expected return on single premium policies is less than the expected return on monthly policies.

Net Investment Income

Our investment portfolio was predominantly comprised of investment-grade fixed income securities and money market funds as of ~~June 30, 2020.~~March 31, 2021. The principal factors that influence investment income are the size of the investment portfolio and the yield on individual securities. As measured by amortized cost (which excludes changes in fair market value, such as from changes in interest rates), the size of our investment portfolio is mainly a function of increases in capital and cash generated from or used in operations which is impacted by net premiums received, investment earnings, net claim payments and expenses. Realized gains and losses are a function of the difference between the amount received on the sale of a security and the security’s amortized cost, as well as any provision for credit losses or impairments recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.

Other Income

Other income includes revenues associated with contract underwriting services and underwriting consulting services to third-party reinsurers. The level of contract underwriting revenue is dependent upon the number of customers who have engaged us for this service and the number of loans underwritten for these customers. Revenue from underwriting consulting services to third-party reinsurers is dependent upon the number of customers who have engaged us for this service and the level of premiums associated with the transactions underwritten for these customers.

In connection with the acquisition of our mortgage insurance platform, we entered into a services agreement with Triad Guaranty Inc. and its wholly-owned subsidiary, Triad Guaranty Insurance Corporation, which we refer to collectively as “Triad,” to provide certain information technology maintenance and development and customer support-related services. In return for these services, we receive a fee which is recorded in other income. Prior to December 1, 2019, this fee was adjusted monthly based on the number of Triad’s mortgage insurance policies in force and, accordingly, decreased over time as Triad’s existing policies were cancelled. Effective December 1, 2019, theThe services agreement ~~was amended providing~~provides for a flat monthly fee through November 30, 2021. The services agreement provides for two subsequent one-year renewals at Triad's option.

As more fully described in Note 4 to our condensed consolidated financial statements, the premiums ceded under certain reinsurance contracts with unaffiliated third parties vary based on changes in market interest rates. Under GAAP, these contracts contain embedded derivatives that are accounted for separately as freestanding derivatives. The change in the fair value of the embedded derivatives is reported in earnings and included in other income.

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Provision for Losses and Loss Adjustment Expenses

The provision for losses and loss adjustment expenses reflects the current expense that is recorded within a particular period to reflect actual and estimated loss payments that we believe will ultimately be made as a result of insured loans that are in default.

Losses incurred are generally affected by:

•the overall state of the economy, which broadly affects the likelihood that borrowers may default on their loans and have the ability to cure such defaults;

•changes in housing values, which affect our ability to mitigate our losses through the sale of properties with loans in default as well as borrower willingness to continue to make mortgage payments when the value of the home is below or perceived to be below the mortgage balance;

•the product mix of IIF, with loans having higher risk characteristics generally resulting in higher defaults and claims;

•the size of loans insured, with higher average loan amounts tending to increase losses incurred;

•the loan-to-value ratio, with higher average loan-to-value ratios tending to increase losses incurred;

•the percentage of coverage on insured loans, with deeper average coverage tending to increase losses incurred;

•credit quality of borrowers, including higher debt-to-income ratios and lower FICO scores, which tend to increase incurred losses;

•the level and amount of reinsurance coverage maintained with third parties;

•the rate at which we rescind policies. Because of tighter underwriting standards generally in the mortgage lending industry and terms set forth in our master policy, we expect that our level of rescission activity will be lower than rescission activity seen in the mortgage insurance industry for vintages originated prior to the financial crisis; and

•the distribution of claims over the life of a book. As of ~~June 30, 2020, 68%~~March 31, 2021, 75% of our IIF relates to business written since January 1, ~~2018~~2019 and was less than three years old. As a result, based on historical industry performance, we expect the number of defaults and claims we experience, as well as our provision for losses and loss adjustment expenses ("LAE"), to increase as our portfolio seasons. See “— Mortgage Insurance Earnings and Cash Flow Cycle” below.

We establish loss reserves for delinquent loans when we are notified that a borrower has missed at least two consecutive monthly payments (“Case Reserves”), as well as estimated reserves for defaults that may have occurred but not yet been reported to us (“IBNR Reserves”). We also establish reserves for the associated loss adjustment expenses, consisting of the estimated cost of the claims administration process, including legal and other fees. Using both internal and external information, we establish our reserves based on the likelihood that a default will reach claim status and estimated claim severity. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” included in our Annual Report for further information.

~~We believe, based~~Based upon our experience and industry data, ~~that~~ claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. Claims incidence for defaults associated with COVID-19 may not follow this pattern. As of ~~June 30, 2020, 68%~~March 31, 2021, 75% of our IIF relates to business written since January 1, ~~2018~~2019 and was less than three years old. Although the claims experience on new insurance written by us to date has been favorable, we expect incurred losses and claims to increase as a greater amount of this book of insurance reaches its anticipated period of highest claim frequency. The actual default rate and the average reserve per default that we experience as our portfolio matures is difficult to predict and is dependent on the specific characteristics of our current in-force book (including the credit score of the borrower, the loan-to-value ratio of the mortgage, geographic concentrations, etc.), as well as the profile of new business we write in the future. In addition, the default rate and the average reserve per default will be affected by future macroeconomic factors such as housing prices, interest rates and employment.

Due to business restrictions, stay-at-home orders and travel restrictions implemented in March 2020 as a result of COVID-19, unemployment in the United States ~~has~~ increased ~~significantly.~~significantly in the second quarter of 2020 and remained elevated at

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March 31, 2021. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment has increased the number of delinquencies on the mortgages we insure, and has the potential to increase claim frequencies on defaults. As of ~~June 30, 2020,~~March 31, 2021, insured loans in default totaled ~~38,068~~29,080 and included ~~34,352~~26,874 defaults classified as COVID-19 defaults compared to 5,841 total defaults and no COVID-19 defaults as of March 31, 2020. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status. We believe that the forbearance process could have a favorable effect on the frequency of claims that we ultimately pay. Based on the forbearance programs in place and the credit characteristics of the ~~COVID-19 defaulted loans,~~Early COVID Defaults, we expect the ultimate number of ~~COVID-19-related defaults~~Early COVID Defaults that result in claims will be less than our historical default-to-claim experience. ~~Accordingly, we~~We applied a lower reserve rate to ~~COVID-19 default notices received in~~ the ~~three months ended June 30, 2020~~Early COVID Defaults than the rate used for defaults that had missed ~~three~~a comparable number of payments ~~or less~~ as of ~~June~~March 31, 2020 due to the sudden impact on the economy following the onset of the pandemic. The credit characteristics of defaults reported in October 2020 through March 2021 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, the economic conditions during the fourth quarter of 2020 and the first quarter of 2021 have been different than those experienced in the second and third quarters of 2020. We believe that while defaults in October 2020 through March 2021 were impacted by the pandemic’s effect on the economy, the underlying credit performance of these defaults may not be the same as the expected performance for Early COVID Defaults that occurred following the onset of the pandemic and these defaults are more likely to transition like pre-pandemic defaults. Accordingly, although defaults reported in October 2020 through March 2021 are classified as COVID-19 defaults, beginning in the fourth quarter of 2020, we resumed establishing reserves for defaults reported after September 30, ~~2019.~~2020 using our normal reserve methodology. It is reasonably possible that our estimate of the losses for the COVID-19 defaults could change in the near term as a result of the continued impact of the pandemic on the economic environment, the results of existing and future governmental programs designed to assist individuals and businesses impacted by the virus and the performance of the COVID-19 defaults in the forbearance programs. As more fully described in Note 4 to our condensed consolidated financial statements, at ~~June 30, 2020,~~March 31, 2021, we had approximately ~~$1.6~~$2.0 billion of excess of loss reinsurance covering NIW from January 1, 2015 to ~~August~~July 31, ~~2019~~2020 and a quota share reinsurance transaction on a portion of our NIW effective September 1, 2019 ~~and continuing~~ through December 31, 2020. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers, the performance of COVID-19 defaults and our expectations for the amount of ultimate losses on these delinquencies.

Third-Party Reinsurance

We use third-party reinsurance to provide protection against adverse loss experience and to expand our capital sources. When we enter into a reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements have the impact of reducing our earned premiums, but also reduce our risk in force ("RIF"), which provides capital relief, and may include capital relief under the PMIERs financial strength requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement. For additional information regarding reinsurance, see Note 4 to our condensed consolidated financial statements.

Other Underwriting and Operating Expenses

Our other underwriting and operating expenses include components that are substantially fixed, as well as expenses that generally increase or decrease in line with the level of NIW.

Our most significant expense is compensation and benefits for our employees, which represented ~~62% and 61%~~58% of other underwriting and operating expenses for the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, compared to ~~56%~~59% of other underwriting and operating expenses for ~~each of~~ the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2020. Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes.

Underwriting and other expenses include legal, consulting, other professional fees, premium taxes, travel, entertainment, marketing, licensing, supplies, hardware, software, rent, utilities, depreciation and amortization and other expenses. We anticipate that as we continue to add new customers and increase our IIF, our expenses will also continue to increase.

Interest Expense

Interest expense is incurred as a result of borrowings under our secured credit facility (the “Credit Facility”). 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.

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Income Taxes

Income taxes are incurred based on the amount of earnings or losses generated in the jurisdictions in which we operate and the applicable tax rates and regulations in those jurisdictions. Our U.S. insurance subsidiaries are generally not subject to income taxes in the states in which we operate; however, our non-insurance subsidiaries are subject to state income taxes. In lieu of state income taxes, our insurance subsidiaries pay premium taxes that are recorded in other underwriting and operating expenses.

Essent Group Ltd. ("Essent Group") and its wholly-owned subsidiary, Essent Re, are domiciled in Bermuda, which does not have a corporate income tax. Essent Re reinsures 25% of Essent Guaranty's NIW under a quota share reinsurance agreement. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae.

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

Mortgage Insurance Earnings and Cash Flow Cycle

In general, the majority of any underwriting profit (premium revenue minus losses) that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year. Subsequent years of a book generally result in modest underwriting profit or underwriting losses. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses.

Key Performance Indicators

Insurance In Force

As discussed above, premiums we collect and earn are generated based on our IIF, which is a function of our NIW and cancellations. The following table includes a summary of the change in our IIF for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ for our U.S. mortgage insurance portfolio. In addition, this table includes RIF at the end of each period.


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(In thousands)	2020			2019			2020			2019			(In thousands)		2021		2020
IIF, beginning of period	$	165,615,503		$	143,181,641		$	164,005,853		$	137,720,786		IIF, beginning of period		$	198,882,352	$	164,005,853
NIW - Flow	28,163,212			17,973,505			41,712,511			28,918,812			NIW - Flow		19,254,014		13,549,299
NIW - Bulk	—			29,524			151			84,526			NIW - Bulk		—		151
Cancellations	(19,132,442		)	(7,867,513		)	(31,072,242		)	(13,406,967		)	Cancellations		(21,045,175)		(11,939,800)
IIF, end of period	$	174,646,273		$	153,317,157		$	174,646,273		$	153,317,157		IIF, end of period		$	197,091,191	$	165,615,503
Average IIF during the period	$	168,635,275		$	148,188,377		$	166,865,006		$	144,302,864		Average IIF during the period		$	197,749,668	$	164,782,361
RIF, end of period	$	39,113,879		$	37,034,687		$	39,113,879		$	37,034,687		RIF, end of period		$	41,135,978	$	38,290,022

The following is a summary of our IIF at ~~June 30, 2020~~March 31, 2021 by vintage:


($ in thousands)	$		%		($ in thousands)	$		%
2020 (through June 30)	$	41,196,840	23.6	%
2021 (through March 31)					2021 (through March 31)	$	19,094,071	9.7	%
2020					2020	96,534,141		49.0
2019	51,138,928		29.3		2019	32,499,325		16.5
2018	26,920,663		15.4		2018	15,685,099		7.9
2017	23,247,877		13.3		2017	13,655,157		6.9
2016	15,675,316		9.0
2015 and prior	16,466,649		9.4
2016 and prior					2016 and prior	19,623,398		10.0
	$	174,646,273	100.0	%		$	197,091,191	100.0	%

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Average Net Premium Rate

Our average net premium rate is dependent on a number of factors, including: (1) the risk characteristics and average coverage on the mortgages we insure; (2) the mix of monthly premiums compared to single premiums in our portfolio; (3) cancellations of non-refundable single premiums during the period; (4) changes to our pricing for NIW; and (5) premiums ceded under third-party reinsurance agreements. For ~~each of~~ the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, our average net premium rate was ~~0.48%~~0.42%, as compared to ~~0.49% and~~ 0.48% for the three ~~and six~~ months ended ~~June 30, 2019, respectively. In 2019 and 2020, Essent Guaranty entered into third-party reinsurance agreements.~~March 31, 2020. We anticipate that the continued use of third-party reinsurance along with changes to the level of future cancellations of non-refundable single premium policies and mix of IIF will reduce our average net premium rate in future periods.

Persistency Rate

The measure for assessing the impact of policy cancellations on IIF is our persistency rate, defined as the percentage of IIF that remains on our books after any twelve-month period. See additional discussion regarding the impact of the persistency rate on our performance in “— Factors Affecting Our Results of Operations — Persistency and Business Mix.”

Risk-to-Capital

The risk-to-capital ratio has historically been used as a measure of capital adequacy in the U.S. mortgage insurance industry and is calculated as a ratio of net risk in force to statutory capital. Net risk in force represents total risk in force net of reinsurance ceded and net of exposures on policies for which loss reserves have been established. Statutory capital for our U.S. insurance companies is computed based on accounting practices prescribed or permitted by the Pennsylvania Insurance Department. See additional discussion in “— Liquidity and Capital Resources — Insurance Company Capital.”

As of ~~June 30, 2020,~~March 31, 2021, our combined net risk in force for our U.S. insurance companies was ~~$28.8~~$29.4 billion and our combined statutory capital was ~~$2.5~~$2.8 billion, resulting in a risk-to-capital ratio of ~~11.7~~10.6 to 1. The amount of capital required varies in each jurisdiction in which we operate; however, generally, the maximum permitted risk-to-capital ratio is 25.0 to 1. State insurance regulators are currently examining their respective capital rules to determine whether, in light of the financial crisis, changes are needed to more accurately assess mortgage insurers’ ability to withstand stressful economic conditions. As a result, the capital metrics under which they assess and measure capital adequacy may change in the future. Independent of the state regulator and GSE capital requirements, management continually assesses the risk of our insurance portfolio and current market and economic conditions to determine the appropriate levels of capital to support our business.

Table of Contents

Results of Operations

The following table sets forth our results of operations for the periods indicated:


Summary of Operations	Three Months Ended June 30,					Six Months Ended June 30,				Summary of Operations	Three Months Ended March 31,
(In thousands)	2020			2019		2020		2019		(In thousands)		2021		2020
Revenues:										Revenues:
Net premiums written	$	205,904		$	188,404	$	397,647	$	366,048	Net premiums written		$	204,361	$	191,743
Decrease in unearned premiums	5,567			86		20,320		233		Decrease in unearned premiums		14,706		14,753
Net premiums earned	211,471			188,490		417,967		366,281		Net premiums earned		219,067		206,496
Net investment income	19,866			20,581		40,499		40,461		Net investment income		21,788		20,633
Realized investment gains (losses), net	(1,269		)	583		1,866		1,243
Other income	6,009			2,238		4,585		4,433
Realized investment gains, net										Realized investment gains, net		641		3,135
Other income (loss)										Other income (loss)		3,301		(1,424)
Total revenues	236,077			211,892		464,917		412,418		Total revenues		244,797		228,840

Losses and expenses:										Losses and expenses:
Provision for losses and LAE	175,877			4,960		183,940		12,067		Provision for losses and LAE		32,322		8,063
Other underwriting and operating expenses	38,819			41,520		80,766		82,550		Other underwriting and operating expenses		42,239		41,947
Interest expense	2,566			2,679		4,698		5,349		Interest expense		2,051		2,132
Total losses and expenses	217,262			49,159		269,404		99,966		Total losses and expenses		76,612		52,142
Income before income taxes	18,815			162,733		195,513		312,452		Income before income taxes		168,185		176,698
Income tax expense	3,435			26,328		30,610		48,327		Income tax expense		32,537		27,175
Net income	$	15,380		$	136,405	$	164,903	$	264,125	Net income		$	135,648	$	149,523

Three ~~and Six~~ Months Ended ~~June 30, 2020~~March 31, 2021 Compared to the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31, 2020

For the three months ended ~~June 30, 2020,~~March 31, 2021, we reported net income of ~~$15.4~~$135.6 million, compared to net income of ~~$136.4~~$149.5 million for the three months ended ~~June 30, 2019. For the six months ended June 30, 2020, we reported net income of $164.9 million, compared to net income of $264.1 million for the six months ended June 30, 2019.~~March 31, 2020. The ~~decreases~~decrease in our operating results in ~~2020~~2021 over the same ~~periods~~period in ~~2019~~2020 was primarily due to increases in the provision for losses and LAE and income tax expense, partially offset by increases in net premiums earned and other ~~income and decreases in other underwriting and operating expenses and income tax expense.~~income.

Net Premiums Written and Earned

Net premiums earned increased in the three months ended ~~June 30, 2020~~March 31, 2021 by ~~12%~~6%, compared to the three months ended ~~June 30, 2019~~March 31, 2020 primarily due to the increase in our average IIF from ~~$148.2~~$164.8 billion at ~~June 30, 2019~~March 31, 2020 to ~~$168.6~~$197.7 billion at ~~June 30, 2020.~~March 31, 2021. The average net premium rate was ~~0.48%~~0.42% and ~~0.49%~~0.48% for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, as~~respectively. The decrease in the average net premium rate in the three month period ended March 31, 2021 was a result of an increase in ceded premiums, changes in the mix of mortgages we insure, in part due to lower persistency, and changes in our pricing which were largely offset by an increase in premiums earned on the cancellation of non-refundable single premium policies. Net premiums earned increased in the six months ended June 30, 2020 by 14% compared to the six months ended June 30, 2019 due to the increase in our average IIF from $144.3 billion at June 30, 2019 to $166.9 billion at June 30, 2020. The average net premium rate was 0.48% in each of the six months ended June 30, 2020 and 2019 as an increase in ceded premiums waspartially offset by an increase in premiums earned on the cancellation of non-refundable single premium policies. In the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, ceded premiums increased to ~~$22.1~~$30.9 million ~~and $36.4 million, respectively,~~ from ~~$8.4 million and $14.5~~$14.2 million in the three ~~and six~~ months ended ~~June 30, 2019, respectively,~~March 31, 2020 due to ~~reduced profit commission~~additional risk ceded under our QSR Agreement ~~as a result of higher ceded losses,~~and new third-party reinsurance agreements entered in ~~2020 and a full three and six months of premiums ceded under third-party reinsurance agreements entered in 2019.~~2020. In the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, premiums earned on the cancellation of non-refundable single premium policies increased to ~~$26.7~~$19.8 million ~~and $41.3 million, respectively,~~ from ~~$8.8 million and $13.1~~$14.6 million in the three ~~and six~~ months ended ~~June 30, 2019, respectively,~~March 31, 2020 as a result of an increase in existing borrowers refinancing their mortgages due to favorable mortgage interest rates.

Net premiums written increased by 9%7% in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 primarily due to an increase in average IIF in the ~~respective periods,~~three months ended March 31, 2021 compared to the same period in 2020, partially offset by an increase

in premiums ceded under third-party reinsurance agreements, a decrease in new single premium policies written, changes in the mix of mortgages we insure and changes in our pricing.

In the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ unearned premiums decreased by ~~$5.6~~$14.7 million and ~~$0.1~~$14.8 million, respectively. The change in unearned premiums was a result of net premiums written on single premium policies of ~~$36.8~~$18.3 million and ~~$26.5~~$16.0 million, respectively, which was offset by ~~$42.4~~$33.0 million and $26.6 million, respectively, of unearned premium that was recognized in earnings during the periods. In the six months ended June 30, 2020 and 2019, unearned premiums decreased by $20.3 million and $0.2 million, respectively. This was a result of net premiums written on single premium policies of $52.9 million and $46.5 million, respectively, which was offset by $73.2 million and $46.7$30.8 million, respectively, of unearned premium that was recognized in earnings during the periods.

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Net Investment Income

Our net investment income was derived from the following sources for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(In thousands)	2020			2019			2020			2019			(In thousands)		2021		2020
Fixed maturities	$	20,569		$	20,180		$	41,183		$	39,923		Fixed maturities		$	23,024	$	20,614
Short-term investments	358			1,310			1,480			2,368			Short-term investments		81		1,122
Gross investment income	20,927			21,490			42,663			42,291			Gross investment income		23,105		21,736
Investment expenses	(1,061		)	(909		)	(2,164		)	(1,830		)	Investment expenses		(1,317)		(1,103)
Net investment income	$	19,866		$	20,581		$	40,499		$	40,461		Net investment income		$	21,788	$	20,633

The ~~changes~~increase in net investment income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 as compared to the same ~~periods~~period in ~~2019~~2020 was due to ~~a decrease in the pre-tax investment income yield partially offset by~~ the increase in the weighted average balance of our investment ~~portfolio.~~portfolio partially offset by a decrease in the pre-tax investment income yield. The average cash and investment portfolio balance increased to ~~$3.9~~$4.6 billion for the three months ended ~~June 30, 2020~~March 31, 2021 from ~~$3.0~~$3.5 billion for the three months ended ~~June 30, 2019. The average cash and investment portfolio balance increased to $3.7 billion for the six months ended June 30, 2020 from $3.0 billion for the six months ended June 30, 2019.~~March 31, 2020. The increase in the average cash and investment portfolio was primarily due to investing cash flows from operations, proceeds from the public offering of common shares completed in June 2020 and increased borrowings under the Credit Facility. The pre-tax investment income yield decreased from ~~2.8% in each of the three and six months ended June 30, 2019 to 2.2% and 2.3%~~2.5% in the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 ~~respectively,~~to 2.0% in the three months ended March 31, 2021 primarily due to an increase in the share of our investments allocated to cash, a general decline in investment yields due to declining interest rates and an increase in premium amortization on mortgage-backed and asset-backed securities. The pre-tax investment income yields are calculated based on amortized cost and exclude investment expenses. See “— Liquidity and Capital Resources” for further details of our investment portfolio.

Other Income

Other income for the three months ended ~~June 30, 2020~~March 31, 2021 was ~~$6.0~~$3.3 million as compared to ~~$2.2~~a loss of $1.4 million for the three months ended ~~June 30, 2019.~~March 31, 2020. The increase in other income for the three months ended ~~June 30, 2020~~March 31, 2021 as compared to the same period in ~~2019~~2020 was primarily due to ~~a favorable increase~~changes in the fair value of the embedded derivatives contained in certain of our reinsurance ~~agreements and an increase in fees earned for information technology and customer support services~~ ~~provided to Triad~~. Other income for the six months ended June 30, 2020 was $4.6 million compared to $4.4 million for the six months ended June 30, 2019. The increase in other income for the six months ended June 30, 2020 as compared to the same period in 2019 was primarily due to an increase in Triad service fees partially offset by a net unfavorable decrease in the fair value of the embedded derivatives. In the three and six months ended June 30, 2020 we earned Triad service fees of $1.6 million and $3.2 million, respectively, compared to $0.2 million and $0.4 million for the three and six months ended June 30, 2019, respectively. Effective December 1, 2019, the Triad services agreement was amended providing for a flat monthly fee through November 30, 2021.agreements. In the three months ended ~~June 30, 2020,~~March 31, 2021, we recorded ~~a favorable increase~~an unfavorable decrease in the fair value of these embedded derivatives of ~~$2.5~~$0.6 million compared to ~~a favorable increase in the fair value of the embedded derivatives of $1.2 million in the three months ended June 30, 2019. In the six months ended June 30, 2020 we recorded a net~~an unfavorable decrease in the fair value of the embedded derivatives of ~~$1.7~~$4.2 million ~~compared to a favorable increase of $2.6 million~~ in the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. Other income also includes Triad service fee income, contract underwriting revenues and underwriting consulting services to third-party reinsurers.

Provision for Losses and Loss Adjustment Expenses

The increase in the provision for losses and LAE in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 as compared to the same ~~periods~~period in ~~2019~~2020 was primarily due to an increase in defaults related to COVID-19.

The following table presents a rollforward of insured loans in default for our U.S. mortgage insurance portfolio for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
	2020		2019		2020		2019				2021	2020
Beginning default inventory	5,841		4,096		5,947		4,024		Beginning default inventory		31,469	5,947
Plus: new defaults	37,357		2,849		41,290		5,767		Plus: new defaults		7,422	3,933
Less: cures	(4,983	)	(2,433	)	(8,897	)	(5,182	)	Less: cures		(9,737)	(3,914)
Less: claims paid	(144	)	(106	)	(262	)	(194	)	Less: claims paid		(61)	(118)
Less: rescissions and denials, net	(3	)	(1	)	(10	)	(10	)	Less: rescissions and denials, net		(13)	(7)
Ending default inventory	38,068		4,405		38,068		4,405		Ending default inventory		29,080	5,841

As of ~~June 30, 2020,~~March 31, 2021, the ending default inventory included ~~34,352~~26,874 defaults classified as COVID-19 defaults.

Table of Contents

The following table includes additional information about our loans in default as of the dates indicated for our U.S. mortgage insurance portfolio:

As of June 30,
2020 2019
Case reserves (in thousands) (1)
$ 227,786
$ 50,576
Total reserves (in thousands) (1)
$ 250,862
$ 55,138
Ending default inventory 38,068
4,405
Average case reserve per default (in thousands) $ 6.0
$ 11.5
Average total reserve per default (in thousands) $ 6.6
$ 12.5
Default rate 5.19 % 0.66 %
Claims received included in ending default inventory 77
82


	As of March 31,
	2021			2020
Case reserves (in thousands) (1)	$	377,079		$	67,097
Total reserves (in thousands) (1)	$	409,811		$	73,325
Ending default inventory	29,080			5,841
Average case reserve per default (in thousands)	$	13.0		$	11.5
Average total reserve per default (in thousands)	$	14.1		$	12.6
Default rate	3.70		%	0.83		%
Claims received included in ending default inventory	43			140


~~(1)~~	~~The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $28 thousand as of June 30, 2020.~~

(1)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $1.3 million and $16 thousand as of March 31, 2021 and 2020, respectively.

The ~~decrease~~increase in the average ~~total~~case reserve per default was primarily due to ~~a lower total reserve per COVID-19 default.~~cure activity for Early COVID Defaults. Based on the forbearance programs in place and the credit characteristics of the ~~COVID-19~~ defaulted loans, we expect the ultimate number of ~~COVID-19-related defaults~~Early COVID Defaults that result in claims will be less than our historical default-to-claim experience. Accordingly, we recorded a reserve equal to approximately 7% of the risk in force for the ~~COVID-19 default notices received in~~Early COVID Defaults. We have not adjusted the loss reserves associated with the Early COVID Defaults as we continue to believe that these reserves represent the best estimate of the ultimate loss. As a result of cure activity for the Early COVID Defaults during the three months ended ~~June~~March 31, 2021, the average reserve per Early COVID Default has increased from approximately 16% as of December 31, 2020 to approximately 19% as of March 31, 2021. The credit characteristics of defaults reported in October 2020 through March 2021 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, the economic conditions during the fourth quarter of 2020 and first quarter of 2021 have been different than those experienced in the second and third quarters of 2020. We believe that while defaults in October 2020 through March 2021 were impacted by the pandemic’s effect on the economy, the underlying credit performance of these defaults may not be the same as the expected performance for the Early COVID defaults that occurred following the onset of the pandemic and defaults after September 30, 2020 ~~compared~~are more likely to ~~approximately a 9% reserve estimate~~transition like pre-pandemic defaults. Accordingly, beginning in the fourth quarter of 2020, we resumed establishing reserves for defaults ~~that had missed three payments or less as of June~~reported after September 30, ~~2019.~~2020 using our normal reserve methodology. The reserve for losses and LAE on COVID-19 defaults was ~~$189.0~~$362.9 million at ~~June 30, 2020.~~March 31, 2021 and includes $244.8 million of reserves for Early COVID Defaults.

The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE:


	Three Months Ended March 31,
(In thousands)		2021		2020
Reserve for losses and LAE at beginning of period		$	374,941	$	69,362
Less: Reinsurance recoverables		19,061		71
Net reserve for losses and LAE at beginning of period		355,880		69,291
Add provision for losses and LAE occurring in:
Current period		47,989		15,419
Prior years		(15,667)		(7,356)
Incurred losses and LAE during the current period		32,322		8,063
Deduct payments for losses and LAE occurring in:
Current period		114		1
Prior years		1,872		4,110
Loss and LAE payments during the current period		1,986		4,111
Net reserve for losses and LAE at end of period		386,216		73,243
Plus: Reinsurance recoverables		24,907		98
Reserve for losses and LAE at end of period		$	411,123	$	73,341

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Reserve for losses and LAE at beginning of period $ 73,341
$ 53,484
$ 69,362
$ 49,464
Less: Reinsurance recoverables 98
—
71
—
Net reserve for losses and LAE at beginning of period 73,243
53,484
69,291
49,464
Add provision for losses and LAE occurring in:
Current period 181,776
11,354
197,195
23,182
Prior years (5,899 ) (6,394 ) (13,255 ) (11,115 )
Incurred losses and LAE during the current period 175,877
4,960
183,940
12,067
Deduct payments for losses and LAE occurring in:
Current period 288
230
289
245
Prior years 5,703
3,076
9,813
6,148
Loss and LAE payments during the current period 5,991
3,306
10,102
6,393
Net reserve for losses and LAE at end of period 243,129
55,138
243,129
55,138
Plus: Reinsurance recoverables 7,761
—
7,761
—
Reserve for losses and LAE at end of period $ 250,890
$ 55,138
$ 250,890
$ 55,138

Table of Contents

The following tables provide a detail of reserves and defaulted RIF by the number of missed payments and pending claims for our U.S. mortgage insurance portfolio:

As of June 30, 2020
($ in thousands) Number of
Policies in
Default Percentage of
Policies in
Default Amount of
Reserves Percentage of
Reserves Defaulted
RIF Reserves as a
Percentage of
Defaulted RIF
Missed payments:

Three payments or less 33,514
88 % $ 166,897
73 % $ 2,233,678
7 %
Four to eleven payments 3,813
10
39,028
17
234,152
17
Twelve or more payments 664
2
18,590
8
36,694
51
Pending claims 77
—
3,271
2
3,846
85
Total case reserves (1)
38,068
100 % 227,786
100 % $ 2,508,370
9
IBNR

17,084

LAE

5,992

Total reserves for losses and LAE (1)

$ 250,862


	As of March 31, 2021
($ in thousands)	Number of Policies in Default	Percentage of Policies in Default		Amount of Reserves		Percentage of Reserves		Defaulted RIF		Reserves as a Percentage of Defaulted RIF
Missed payments:
Three payments or less	5,487	19	%	$	39,244	10	%	$	329,223	12	%
Four to eleven payments	16,157	56		215,949		57		1,022,979		21
Twelve or more payments	7,393	25		120,128		32		500,658		24
Pending claims	43	—		1,758		1		2,236		79
Total case reserves (1)	29,080	100	%	377,079		100	%	$	1,855,096	20
IBNR				28,281
LAE				4,451
Total reserves for losses and LAE (1)				$	409,811

(1)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $1.3 million as of March 31, 2021.


	As of March 31, 2020
($ in thousands)	Number of Policies in Default	Percentage of Policies in Default		Amount of Reserves		Percentage of Reserves		Defaulted RIF		Reserves as a Percentage of Defaulted RIF
Missed payments:
Three payments or less	3,043	52	%	$	15,128	23	%	$	170,374	9	%
Four to eleven payments	2,140	37		30,493		45		114,135		27
Twelve or more payments	518	9		15,235		23		29,596		51
Pending claims	140	2		6,241		9		7,074		88
Total case reserves (2)	5,841	100	%	67,097		100	%	$	321,179	21
IBNR				5,032
LAE				1,196
Total reserves for losses and LAE (2)				$	73,325


~~(1)~~			~~The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $28 thousand as of June 30, 2020.~~

(2)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $16 thousand as of March 31, 2020.

As of June 30, 2019
($ in thousands)
Number of
Policies in
Default

Percentage of
Policies in
Default

Amount of
Reserves

Percentage of
Reserves

Defaulted
RIF

Reserves as a
Percentage of
Defaulted RIF
Missed payments:

Three payments or less 2,511
57 % $ 12,646
25 % $ 133,536
9 %
Four to eleven payments 1,443
33
22,292
44
78,047
29
Twelve or more payments 369
8
11,583
23
22,093
52
Pending claims 82
2
4,055
8
4,657
87
Total case reserves 4,405
100 % 50,576
100 % $ 238,333
21
IBNR

3,792

LAE

770

Total reserves for losses and LAE

$ 55,138

During the three months ended ~~June 30, 2020,~~March 31, 2021, the provision for losses and LAE was ~~$175.9~~$32.3 million, comprised of ~~$181.8~~$48.0 million of current year losses partially offset by ~~$5.9~~$15.7 million of favorable prior years’ loss development. During the three months ended ~~June 30, 2019,~~March 31, 2020, the provision for losses and LAE was ~~$5.0~~$8.1 million, comprised of ~~$11.4~~$15.4 million of current year losses partially offset by ~~$6.4~~$7.4 million of favorable prior years’ loss development. In both periods, the 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.

During the six months ended June 30, 2020, the provision for losses and LAE was $183.9 million, comprised of $197.2 million of current year losses partially offset by $13.3 million of favorable prior years’ loss development. During the six months ended June 30, 2019, the provision for losses and LAE was $12.1 million, comprised of $23.2 million of current year losses partially offset by $11.1 million of favorable prior years’ loss development. In both periods, the 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.

The following table includes additional information about our claims paid and claim severity for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
($ in thousands)	2020			2019			2020			2019			($ in thousands)		2021			2020
Number of claims paid	144			106			262			194			Number of claims paid		61			118
Amount of claims paid	$	5,718		$	3,208		$	9,875		$	6,107		Amount of claims paid		$	1,989		$	4,157
Claim severity	78		%	69		%	78		%	74		%	Claim severity		70		%	77		%

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Other Underwriting and Operating Expenses

Following are the components of our other underwriting and operating expenses for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,									Three Months Ended March 31,
	2020				2019				2020				2019						2021	2020
($ in thousands)	$		%		$		%		$		%		$		%		($ in thousands)			$		%		$		%
Compensation and benefits	$	24,174	62	%	$	23,167	56	%	$	49,040	61	%	$	46,516	56	%	Compensation and benefits			$	24,760	58	%	$	24,866	59	%
Premium taxes	4,963		13		4,291		10		9,396		12		8,369		10		Premium taxes			4,502		11		4,433		11
Other	9,682		25		14,062		34		22,330		28		27,665		34		Other			12,977		31		12,648		30
Total other underwriting and operating expenses	$	38,819	100	%	$	41,520	100	%	$	80,766	100	%	$	82,550	100	%	Total other underwriting and operating expenses			$	42,239	100	%	$	41,947	100	%

Number of employees at end of period											389				383		Number of employees at end of period					365				381

The significant factors contributing to the change in other underwriting and operating expenses are:

•Compensation and benefits ~~increased~~were largely unchanged in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 as compared to the three ~~and six~~ months ended ~~June 30, 2019 primarily~~March 31, 2020 as a decrease in salaries, wages and bonuses due to ~~increased~~a decrease in the number of employees at March 31, 2021 was partially offset by an increase in stock compensation expense ~~associated with~~largely due to shares granted in ~~2019 and~~ 2020 and ~~increased salaries and overtime associated with our increased NIW.~~2021. Compensation and benefits includes salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.

•Premium taxes ~~increased~~were largely unchanged primarily due to ~~an increase~~a decrease in ~~premiums written.~~our effective premium tax rate.

•Other expenses ~~decreased~~increased primarily as a result of an increase in professional fees partially offset by an increase in ceding commission earned under the QSR Agreement and lower travel expenses. Other expenses include professional fees, travel, marketing, hardware, software, rent, depreciation and amortization and other facilities expenses.

Interest Expense

For each of the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, we incurred interest expense of ~~$2.6 million and $4.7 million, respectively, as compared to $2.7 million and $5.3 million for the three and six months ended June 30, 2019, respectively. The decreases were~~$2.1 million. Interest expense remained relatively unchanged primarily due to a decrease in the weighted average interest rate for borrowings outstanding, partially offset by

an increase in the average amounts outstanding under the Credit Facility. For the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, the average amount outstanding under the Credit Facility was ~~$425.0~~$325.0 million ~~and $330.5 million, respectively,~~ as compared to ~~$225.0~~$236.0 million for ~~each of~~ the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2020. For the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, the borrowings under the Credit Facility had a weighted average interest rate of ~~2.30% and 2.61%, respectively,~~2.16% as compared to ~~4.56% and 4.53%~~3.08% for the three ~~and six~~ months ended ~~June 30, 2019, respectively.~~March 31, 2020.

Income Taxes

Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax expense was ~~$3.4~~$32.5 million and ~~$26.3~~$27.2 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $30.6 million and $48.3 million for the six months ended June 30, 2020 and 2019,~~ respectively. For the six months ended June 30, 2020, our provision for income taxes was not based on an estimated annual effective rate due to uncertainty regarding the potential impacts of COVID-19 on our results of operations. Accordingly, we were unable to make a reliable estimate of pretax income and the annual effective tax rate for the full year 2020, and theThe provision for income taxes for the ~~six~~three months ended ~~June 30, 2020 was based on the actual effective tax rate of 15.7% for the year to date period. For the six months ended June 30, 2019, our income tax expense~~March 31, 2021 was calculated using an estimated annual effective tax rate of ~~16.1%.~~15.9% as compared to an estimated annual effective tax rate of 15.7% for the three months ended March 31, 2020. For the ~~six~~three months ended ~~June 30,~~March 31, 2021, income tax expense includes $5.7 million of discrete tax expense associated with an increase in the estimate of our beginning of the year deferred state income tax liability. For the three months ended March 31, 2020, ~~and 2019,~~ income tax expense was reduced by excess tax benefits associated with the vesting of common shares and common share units of $0.6 ~~million and $2.0 million, respectively.~~million. The tax effects associated with the increase to our deferred state income tax liability and vesting of common shares and common share units are treated as discrete items in the reporting period in which they occur and are not considered in determining the ~~2019 estimated~~ annual effective tax ~~rate above.~~rate.

Liquidity and Capital Resources

Overview

Our sources of funds consist primarily of:

•our investment portfolio and interest income on the portfolio;

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•net premiums that we will receive from our existing IIF as well as policies that we write in the future;

•borrowings under our Credit Facility; and

•issuance of capital shares.

Our obligations consist primarily of:

•claim payments under our policies;

•interest payments and repayment of borrowings under our Credit Facility;

•the other costs and operating expenses of our business; and

•the payment of dividends on our common shares.

As of ~~June 30, 2020,~~March 31, 2021, we had substantial liquidity with cash of ~~$72.8~~$81.0 million, short-term investments of ~~$1.1 billion~~$449.3 million and fixed maturity investments of ~~$3.2~~$4.3 billion. We also had ~~$75~~$300 million available capacity under the revolving credit component of our Credit Facility, with ~~$425~~$325 million of borrowings outstanding under our Credit Facility. Borrowings under the Credit Facility contractually mature on May 17, 2021. In June 2020, we completed a public offering of 13.8 million common shares to strengthen our capital resources and provide financial flexibility. Net proceeds from this offering were approximately $440 million.October 16, 2023. At ~~June 30, 2020,~~March 31, 2021, net cash and investments at the holding company were ~~$702.2~~$540.3 million. In addition, Essent Guaranty is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLBank”) and has access to secured borrowing capacity with the FHLBank to provide Essent Guaranty with supplemental liquidity. Essent Guaranty had no outstanding borrowings with the FHLBank at ~~June 30, 2020.~~March 31, 2021.

Management believes that the Company has sufficient liquidity available both at the holding company and in its insurance and other operating subsidiaries to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months.

While the Company and all of its subsidiaries are expected to have sufficient liquidity to meet all their expected obligations, additional capital may be required to meet any new capital requirements that are adopted by regulatory authorities or the GSEs, or to respond to changes in the business or economic environment related to COVID-19, or to provide additional capital related to the growth of our risk in force in our mortgage insurance portfolio, or to fund new business initiatives including the insurance activities of Essent Re. We continually evaluate opportunities based upon market conditions to further increase our financial flexibility through the issuance of equity or debt, or other options including reinsurance or credit risk transfer transactions. There can be no guarantee that any such opportunities will be available on acceptable terms or at all.

At the operating subsidiary level, liquidity could be impacted by any one of the following factors:

•significant decline in the value of our investments;

•inability to sell investment assets to provide cash to fund operating needs;

•decline in expected revenues generated from operations;

•increase in expected claim payments related to our IIF; or

•increase in operating expenses.

Our U.S. insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. Under the insurance laws of the Commonwealth of Pennsylvania, the insurance subsidiaries may pay dividends during any twelve-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year’s statutory net income. The Pennsylvania statute also requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. At ~~June 30, 2020,~~March 31, 2021, Essent Guaranty had unassigned surplus of approximately ~~$298.5~~$385.9 million. Essent Guaranty of PA, Inc. (“Essent PA") had unassigned surplus of approximately ~~$14.4~~$16.0 million as of ~~June 30, 2020.~~March 31, 2021. As a result of PMIERs guidance issued by the GSEs, ~~effective~~through June 30, ~~2020 through March 31,~~ 2021, Essent Guaranty is required to obtain GSE written approval before paying a dividend. On May 5, 2021, Essent Guaranty paid to its parent, Essent US Holdings, Inc., a $100 million dividend. Essent Re is subject to certain dividend restrictions as prescribed by the Bermuda Monetary Authority and under certain agreements with

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counterparties. In connection with a quota share reinsurance agreement with Essent Guaranty, Essent Re has agreed to maintain a minimum total equity of $100 million. As of ~~June 30, 2020,~~March 31, 2021, Essent Re had total equity of ~~$1.0~~$1.1 billion. In connection with its insurance and reinsurance activities, Essent Re is required to maintain assets in trusts for the benefit of its contractual counterparties. See Note 3 to our condensed consolidated financial statements. At ~~June 30, 2020,~~March 31, 2021, our insurance subsidiaries were in compliance with these rules, regulations and agreements.

Cash Flows

The following table summarizes our consolidated cash flows from operating, investing and financing activities:


	Six Months Ended June 30,							Three Months Ended March 31,
(In thousands)	2020			2019			(In thousands)	2021		2020
Net cash provided by operating activities	$	345,785		$	265,484		Net cash provided by operating activities	$	187,771	$	163,131
Net cash used in investing activities	(944,893		)	(296,935		)	Net cash used in investing activities	(186,259)		(381,426)
Net cash provided by (used in) financing activities	600,545			(8,240		)
Net increase (decrease) in cash	$	1,437		$	(39,691	)
Net cash (used in) provided by financing activities							Net cash (used in) provided by financing activities	(23,320)		178,000
Net decrease in cash							Net decrease in cash	$	(21,808)	$	(40,295)

Operating Activities

Cash flow provided by operating activities totaled ~~$345.8~~$187.8 million for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, as compared to ~~$265.5~~$163.1 million for the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. The increase in cash flow provided by operating activities of ~~$80.3~~$24.6 million was primarily due to an increase in premiums collected ~~lower income tax payments and lower T&L Bond purchases~~ during 2020.

Investing Activities

Cash flow used in investing activities totaled ~~$944.9~~$186.3 million and ~~$296.9~~$381.4 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. In both periods, cash flow used in investing activities related to investing cash flows from

operations. Additionally, in 2020 cash flow used in investing activities included investing ~~$440 million of net proceeds from the completion of a public offering of common shares in June and~~ $200 million of increased borrowings under the Credit Facility.

Financing Activities

Cash flow used in financing activities totaled $23.3 million for the three months ended March 31, 2021, primarily related to the quarterly cash dividend paid in March and treasury stock acquired from employees to satisfy tax withholding obligations. Cash flow provided by financing activities totaled ~~$600.5~~$178.0 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 primarily related to ~~$440 million of net proceeds from the completion of a public offering of common shares in June and~~ $200 million of increased borrowings under the Credit Facility, partially offset by the quarterly cash ~~dividends paid~~dividend pain in March and June and treasury stock acquired from employees to satisfy tax withholding obligations. Cash flow used in financing activities totaled $8.2 million for the six months ended June 30, 2019 primarily related to treasury stock acquired from employees to satisfy tax withholding obligations.

Insurance Company Capital

We compute a risk-to-capital ratio for our U.S. insurance companies on a separate company statutory basis, as well as for our combined insurance operations. The risk-to-capital ratio is our net risk in force divided by our statutory capital. Our net risk in force represents risk in force net of reinsurance ceded, if any, and net of exposures on policies for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual contributions to the contingency reserve of 50% of net premiums earned. These contributions must generally be maintained for a period of ten years. However, with regulatory approval, a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year.

During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ no capital contributions were made to our U.S. insurance subsidiaries.

Essent Guaranty has entered into reinsurance agreements that provide excess of loss reinsurance coverage for new defaults on portfolios of mortgage insurance policies issued in 2015 through ~~2019.~~2020. The aggregate excess of loss reinsurance coverages decrease over a ten-year period as the underlying covered mortgages amortize. Based on the level of delinquencies

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reported to us, the insurance-linked note transactions (the "ILNs") that Essent Guaranty has entered into prior to ~~date (the “ILNs”)~~March 31, 2020 became subject to a "trigger event" as of June 25, 2020. The aggregate excess of loss reinsurance coverage will not amortize during the continuation of a trigger event. Effective September 1, 2019, Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers (the "QSR Agreement"). Under the QSR Agreement, Essent Guaranty will cede premiums earned related to 40% of risk on eligible single premium policies and 20% of risk on all other eligible policies written September 1, 2019 through December 31, 2020, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims. These reinsurance coverages also reduces net risk in force and PMIERs Minimum Required Assets. See Note 4 to our condensed consolidated financial statements.

Our combined risk-to-capital calculation for our U.S. insurance subsidiaries as of ~~June 30, 2020~~March 31, 2021 was as follows:

Combined statutory capital:
($ in thousands)
Policyholders’ surplus $ 1,057,420
Contingency reserves 1,399,948
Combined statutory capital $ 2,457,368
Combined net risk in force $ 28,787,600
Combined risk-to-capital ratio 11.7:1


Combined statutory capital: ($ in thousands)
Policyholders’ surplus	$	1,146,273
Contingency reserves	1,631,858
Combined statutory capital	$	2,778,131
Combined net risk in force	$	29,358,191
Combined risk-to-capital ratio	10.6:1

For additional information regarding regulatory capital, see Note 1514 to our condensed consolidated financial statements. Our combined statutory capital equals the sum of statutory capital of Essent Guaranty plus Essent PA, after eliminating the impact of intercompany transactions. The combined risk-to-capital ratio equals the sum of the net risk in force of Essent Guaranty and Essent PA divided by combined statutory capital. The information above has been derived from the annual and quarterly statements of our insurance subsidiaries, which have been prepared in conformity with accounting practices prescribed or permitted by the Pennsylvania Insurance Department and the National Association of Insurance

Commissioners Accounting Practices and Procedures Manual. Such practices vary from accounting principles generally accepted in the United States.

Essent Re has entered into GSE and other risk share transactions, including insurance and reinsurance transactions with Freddie Mac and Fannie Mae. Essent Re also reinsures 25% of Essent Guaranty’s NIW under a quota share reinsurance agreement. During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ Essent Re paid no dividends to Essent Group and Essent Group made no capital contributions to Essent Re. As of ~~June 30, 2020,~~March 31, 2021, Essent Re had total stockholders’ equity of ~~$1.0~~$1.1 billion and net risk in force of ~~$11.1~~$12.9 billion.

Financial Strength Ratings

The insurer financial strength rating of Essent Guaranty, our principal mortgage insurance subsidiary, is rated A3 with a stable outlook by Moody’s Investors Service (“Moody's”), BBB+ with a negative outlook by S&P and A (Excellent) with stable outlook by A.M. Best. The insurer financial strength rating of Essent Re is BBB+ with a negative outlook by S&P and A (Excellent) with stable outlook by A.M. Best.

Private Mortgage Insurer Eligibility Requirements

Effective December 31, 2015, Fannie Mae and Freddie Mac, at the direction of the FHFA, implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include financial strength requirements incorporating a risk-based framework that require approved insurers to have a sufficient level of liquid assets from which to pay claims. This risk-based framework provides that an insurer must hold a substantially higher level of required assets for insured loans that are in default compared to a performing loan. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0") which became effective on March 31, 2019. As of ~~June 30, 2020,~~March 31, 2021, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0. As of ~~June 30, 2020,~~March 31, 2021, Essent Guaranty's Available Assets were ~~$2.59~~$3.00 billion and its Minimum Required Assets were ~~$1.46~~$1.86 billion based on our interpretation of PMIERs 2.0.

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Under PMIERs guidance issued by the GSEs effective June 30, 2020, Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property located in a Federal Emergency Management Agency (“FEMA”) Declared Major Disaster Area eligible for Individual Assistance and that either 1) is subject to a forbearance plan granted in response to a FEMA Declared Major Disaster, the terms of which are materially consistent with terms of forbearance plans, repayment plans or loan modification trial period offered by Fannie Mae or Freddie Mac, or 2) has an initial missed payment occurring up to either (i) 30 days prior to the first day of the incident period specified in the FEMA Major Disaster Declaration or (ii) 90 days following the last day of the incident period specified in the FEMA Major Disaster Declaration, not to exceed 180 days from the first day of the incident period specified in the FEMA Major Disaster Declaration. In the case of the foregoing, the 0.30 multiplier shall be applied to the risk-based required asset amount factor for ~~each insured~~a non-performing primary mortgage guaranty insurance loan ~~in default~~ for no longer than ~~four~~three calendar months ~~from~~beginning with the ~~initial~~month the loan becomes a non-performing primary mortgage guaranty insurance loan by reaching two missed ~~payment~~monthly payments absent a forbearance plan described in 1) above. Further, under temporary provisions provided by the PMIERs guidance, Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property that has an initial missed payment occurring on or after March 1, 2020 and prior to ~~January~~April 1, 2021 (COVID-19 Crisis Period). The 0.30 multiplier will be applicable for insured loans in default 1) subject to a forbearance plan granted in response to a financial hardship related to COVID-19 (which shall be assumed to be the case for any loan that has an initial missed payment occurring during the COVID-19 Crisis Period and is subject to a forbearance plan, repayment plan or loan modification trial period), the terms of which are materially consistent with terms offered by Fannie Mae or Freddie Mac or 2) for ~~up to four~~no longer than three calendar months ~~after~~beginning with the ~~initial~~month the loan becomes a non-performing primary mortgage guaranty insurance loan by reaching two missed ~~payment absent a forbearance plan.~~monthly payments. The ~~34,352~~26,874 COVID-19 defaults included in our ~~June 30, 2020~~March 31, 2021 default inventory fall into categories 1) and 2) above and received the 0.30 multiplier in calculating the PMIERs required assets.

Financial Condition

Stockholders’ Equity

As of ~~June 30, 2020,~~March 31, 2021, stockholders’ equity was ~~$3.6~~$3.92 billion, compared to ~~$3.0~~$3.86 billion as of December 31, ~~2019. This increase~~2020. Stockholders' equity was largely unchanged primarily due to ~~the completion of a public offering of common shares in June 2020,~~ net income generated in ~~2020 and an increase~~2021 partially offset by a decrease in accumulated other comprehensive income related to ~~an increase~~a decrease in our net unrealized investment gains.

Investments

As of ~~June 30, 2020,~~March 31, 2021, investments totaled ~~$4.4~~$4.8 billion compared to ~~$3.4~~$4.7 billion as of December 31, ~~2019.~~2020. In addition, our total cash was ~~$72.8~~$81.0 million as of ~~June 30, 2020,~~March 31, 2021, compared to ~~$71.4~~$102.8 million as of December 31, ~~2019.~~2020. The increase in investments was primarily due to investing net cash flows from operations ~~the net proceeds from the public offering of common shares and the borrowings under the Credit Facility~~ during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021 partially offset by a decrease in our net unrealized investment gains.

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Investments Available for Sale by Asset Class

Asset Class June 30, 2020 December 31, 2019
($ in thousands) Fair Value Percent Fair Value Percent
U.S. Treasury securities $ 259,259
5.9 % $ 242,206
7.2 %
U.S. agency securities 14,682
0.3
33,605
1.0
U.S. agency mortgage-backed securities 830,124
19.1
848,334
25.3
Municipal debt securities(1) 465,063
10.7
361,638
10.8
Non-U.S. government securities 54,637
1.2
54,995
1.7
Corporate debt securities(2) 912,137
21.0
880,301
26.3
Residential and commercial mortgage securities 312,511
7.2
288,281
8.6
Asset-backed securities 385,486
8.9
326,025
9.7
Money market funds 1,118,204
25.7
315,362
9.4
Total Investments Available for Sale $ 4,352,103
100.0 % $ 3,350,747
100.0 %


Asset Class	March 31, 2021				December 31, 2020
($ in thousands)	Fair Value		Percent		Fair Value		Percent
U.S. Treasury securities	$	262,309	5.6	%	$	268,444	5.9	%
U.S. agency securities	16,138		0.3		18,085		0.4
U.S. agency mortgage-backed securities	1,022,991		21.7		995,905		21.8
Municipal debt securities(1)	572,263		12.2		551,517		12.1
Non-U.S. government securities	79,280		1.7		61,607		1.3
Corporate debt securities(2)	1,414,938		30.1		1,126,512		24.7
Residential and commercial mortgage securities	446,208		9.5		409,282		9.0
Asset-backed securities	473,804		10.1		454,717		9.9
Money market funds	413,545		8.8		679,304		14.9
Total Investments Available for Sale	$	4,701,476	100.0	%	$	4,565,373	100.0	%


	March 31,		December 31,
(1) The following table summarizes municipal debt securities as of :	2021		2020
Special revenue bonds	76.9	%	76.8	%
General obligation bonds	20.3		20.3
Certificate of participation bonds	2.1		2.3
Tax allocation bonds	0.6		0.6
Special tax bonds	0.1		—
Total	100.0	%	100.0	%


	March 31,		December 31,
(2) The following table summarizes corporate debt securities as of :	2021		2020
Financial	32.8	%	34.9	%
Consumer, non-cyclical	19.2		19.1
Communications	11.6		9.3
Consumer, cyclical	7.6		8.0
Industrial	7.3		5.3
Energy	6.6		8.2
Utilities	5.9		5.9
Technology	5.4		6.1
Basic materials	3.5		3.1
Government	0.1		0.1
Total	100.0	%	100.0	%

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Investments Available for Sale by Rating

Rating(1) June 30, 2020 December 31, 2019
($ in thousands) Fair Value Percent Fair Value Percent
Aaa $ 2,642,359
60.7 % $ 1,817,905
54.2 %
Aa1 129,451
3.0
109,122
3.3
Aa2 171,704
3.9
145,282
4.3
Aa3 235,462
5.4
159,599
4.8
A1 213,946
4.9
206,643
6.2
A2 253,507
5.8
183,780
5.5
A3 211,209
4.9
191,933
5.7
Baa1 244,669
5.6
232,490
6.9
Baa2 183,639
4.2
179,664
5.4
Baa3 37,005
0.9
65,119
1.9
Below Baa3 29,152
0.7
59,210
1.8
Total Investments Available for Sale $ 4,352,103
100.0 % $ 3,350,747
100.0 %


Rating(1)	March 31, 2021				December 31, 2020
($ in thousands)	Fair Value		Percent		Fair Value		Percent
Aaa	$	2,310,267	49.1	%	$	2,564,746	56.2	%
Aa1	138,510		3.0		133,100		2.9
Aa2	288,583		6.1		260,462		5.7
Aa3	217,683		4.6		204,917		4.5
A1	266,937		5.7		249,710		5.5
A2	426,285		9.1		401,175		8.8
A3	278,424		5.9		229,882		5.0
Baa1	296,627		6.3		260,602		5.7
Baa2	274,367		5.8		178,926		3.9
Baa3	140,688		3.0		48,199		1.1
Below Baa3	63,105		1.4		33,654		0.7

Total Investments Available for Sale	$	4,701,476	100.0	%	$	4,565,373	100.0	%


~~(1)~~	~~Based on ratings issued by Moody’s, if available. S&P or Fitch Ratings ("Fitch") rating utilized if Moody’s not available.~~

(1)Based on ratings issued by Moody’s, if available. S&P or Fitch Ratings ("Fitch") rating utilized if Moody’s not available.

Investments Available for Sale by Effective Duration


Effective Duration	March 31, 2021				December 31, 2020
($ in thousands)	Fair Value		Percent		Fair Value		Percent
< 1 Year	$	1,158,371	24.6	%	$	1,568,505	34.4	%
1 to < 2 Years	443,897		9.4		581,003		12.7
2 to < 3 Years	708,723		15.1		616,069		13.5
3 to < 4 Years	473,707		10.1		426,333		9.3
4 to < 5 Years	511,955		10.9		367,633		8.1
5 or more Years	1,404,823		29.9		1,005,830		22.0
Total Investments Available for Sale	$	4,701,476	100.0	%	$	4,565,373	100.0	%

Effective Duration June 30, 2020 December 31, 2019
($ in thousands) Fair Value Percent Fair Value Percent
< 1 Year $ 2,140,698
49.2 % $ 1,038,782
31.0 %
1 to < 2 Years 415,342
9.5
306,148
9.1
2 to < 3 Years 369,123
8.5
348,708
10.4
3 to < 4 Years 258,405
5.9
361,147
10.8
4 to < 5 Years 343,687
7.9
443,382
13.2
5 or more Years 824,848
19.0
852,580
25.5
Total Investments Available for Sale $ 4,352,103
100.0 % $ 3,350,747
100.0 %

Table of Contents

Top Ten Investments Available for Sale Holdings


		June 30, 2020										March 31, 2021
Rank ($ in thousands)		Security	Fair Value			Amortized Cost		Unrealized Gain		Credit Rating(1)	Rank ($ in thousands)	Security	Fair Value			Amortized Cost		Unrealized Gain (Loss)(1)		Credit Rating(2)
1		Fannie Mae 3.500% 1/1/2058	$	28,982		$	27,508	$	1,474	Aaa	1	Fannie Mae 3.500% 1/1/2058	$	25,710		$	24,392	$	1,318	Aaa
2		Freddie Mac 4.000% 11/1/2048	25,869			24,847		1,022		Aaa	2	U.S. Treasury 0.250% 5/31/2025	25,114			25,568		(454)		Aaa
3		U.S. Treasury 0.250% 5/31/2025	25,578			25,560		18		Aaa	3	U.S. Treasury 2.625% 6/30/2023	20,824			19,691		1,133		Aaa
4		U.S. Treasury 2.625% 6/30/2023	21,194			19,672		1,522		Aaa	4	U.S. Treasury 5.250% 11/15/2028	19,401			18,462		939		Aaa
5		U.S. Treasury 5.250% 11/15/2028	21,100			18,750		2,350		Aaa	5	Fannie Mae 2.000% 8/1/2050	18,353			18,989		(636)		Aaa
6		U.S. Treasury 1.500% 8/15/2026	18,646			17,449		1,197		Aaa	6	Freddie Mac 4.000% 11/1/2048	18,130			17,569		561		Aaa
7		Ginnie Mae 4.000% 4/20/2049	15,932			15,647		285		Aaa	7	U.S. Treasury 1.500% 8/15/2026	17,916			17,455		461		Aaa
8		Fannie Mae 4.500% 5/1/2048	15,352			14,387		965		Aaa	8	U.S. Treasury 0.125% 10/15/2023	17,564			17,598		(34)		Aaa
9		U.S. Treasury 2.625% 7/15/2021	15,123			14,742		381		Aaa	9	Freddie Mac 2.500% 7/1/2050	15,960			16,275		(315)		Aaa
10		Freddie Mac 4.500% 4/1/2049	14,531			13,865		666		Aaa	10	U.S. Treasury 0.375% 1/31/2026	15,108			15,348		(240)		Aaa
Total			$	202,307		$	192,427	$	9,880		Total		$	194,080		$	191,347	$	2,733
Percent of Investments Available for Sale	Percent of Investments Available for Sale		4.6		%						Percent of Investments Available for Sale		4.1		%

(1)As of March 31, 2021, for securities in an unrealized loss position, management believes the declines in fair value are principally associated with the changes in the interest rate environment subsequent to its purchase. Also, see Note 3 to our condensed consolidated financial statements, which summarizes the aggregate amount of gross unrealized losses by asset class in which the fair value of investments available for sale has been less than cost for less than 12 months and for 12 months or more.


~~(1)~~	~~Based on ratings issued by Moody’s, if available. S&P or Fitch rating utilized if Moody’s not available.~~

(2)Based on ratings issued by Moody’s, if available. S&P or Fitch rating utilized if Moody’s not available.


Rank	December 31, 2020
($ in thousands)	Security	Fair Value
1	Fannie Mae 3.500% 1/1/2058	$	26,634
2	U.S. Treasury 0.250% 5/31/2025	25,558
3	U.S. Treasury 2.625% 6/30/2023	20,966
4	Fannie Mae 2.000% 8/1/2050	20,549
5	U.S. Treasury 5.250% 11/15/2028	20,540
6	Freddie Mac 4.000% 11/1/2048	20,371
7	U.S. Treasury 1.500% 8/15/2026	18,525
8	U.S. Treasury 0.125% 10/15/2023	17,611
9	Freddie Mac 2.500% 7/1/2050	17,063
10	U.S. Treasury 2.625% 7/15/2021	14,946
Total		$	202,763
Percent of Investments Available for Sale		4.4		%

Rank
December 31, 2019
($ in thousands) Security Fair Value
1 Fannie Mae 3.500% 1/1/2058 $ 30,112
2 U.S. Treasury 5.250% 11/15/2028 29,480
3 Freddie Mac 4.000% 11/1/2048 28,530
4 U.S. Treasury 2.625% 6/30/2023 20,465
5 U.S. Treasury 1.500% 8/15/2026 17,161
6 Fannie Mae 4.500% 5/1/2048 16,972
7 Freddie Mac 4.500% 4/1/2049 16,585
8 U.S. Treasury 2.625% 7/15/2021 14,978
9 Freddie Mac 4.000% 5/15/2050 14,700
10 Fannie Mae 4.000% 5/1/2056 13,079
Total $ 202,062
Percent of Investments Available for Sale 6.0 %

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The following tables include municipal debt securities for states that represent more than 10% of the total municipal bond position as of ~~June 30, 2020:~~March 31, 2021:


($ in thousands)	Fair Value		Amortized Cost		Credit Rating (1), (2)
Texas
North Texas Tollway System	$	11,038	$	10,837	A2
University of Houston	6,494		6,318		Aa2
Texas A&M University	6,290		5,816		Aaa
State of Texas	5,730		5,405		Aaa
City of Houston TX Combined Utility System Revenue	5,136		4,600		Aa2
LCRA Transmission Services Corp	3,111		3,042		A2
Dallas Fort Worth International Airport	2,577		2,457		A2
City of Austin TX Electric Utility Revenue	2,345		2,125		Aa3
Harris County-Houston Sports Authority	2,218		2,055		A2
City of Houston TX	2,194		2,078		Aa3
City of Dallas TX	1,846		1,654		Aa3
City of Houston TX Airport System Revenue	1,706		1,661		A1
Houston Community College System	1,604		1,665		Aaa
City of Fort Worth TX Water & Sewer System Revenue	1,525		1,445		Aa1
Tarrant Regional Water District	1,520		1,425		Aaa
City of San Antonio TX Airport System	1,285		1,181		A1
City of Corpus Christi TX Utility System Revenue	1,139		1,065		Aa3
Harris County Toll Road Authority	1,050		1,009		Aa1
Texas Tech University System	1,005		1,000		Aa1
Central Texas Turnpike System	989		940		Baa1
Metropolitan Transit Authority of Harris County Sales & Use Tax Revenue	904		911		Aaa
Denton Independent School District	895		894		Aaa
Frisco Independent School District	870		874		Aaa
County of Fort Bend TX	842		790		Aa1
Austin-Bergstrom Landhost Enterprises, Inc.	602		583		A3
San Jacinto Community College District	585		538		Aa3
City of Houston TX Reinvestment Zone No 16	337		332		A2
Austin Independent School District	289		298		Aaa
	$	66,126	$	62,998


($ in thousands)	Fair Value		Amortized Cost		Credit Rating (1), (2)
New York
New York City Transitional Finance Authority Future Tax Secured Revenue	$	12,805	$	12,133	Aa1
The Port Authority of New York and New Jersey	7,588		7,224		Aa3
Metropolitan Transportation Authority	7,543		7,192		A3
State of New York Personal Income Tax Revenue	7,325		6,848		Aa2
City of New York NY	7,159		6,484		Aa2
New York City Water & Sewer System	6,490		6,436		Aa1
Long Island Power Authority	4,130		3,993		A2
The Research Foundation of State University of New York	3,212		3,020		A1
New York State Dormitory Authority	2,828		2,741		A1
TSASC, Inc.	2,459		2,171		A2
City of Yonkers NY	2,419		2,300		A3
County of Nassau NY	2,170		1,980		A2
New York City Transitional Finance Authority Building Aid Revenue	1,583		1,489		Aa3
Town of Oyster Bay NY	1,063		1,028		Aa2
Yankee Stadium LLC	834		798		A2
	$	69,608	$	65,837

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($ in thousands) Fair Value Amortized
Cost Credit
Rating (1), (2)
Texas

University of Houston $ 6,722
$ 6,353
Aa2
Texas A&M University 6,382
5,909
Aaa
State of Texas 5,882
5,495
Aaa
City of Houston TX Combined Utility System Revenue 5,246
4,645
Aa2
City of Austin TX Electric Utility Revenue 2,362
2,144
Aa3
Dallas/Fort Worth International Airport 2,257
2,175
A2
City of Houston TX 2,241
2,108
Aa3
North Texas Municipal Water District 2,100
1,951
Aaa
North Texas Tollway System 1,891
1,759
A2
City of Dallas TX 1,869
1,672
Aa3
LCRA Transmission Services Corp 1,836
1,814
A2
City of Fort Worth TX Water & Sewer System Revenue 1,563
1,471
Aa1
Tarrant Regional Water District 1,559
1,447
Aaa
City of San Antonio TX Airport System 1,248
1,191
A1
City of Corpus Christi TX Utility System Revenue 1,167
1,076
Aa3
Harris County Toll Road Authority 1,076
1,029
Aa2
Central Texas Turnpike System 1,017
1,012
Baa1
Metropolitan Transit Authority of Harris County Sales & Use Tax Revenue 932
911
Aaa
County of Fort Bend TX 869
800
Aa1
San Jacinto Community College District 595
545
Aa3
Austin-Bergstrom Landhost Enterprises, Inc. 584
589
A3
Austin Independent School District 311
301
Aaa
$ 49,709
$ 46,397

($ in thousands) Fair Value Amortized
Cost Credit
Rating (1), (2)
New York
New York City Transitional Finance Authority Future Tax Secured Revenue $ 8,797
$ 8,172
Aa1
State of New York Personal Income Tax Revenue 7,411
6,921
Aa1
Metropolitan Transportation Authority 7,378
7,276
A2
City of New York NY 7,225
6,512
Aa1
The Port Authority of New York and New Jersey 5,901
5,565
Aa3
The Research Foundation of State University of New York 3,486
3,165
A1
City of Yonkers NY 2,456
2,304
A2
TSASC, Inc. 2,327
2,189
A2
County of Nassau NY 2,197
2,003
A2
Long Island Power Authority 1,893
1,758
A2
New York State Dormitory Authority 1,803
1,767
Aa3
New York City Transitional Finance Authority Building Aid Revenue 1,594
1,486
Aa2
Town of Oyster Bay NY 1,094
1,042
Aa2
$ 53,562
$ 50,160


($ in thousands)	Fair Value		Amortized Cost		Credit Rating (1), (2)
California
State of California	$	7,573	$	6,839	Aa2
City of Carson CA	4,343		4,423		Aa3
San Jose Unified School District	3,910		4,090		Aa1
California Infrastructure & Economic Development Bank	3,765		3,765		Aaa
City of Long Beach CA Harbor Revenue	3,497		3,224		Aa2
City of Los Angeles Department of Airports	3,256		3,032		Aa3
County of Kern CA	3,006		2,738		Baa2
City of San Francisco CA Public Utilities Commission Water Revenue	2,922		3,008		Aa2
County of Riverside CA	2,743		2,575		A2
Foothill-Eastern Transportation Corridor Agency	2,309		2,350		A2
Bay Area Toll Authority	2,032		2,127		Aa3
Compton Community College District	1,680		1,525		A1
Los Angeles Unified School District/CA	1,477		1,425		Aa3
Kaiser Foundation Hospitals	1,466		1,349		Aa3
University of California	1,374		1,310		Aa2
City of Los Angeles CA	1,305		1,196		Aa2
Port of Oakland	1,291		1,286		A1
City of El Cajon CA	1,264		1,285		Aa2
City of Torrance CA	1,242		1,251		Aa2
Cathedral City Redevelopment Agency Successor Agency	1,135		1,053		Aa2
Pomona Redevelopment Agency Successor Agency	1,088		1,000		Aa2
County of Sacramento CA	1,027		914		A3
City of El Monte CA	1,027		1,000		Aa2
Alameda Corridor Transportation Authority	954		894		A3
County of San Bernardino CA	773		752		Aa3
California Independent System Operator Corp	700		725		A1
California County Tobacco Securitization Agency	512		485		A3
San Bernardino City Unified School District	379		375		A1
Oxnard Union High School District	240		250		Aa2
City of San Jose CA	197		205		Aa2
City of Riverside CA	160		155		Aa2

	$	58,647	$	56,606

(1)

~~Certain of the above securities may include financial guaranty insurance or state enhancements. The above ratings include the effect of these credit enhancements, if applicable.~~Certain of the above securities may include financial guaranty insurance or state enhancements. The above ratings include the effect of these credit enhancements, if applicable.

(2)Based on ratings issued by Moody’s, if available. S&P or Fitch rating utilized if Moody’s not available.


~~(2)~~	~~Based on ratings issued by Moody’s, if available. S&P or Fitch rating utilized if Moody’s not available.~~

Off-Balance Sheet Arrangements

Essent Guaranty has entered into fully collateralized reinsurance agreements ("Radnor Re Transactions") with unaffiliated special purpose insurers domiciled in Bermuda. The Radnor Re special purpose insurers are special purpose variable interest entities that are not consolidated in our condensed consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance. As of ~~June 30, 2020,~~March 31, 2021, our estimated off-balance sheet maximum exposure to loss from the Radnor Re entities was ~~$1.1~~$0.4 million, representing the estimated net present value of investment earnings on the assets in the reinsurance trusts. See Note 4 to our condensed consolidated financial statements for additional information.

Critical Accounting Policies

As of the filing date of this report, there were no significant changes in our critical accounting policies from those discussed in our ~~2019~~2020 Form 10-K. See Note 2 to our condensed consolidated financial statements for recently issued accounting standards adopted or under evaluation.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We own and manage a large investment portfolio of various holdings, types and maturities. Investment income is one of our primary sources of cash flow supporting operations and claim payments. The assets within the investment portfolio are exposed to the same factors that affect overall financial market performance. While our investment portfolio is exposed to factors affecting markets worldwide, it is most sensitive to fluctuations in the drivers of U.S. markets.

We manage market risk via defined investment policy implemented by our treasury function with oversight from our board of directors and our senior management. Important drivers of our market risk exposure monitored and managed by us include but are not limited to:

•

•Changes to the level of interest rates. Increasing interest rates may reduce the value of certain fixed-rate bonds held in the investment portfolio. Higher rates may cause variable-rate assets to generate additional income. Decreasing rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates which may in turn require that the investment portfolio be restructured to better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated when market conditions are adverse.

•

•Changes to the term structure of interest rates. Rising or falling rates typically change by different amounts along the yield curve. These changes may have unforeseen impacts on the value of certain assets.

•Market volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of investments, identified through changes to our own or third-party (e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments.

•Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.

•~~Rising or falling rates typically change by different amounts along the yield curve. These changes may have unforeseen impacts on the value of certain assets.~~


•	~~Market volatility/changes in the real or perceived credit quality of investments.~~ Deterioration in the quality of investments, identified through changes to our own or third-party (e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments.


•	~~Concentration Risk.~~ If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.


•	Prepayment Risk. Bonds may have call provisions that permit debtors to repay prior to maturity when it is to their advantage. This typically occurs when rates fall below the interest rate of the debt.

Market risk is measured for all investment assets at the individual security level. Market risks that are not fully captured by the quantitative analysis are highlighted. In addition, material market risk changes that occur from the last reporting period to the current are discussed. Changes to how risks are managed will also be identified and described.

At ~~June 30, 2020,~~March 31, 2021, the effective duration of our investments available for sale was ~~2.2~~3.9 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of ~~2.2%~~3.9% in fair value of our investments available for sale. Excluding short-term investments, our investments available for sale effective duration was ~~3.0~~4.3 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of ~~3.0%~~4.3% in fair value of our investments available for sale.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of ~~June 30, 2020,~~March 31, 2021, the end of the period covered by this Quarterly Report.

Changes in Internal Control Over Financial Reporting

During our most recent fiscal quarter, there has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings.

Item 1A. Risk Factors

Risk factors that affect our business and financial results are discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2019. There~~2020. Except as discussed below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report, along with the disclosure below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

~~Risks relating to the impact of COVID-19~~

An outbreak of COVID-19 is currently spreading throughout the world, including in Asia, Europe and the United States. This outbreak is unprecedented in modern history and continues to rapidly evolve and disrupt the global economy and financial markets, including the U.S. housing and mortgage markets. On March 11, 2020, the World Health Organization declared the outbreak to be a pandemic, and on March 13, 2020, U.S. President Donald Trump declared the outbreak to be a national emergency. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies.

The emergence of the COVID-19 pandemic and the resulting containment measures have caused economic and financial disruptions that have adversely affected, and are expected to continue to materially adversely affect, our business, results of operations, financial condition and liquidity. The extent to which the pandemic will continue to materially adversely affect our business, results of operations, financial condition and liquidity will depend on numerous evolving factors and future developments that we are not able to predict, including the duration, spread and severity of the outbreak; the nature, extent and effectiveness of containment measures; the extent and duration of the effect on the economy, unemployment, consumer confidence and consumer and business spending; and how quickly and to what extent normal economic and operating conditions can resume.

Since the outbreak of the pandemic, there have been a number of governmental and GSE efforts to implement programs designed to assist individuals and businesses impacted by the virus. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, referred to as the CARES Act, was signed into law. The CARES Act provides financial assistance for businesses and individuals and targeted regulatory relief for financial institutions. Among many other things, the CARES Act suspends foreclosures and evictions for at least 60 days from March 18, 2020, on mortgages purchased or securitized by the GSEs. In addition, the CARES Act enacts into law a requirement to provide payment forbearance on such mortgages to borrowers experiencing a hardship during the COVID-19 emergency. Forbearance under the CARES Act allows for a mortgage payment to be suspended for up to 360 days due to hardship caused by COVID-19. The CARES Act also provides for enhanced unemployment benefits and direct aid to individuals, among other things.

Fannie Mae and Freddie Mac, the primary purchasers of mortgages we insure, have adopted relief measures consistent with the CARES Act to assist borrowers impacted by COVID-19. Under forbearance plans announced by the GSEs and implemented by their servicers, eligible homeowners who are adversely impacted by COVID-19 are permitted to temporarily reduce or suspend their mortgage payments for up to 12 months. The GSEs have announced that, at the end of the forbearance plan, the homeowner may not be required to pay back their reduced or suspended mortgage payments in one lump sum, but may be eligible for a number of different options offered by their mortgage servicer, including repayment plans, resuming normal payments or lowering the monthly loan payment through a modification. However, there can be no assurances that homeowners will be able to remain current on their mortgages once the forbearance period ends, and a significant percentage could ultimately default and result in a mortgage insurance claim despite the GSE and other programs.

~~The COVID-19 pandemic and containment measures have contributed to, among other things:~~

The risk that policy losses and loss adjustment expenses we ultimately incur as a result of COVID-19 and the related economic impact may be substantially different than the loss reserves established on our financial statements at the end of each period. In accordance with industry practice and statutory accounting rules applicable to mortgage guaranty insurance companies, we establish loss reserves only for loans reported to us in default, including forbearance-related defaults. These reserves are established using estimated claim rates and claim amounts in estimating the ultimate loss, which estimates are subject to significant uncertainty given the unprecedented nature and magnitude of the COVID-19 pandemic. In addition, because our reserving method does not account for the impact of future losses that could occur from loans that are not yet delinquent, our obligation for ultimate losses that we expect to occur under our policies in force at any period end is not reflected in our financial statements, except in the case where a premium deficiency exists.

A deterioration in the ability and willingness of homeowners to continue to make mortgage payments on loans that we insure, which could result in an increase in the amount of insurance regulatory and PMIERs capital we are required to hold for delinquent loans, including forbearance-related delinquencies, as well as an increase in claims ultimately made with respect to such mortgage loans. Mortgage delinquencies are typically affected by a variety of borrower-specific factors, such as job loss, illness, death and divorce, and macroeconomic factors, such as rising unemployment, market deterioration and home price depreciation, many of which are likely exacerbated by the COVID-19 pandemic.

A potential reduction in the number of new mortgage loans available for us to insure, and consequently, on our future volumes of new insurance written, with the degree of the impact dependent in large part on the extent and duration of the economic contraction.

Adverse impacts on capital, credit and reinsurance market conditions, which may limit our ability to issue ILNs, purchase reinsurance or access traditional financing methods. Such adverse impacts may increase our cost of capital and affect our ability to meet liquidity needs.

~~An increased strain on our risk management policies generally, including, but not limited to, the effectiveness and accuracy of our models, given the lack of data inputs and comparable precedent.~~

~~An increased risk to the value of our investments and other assets, which has the potential to result in impairment charges.~~

~~Adverse impacts on our daily business operations and our employees’ ability to perform necessary business functions, including as a result of illness or as a result of restrictions on movement.~~

Adverse impacts on our costs structure, including the need for increased staffing in certain segments of our business, increased spending on our business continuity efforts, such as technology, and readiness efforts for returning to our offices, which may in turn limit our ability to make investments in other areas.

An increased risk of an information or cyber-security incident, fraud, a failure to maintain the uninterrupted operation of our information systems or a failure in the effectiveness of our anti-money laundering and other compliance programs due to, among other things, an increase in remote work.

The above impacts of the COVID-19 pandemic and containment measures are likely to continue and in some cases, may worsen. The pandemic and containment measures may cause us to modify our strategic plans and business practices, and we may take further actions that we determine are in the best interests of our employees, customers and business partners. As a result of the above risks, COVID-19 could materially and adversely impact our business, results of operations, financial position and liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Securities

~~We did not repurchase any~~The table below sets forth information regarding repurchases of our common shares during the three months ended ~~June 30, 2020.~~March 31, 2021. All of the shares represent common shares that were tendered to the Company by employees in connection with the vesting of restricted shares to satisfy tax withholding obligations. We do not consider these transactions to be a share buyback program.


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - January 31, 2021	—	N/A		—	—
February 1 - February 28, 2021	—	N/A		—	—
March 1 - March 31, 2021	70,521	$	43.39	—	—
Total	70,521			—	—

Item 5. Other Information

2021 Annual General Meeting of Shareholders

On ~~August 4, 2020,~~May 5, 2021, we held our 2021 Annual General Meeting of Shareholders (the "Annual Meeting"). A total of 112,840,615 common shares were entitled to vote as of March 19, 2021, the ~~Board~~record date for the Annual Meeting, of ~~Directors~~which 104,418,926 shares were present in person or by proxy at the Annual Meeting.

The following is a summary of the ~~Company appointed Allan Levine~~final voting results for each matter presented to ~~fill a vacancy on~~shareholders at the ~~Board, effective immediately,~~Annual Meeting.

Proposal 1 - Election of three Class I directors to serve through the 2024 Annual General Meeting of Shareholders:


	Votes For	Votes Withheld	Broker Non-Votes
Class I Director to Serve Through the 2024 Annual General Meeting of Shareholders:
Jane P. Chwick	100,977,633	951,745	2,489,548
Aditya Dutt	101,206,715	722,663	2,489,548
Roy J. Kasmar	94,526,102	7,403,276	2,489,548

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Proposal 2 - The re-appointment of PricewaterhouseCoopers LLP as ~~a Class II director~~the Company's independent registered public accounting firm for the year ending December 31, 2021 and until ~~his successor is duly elected~~the 2022 Annual General Meeting of Shareholders, and ~~qualified at~~ the ~~next annual meeting of shareholders. With Mr. Levine’s appointment, the Company’s Board of Directors consists of nine directors.~~

~~Mr. Levine was also appointed to, and as chairman~~referral of the ~~Risk Committee~~determination of the ~~Board. Mr. Glanville, the former chairman of the Risk Committee, will remain a member of the Risk Committee.~~

Mr. Levine, 52, previously served as a member of our Board of Directors from 2008 to 2019. Mr. Levine currently is the chairman and chief executive officer of Global Atlantic Financial Group, a global financial services company, formerly the Goldman Sachs Reinsurance Group which he initially joined in 1997. Priorauditors' compensation to the ~~spin-off~~board of ~~Global Atlantic from Goldman Sachs in 2013, Mr. Levine~~directors, was ratified:


Votes For						103,446,286
Votes Against						928,599
Abstentions						44,041

Proposal 3 - Provide a partner and managing director of Goldman, Sachs & Co. and global head of the Goldman Sachs Reinsurance Group, and prior to assuming that role, was co-head of the firm's strategy group. Mr. Levine holds a BS from Miami University and an MBA from Columbia Business School.non-binding, advisory vote on our executive compensation:


Votes For						46,948,421
Votes Against						54,918,566
Abstentions						62,391
Broker Non-Votes						2,489,548

There are no transactions between Mr. Levine (or any member of his immediate family) and the Company or any of its subsidiaries, and there are no arrangements or understandings between Mr. Levine and any other persons or entities pursuant to which he was appointed as a director of the Company.

Item 6. Exhibits

(a) Exhibits:



Exhibit No.						Description
31.1						Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101						The following financial information from this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2020,~~March 31, 2021, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets (Unaudited); (ii) the Condensed Consolidated Statements of Comprehensive Income (Unaudited); (iii) the Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited); (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited); and (v) the Notes to Condensed Consolidated Financial Statements (Unaudited).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the date indicated.



						ESSENT GROUP LTD.


Date: ~~August~~May 7, ~~2020~~2021						/s/ MARK A. CASALE
						Mark A. Casale
						President, Chief Executive Officer and Chairman (Principal Executive Officer)


Date: ~~August~~May 7, ~~2020~~2021						/s/ LAWRENCE E. MCALEE
						Lawrence E. McAlee
						Senior Vice President and Chief Financial Officer (Principal Financial Officer)


Date: ~~August~~May 7, ~~2020~~2021						/s/ DAVID B. WEINSTOCK
						David B. Weinstock
						Vice President and Chief Accounting Officer (Principal Accounting Officer)



PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements (Unaudited)	1

	Condensed Consolidated Balance Sheets (Unaudited)	1

	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	2

	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows (Unaudited)	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2723

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4844

Item 4.	Controls and Procedures	4844

PART II.	OTHER INFORMATION	4945

Item 1.	Legal Proceedings	4945

Item 1A.	Risk Factors	4945

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5045

Item 5.	Other Information	5145

Item 6.	Exhibits	5146

SIGNATURES		5247



December 31, 2019 (In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury securities	$	239,087	$	3,526	$	(407	)	$	242,206
U.S. agency securities	33,620		36		(51		)	33,605
U.S. agency mortgage-backed securities	836,710		13,956		(2,332		)	848,334
Municipal debt securities (1)	339,511		22,245		(118		)	361,638
Non-U.S. government securities	52,230		2,812		(47		)	54,995
Corporate debt securities (2)	856,638		24,255		(592		)	880,301
Residential and commercial mortgage securities	282,840		6,542		(1,101		)	288,281
Asset-backed securities	326,589		857		(1,421		)	326,025
Money market funds	315,360		2		—			315,362
Total investments available for sale	$	3,282,585	$	74,231	$	(6,069	)	$	3,350,747



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2020			2019			2020			2019
Net premiums written:
Direct	$	228,044		$	196,832		$	434,024		$	380,514
Ceded (1)	(22,140		)	(8,428		)	(36,377		)	(14,466		)
Net premiums written	$	205,904		$	188,404		$	397,647		$	366,048

Net premiums earned:
Direct	$	233,611		$	196,918		$	454,344		$	380,747
Ceded (1)	(22,140		)	(8,428		)	(36,377		)	(14,466		)
Net premiums earned	$	211,471		$	188,490		$	417,967		$	366,281



(In thousands)
2020 (July 1 through December 31)	$	1,490
2021	2,999
2022	3,003
2023	2,752
2024	1,334
2025 and thereafter	793
Total lease payments to be paid	12,371
Less: Future interest expense	(1,055		)
Present value of lease liabilities	$	11,316



Performance level	Compounded Annual Book Value Per Share Growth		Nonvested Common Shares Earned
	<13	%	0	%
Threshold	13	%	10	%
	14	%	35	%
	15	%	60	%
	16	%	85	%
Maximum	≥17	%	100	%



	As of June 30,
	2020			2019
Case reserves (in thousands) (1)	$	227,786		$	50,576
Total reserves (in thousands) (1)	$	250,862		$	55,138
Ending default inventory	38,068			4,405
Average case reserve per default (in thousands)	$	6.0		$	11.5
Average total reserve per default (in thousands)	$	6.6		$	12.5
Default rate	5.19		%	0.66		%
Claims received included in ending default inventory	77			82



	As of June 30, 2020
($ in thousands)	Number of Policies in Default	Percentage of Policies in Default		Amount of Reserves		Percentage of Reserves		Defaulted RIF		Reserves as a Percentage of Defaulted RIF
Missed payments:
Three payments or less	33,514	88	%	$	166,897	73	%	$	2,233,678	7	%
Four to eleven payments	3,813	10		39,028		17		234,152		17
Twelve or more payments	664	2		18,590		8		36,694		51
Pending claims	77	—		3,271		2		3,846		85
Total case reserves (1)	38,068	100	%	227,786		100	%	$	2,508,370	9
IBNR				17,084
LAE				5,992
Total reserves for losses and LAE (1)				$	250,862



	As of June 30, 2019
($ in thousands)	Number of Policies in Default	Percentage of Policies in Default		Amount of Reserves		Percentage of Reserves		Defaulted RIF		Reserves as a Percentage of Defaulted RIF
Missed payments:
Three payments or less	2,511	57	%	$	12,646	25	%	$	133,536	9	%
Four to eleven payments	1,443	33		22,292		44		78,047		29
Twelve or more payments	369	8		11,583		23		22,093		52
Pending claims	82	2		4,055		8		4,657		87
Total case reserves	4,405	100	%	50,576		100	%	$	238,333	21
IBNR				3,792
LAE				770
Total reserves for losses and LAE				$	55,138



Combined statutory capital: ($ in thousands)
Policyholders’ surplus	$	1,057,420
Contingency reserves	1,399,948
Combined statutory capital	$	2,457,368
Combined net risk in force	$	28,787,600
Combined risk-to-capital ratio	11.7:1



Asset Class	June 30, 2020				December 31, 2019
($ in thousands)	Fair Value		Percent		Fair Value		Percent
U.S. Treasury securities	$	259,259	5.9	%	$	242,206	7.2	%
U.S. agency securities	14,682		0.3		33,605		1.0
U.S. agency mortgage-backed securities	830,124		19.1		848,334		25.3
Municipal debt securities(1)	465,063		10.7		361,638		10.8
Non-U.S. government securities	54,637		1.2		54,995		1.7
Corporate debt securities(2)	912,137		21.0		880,301		26.3
Residential and commercial mortgage securities	312,511		7.2		288,281		8.6
Asset-backed securities	385,486		8.9		326,025		9.7
Money market funds	1,118,204		25.7		315,362		9.4
Total Investments Available for Sale	$	4,352,103	100.0	%	$	3,350,747	100.0	%