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Essent Group Ltd. - Quarter Report: 2016 June (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the period ended June 30, 2016
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission file number 001-36157 
 
  
ESSENT GROUP LTD.
(Exact name of registrant as specified in its charter)
 
  
Bermuda
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
Clarendon House
2 Church Street
Hamilton HM11, Bermuda
(Address of principal executive offices and zip code)
 
(441) 297-9901
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 The number of the registrant’s common shares outstanding as of August 1, 2016 was 93,104,004.


Table of Contents

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 subsidiary, Essent Guaranty, Inc., 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, factors described in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, and factors described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission. These factors include, without limitation, the following:
 
changes in or to Fannie Mae and Freddie Mac, which we refer to collectively as the GSEs, whether through Federal legislation, restructurings or a shift in business practices;

failure to continue to meet the mortgage insurer eligibility requirements of the GSEs;

competition for our customers or the loss of a significant customer;
 
lenders or investors seeking alternatives to private mortgage insurance;

increase in the number of loans insured through Federal government mortgage insurance programs, including those offered by the Federal Housing Administration;

decline in the volume of low down payment mortgage originations;

uncertainty of loss reserve estimates;

decrease in the length of time our insurance policies are in force;

deteriorating economic conditions;

the definition of “Qualified Mortgage” reducing the size of the mortgage origination market or creating incentives to use government mortgage insurance programs;

the definition of “Qualified Residential Mortgage” reducing the number of low down payment loans or lenders and investors seeking alternatives to private mortgage insurance;

the implementation of the Basel III Capital Accord, which may discourage the use of private mortgage insurance;

management of risk in our investment portfolio;

fluctuations in interest rates;


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

dependence on management team and qualified personnel;

disturbance to our information technology systems;

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

declines in the value of borrowers’ homes;

limited availability of capital;

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

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

disruption in mortgage loan servicing;

risk of future legal proceedings;

customers’ technological demands;

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

becoming considered a passive foreign investment company for U.S. Federal income tax purposes; and

potential inability of our insurance subsidiaries to pay dividends.
 
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Quarterly Report are based on information available to us on the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
 


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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,
(In thousands, except per share amounts)
 
2016
 
2015
Assets
 
 

 
 

Investments available for sale, at fair value
 
 

 
 

Fixed maturities (amortized cost: 2016 — $1,270,454; 2015 — $1,189,978)
 
$
1,305,939

 
$
1,190,638

Short-term investments (amortized cost: 2016 — $129,235; 2015 — $85,994)
 
129,235

 
85,996

Total investments
 
1,435,174

 
1,276,634

Cash
 
16,172

 
24,606

Accrued investment income
 
8,480

 
7,768

Accounts receivable
 
21,125

 
16,637

Deferred policy acquisition costs
 
12,239

 
11,529

Property and equipment (at cost, less accumulated depreciation of $44,519 in 2016 and $42,479 in 2015)
 
9,030

 
9,021

Prepaid federal income tax
 
149,772

 
119,412

Other assets
 
6,215

 
3,492

Total assets
 
$
1,658,207

 
$
1,469,099

 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Reserve for losses and LAE
 
$
22,474

 
$
17,760

Unearned premium reserve
 
214,910

 
201,045

Accrued payroll and bonuses
 
11,146

 
15,955

Net deferred tax liability
 
126,991

 
87,964

Securities purchases payable
 
21,385

 
14,996

Other accrued liabilities
 
12,694

 
12,138

Total liabilities
 
409,600

 
349,858

Commitments and contingencies
 


 


Stockholders’ Equity
 
 

 
 

Common shares, $0.015 par value:
 
 

 
 

Authorized - 233,333; issued - 93,106 shares in 2016 and 92,650 shares in 2015
 
1,397

 
1,390

Additional paid-in capital
 
909,310

 
904,221

Accumulated other comprehensive income (loss)
 
23,962

 
(99
)
Retained earnings
 
313,938

 
213,729

Total stockholders’ equity
 
1,248,607

 
1,119,241

Total liabilities and stockholders’ equity
 
$
1,658,207

 
$
1,469,099

 
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,
(In thousands, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 

 
 

Net premiums written
 
$
108,513

 
$
92,399

 
$
208,979

 
$
174,656

Increase in unearned premiums
 
(7,802
)
 
(14,038
)
 
(13,865
)
 
(21,257
)
Net premiums earned
 
100,711

 
78,361

 
195,114

 
153,399

Net investment income
 
6,701

 
4,720

 
12,884

 
9,000

Realized investment gains, net
 
583

 
568

 
1,054

 
1,217

Other income
 
170

 
418

 
1,579

 
462

Total revenues
 
108,165

 
84,067

 
210,631

 
164,078

 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 

 
 

 
 

 
 

Provision for losses and LAE
 
2,964

 
2,314

 
6,695

 
4,313

Other underwriting and operating expenses
 
31,409

 
27,148

 
62,797

 
54,646

Total losses and expenses
 
34,373

 
29,462

 
69,492

 
58,959

 
 
 
 
 
 
 
 
 
Income before income taxes
 
73,792

 
54,605

 
141,139

 
105,119

Income tax expense
 
21,534

 
17,412

 
40,930

 
33,088

Net income
 
$
52,258

 
$
37,193

 
$
100,209

 
$
72,031

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.57

 
$
0.41

 
$
1.10

 
$
0.80

Diluted
 
0.57

 
0.41

 
1.09

 
0.79

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
90,912

 
90,344

 
90,848

 
90,265

Diluted
 
92,138

 
91,674

 
91,999

 
91,594

 
 
 
 
 
 
 
 
 
Net income
 
$
52,258

 
$
37,193

 
$
100,209

 
$
72,031

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Change in unrealized appreciation (depreciation) of investments, net of tax expense (benefit) of $5,049 and ($4,002) in the three months ended June 30, 2016 and 2015 and $10,763 and ($1,892) in the six months ended June 30, 2016 and 2015
 
10,702

 
(8,769
)
 
24,061

 
(3,880
)
Total other comprehensive income (loss)
 
10,702

 
(8,769
)
 
24,061

 
(3,880
)
Comprehensive income
 
$
62,960

 
$
28,424

 
$
124,270

 
$
68,151

 
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)
 
(In thousands)
 
Common
Shares
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock
 
Total
Stockholders’
Equity
Balance at January 1, 2015
 
$
1,388

 
$
893,285

 
$
4,667

 
$
56,398

 
$

 
$
955,738

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 

 
 

 
 

 
157,331

 
 

 
157,331

Other comprehensive loss
 
 

 
 

 
(4,766
)
 
 

 
 

 
(4,766
)
Issuance of management incentive shares
 
6

 
(6
)
 
 

 
 

 
 

 

Forfeiture of management incentive shares
 
(1
)
 
1

 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
13,633

 
 

 
 

 
 

 
13,633

Excess tax benefits from stock-based compensation expense
 
 

 
2,420

 
 

 
 

 
 

 
2,420

Treasury stock acquired
 
 

 
 

 
 

 
 

 
(5,168
)
 
(5,168
)
Cancellation of treasury stock
 
(3
)
 
(5,165
)
 
 

 
 

 
5,168

 

Other equity transactions
 
 
 
53

 
 
 
 
 
 
 
53

Balance at December 31, 2015
 
$
1,390

 
$
904,221

 
$
(99
)
 
$
213,729

 
$

 
$
1,119,241

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 

 
 

 
 

 
100,209

 
 

 
100,209

Other comprehensive income
 
 

 
 

 
24,061

 
 

 
 

 
24,061

Issuance of management incentive shares
 
10

 
(10
)
 
 

 
 

 
 

 

Forfeiture of management incentive shares
 

 

 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
7,949

 
 

 
 

 
 

 
7,949

Excess tax benefits from stock-based compensation expense
 
 

 
1,023

 
 

 
 

 
 

 
1,023

Treasury stock acquired
 
 

 
 

 
 

 
 

 
(3,876
)
 
(3,876
)
Cancellation of treasury stock
 
(3
)
 
(3,873
)
 
 

 
 

 
3,876

 

Balance at June 30, 2016
 
$
1,397

 
$
909,310

 
$
23,962

 
$
313,938

 
$

 
$
1,248,607

 
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,
(In thousands)
 
2016
 
2015
Operating Activities
 
 

 
 

Net income
 
$
100,209

 
$
72,031

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

 
 

Gain on the sale of investments, net
 
(1,054
)
 
(1,217
)
Depreciation and amortization
 
2,040

 
1,581

Stock-based compensation expense
 
7,949

 
6,596

Amortization of premium on investment securities
 
5,218

 
4,835

Deferred income tax provision
 
28,264

 
28,961

Excess tax benefits from stock-based compensation
 
(1,023
)
 
(2,332
)
Change in:
 
 

 
 

Accrued investment income
 
(712
)
 
(1,195
)
Accounts receivable
 
(2,478
)
 
(1,162
)
Deferred policy acquisition costs
 
(710
)
 
(949
)
Prepaid federal income tax
 
(30,360
)
 
(35,500
)
Other assets
 
(375
)
 
(3,486
)
Reserve for losses and LAE
 
4,714

 
3,504

Unearned premium reserve
 
13,865

 
21,257

Accrued liabilities
 
(3,480
)
 
(3,078
)
Net cash provided by operating activities
 
122,067

 
89,846

 
 
 
 
 
Investing Activities
 
 

 
 

Net change in short-term investments
 
(43,239
)
 
115,322

Purchase of investments available for sale
 
(268,024
)
 
(417,541
)
Proceeds from maturity of investments available for sale
 
9,043

 
7,525

Proceeds from sales of investments available for sale
 
178,719

 
212,208

Purchase of property and equipment, net
 
(2,049
)
 
(2,932
)
Net cash used in investing activities
 
(125,550
)
 
(85,418
)
 
 
 
 
 
Financing Activities
 
 

 
 

Payment of issuance costs for revolving line of credit
 
(2,098
)
 

Treasury stock acquired
 
(3,876
)
 
(5,078
)
Excess tax benefits from stock-based compensation
 
1,023

 
2,332

Payment of offering costs
 

 
(537
)
Other financing activities
 

 
34

Net cash used in financing activities
 
(4,951
)
 
(3,249
)
 
 
 
 
 
Net (decrease) increase in cash
 
(8,434
)
 
1,179

Cash at beginning of year
 
24,606

 
24,411

Cash at end of period
 
$
16,172

 
$
25,590

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income tax payments
 
$
(10,800
)
 
$
(5,000
)
 
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 GSE-eligible new insurance written to Essent Reinsurance Ltd. (“Essent Re”), an affiliated Bermuda domiciled Class 3A Insurer licensed pursuant to Section 4 of the Bermuda Insurance Act 1978 that provides insurance and reinsurance coverage of mortgage credit risk. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae. In accordance with certain state law requirements, Essent Guaranty also reinsures that portion of the risk that is in excess of 25% of the mortgage balance with respect to any loan insured, after consideration of other reinsurance, to Essent Guaranty of PA, Inc. (“Essent PA”), an affiliate.
 
In addition to offering mortgage insurance, we provide contract underwriting services on a limited basis through CUW Solutions, LLC ("CUW Solutions"), a Delaware limited liability company, that provides, among other things, mortgage contract underwriting services to lenders and mortgage insurance underwriting services to affiliates.

We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These statements should be read in conjunction with the consolidated financial statements and notes thereto, including Note 1 and Note 2 to the consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2015, 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, 2016 prior to the issuance of these condensed consolidated financial statements.
 
Note 2. Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update is intended to provide a consistent approach in recognizing revenue. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB delayed the effective date for this update to interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of this ASU will have on the consolidated financial statements.

In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts (Topic 944). The amendments in this update require insurance entities to disclose certain information about the liability for unpaid claims and claim adjustment expenses. The additional information required is focused on improvements in disclosures regarding insurance liabilities, including the nature, amount, timing, and uncertainty of cash flows related to those liabilities and the effect of those cash flows on the statement of comprehensive income. The disclosures required by this update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, and is to be applied retrospectively. The Company is currently evaluating the impact, if any, of the new disclosures required by this ASU.


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


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance will also require additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of this update are effective for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact the adoption of this ASU will have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement and treated as discrete items in the reporting period. In addition, excess tax benefits are required to be classified along with other income tax cash flows as an operating activity. Further, the new guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The provisions of this update are effective for annual and interim periods beginning after December 15, 2016. The Company is evaluating the impact the adoption of this ASU will have on the consolidated financial statements.

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 provisions of this update are effective for annual and interim periods beginning after December 15, 2019. The Company is evaluating the impact the adoption of this ASU will have on the consolidated financial statements.

Note 3. Investments Available for Sale
 
Investments available for sale consist of the following:
 
June 30, 2016 (In thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
195,757

 
$
6,046

 
$
(1
)
 
$
201,802

U.S. agency securities
 
14,140

 
199

 

 
14,339

U.S. agency mortgage-backed securities
 
200,828

 
3,452

 
(26
)
 
204,254

Municipal debt securities(1)
 
313,847

 
16,405

 
(49
)
 
330,203

Corporate debt securities(2)
 
380,882

 
9,828

 
(285
)
 
390,425

Mortgage-backed securities
 
50,005

 
1,078

 
(479
)
 
50,604

Asset-backed securities
 
129,995

 
400

 
(1,083
)
 
129,312

Money market funds
 
114,235

 

 

 
114,235

Total investments available for sale
 
$
1,399,689

 
$
37,408

 
$
(1,923
)
 
$
1,435,174


December 31, 2015 (In thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
178,460

 
$
235

 
$
(1,088
)
 
$
177,607

U.S. agency securities
 
13,955

 
5

 
(178
)
 
13,782

U.S. agency mortgage-backed securities
 
160,181

 
474

 
(1,053
)
 
159,602

Municipal debt securities(1)
 
272,733

 
7,357

 
(262
)
 
279,828

Corporate debt securities(2)
 
399,246

 
1,338

 
(3,852
)
 
396,732

Mortgage-backed securities
 
56,380

 
97

 
(1,121
)
 
55,356

Asset-backed securities
 
127,919

 
29

 
(1,319
)
 
126,629

Money market funds
 
67,098

 

 

 
67,098

Total investments available for sale
 
$
1,275,972

 
$
9,535

 
$
(8,873
)
 
$
1,276,634

 


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


 
 
June 30,
 
December 31,
(1) The following table summarizes municipal debt securities as of :
 
2016
 
2015
Special revenue bonds
 
65.4
%
 
70.4
%
General obligation bonds
 
30.2

 
24.5

Certificate of participation bonds
 
3.5

 
4.0

Tax allocation bonds
 
0.9

 
1.1

Total
 
100.0
%
 
100.0
%


 
 
June 30,
 
December 31,
(2) The following table summarizes corporate debt securities as of :
 
2016
 
2015
Financial
 
42.1
%
 
44.9
%
Consumer, non-cyclical
 
19.3

 
14.8

Energy
 
6.6

 
9.0

Utilities
 
6.5

 
5.0

Communications
 
6.2

 
7.1

Consumer, cyclical
 
6.2

 
6.2

Industrial
 
5.3

 
5.2

Technology
 
4.8

 
3.8

Basic materials
 
3.0

 
4.0

Total
 
100.0
%
 
100.0
%


7

Table of Contents
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, 2016, 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 mortgage-backed 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
 
$
36,949

 
$
36,972

Due after 1 but within 5 years
 
53,037

 
53,937

Due after 5 but within 10 years
 
90,728

 
95,127

Due after 10 years
 
15,043

 
15,766

Subtotal
 
195,757

 
201,802

U.S. agency securities:
 
 

 
 

Due in 1 year
 
2,003

 
2,004

Due after 1 but within 5 years
 
12,137

 
12,335

Subtotal
 
14,140

 
14,339

Municipal debt securities:
 
 

 
 

Due in 1 year
 
2,255

 
2,259

Due after 1 but within 5 years
 
98,424

 
99,833

Due after 5 but within 10 years
 
122,002

 
129,935

Due after 10 years
 
91,166

 
98,176

Subtotal
 
313,847

 
330,203

Corporate debt securities:
 
 

 
 

Due in 1 year
 
22,643

 
22,692

Due after 1 but within 5 years
 
220,016

 
222,916

Due after 5 but within 10 years
 
135,044

 
141,568

Due after 10 years
 
3,179

 
3,249

Subtotal
 
380,882

 
390,425

U.S. agency mortgage-backed securities
 
200,828

 
204,254

Mortgage-backed securities
 
50,005

 
50,604

Asset-backed securities
 
129,995

 
129,312

Money market funds
 
114,235

 
114,235

Total investments available for sale
 
$
1,399,689

 
$
1,435,174


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)
 
2016
 
2015
 
2016
 
2015
Realized gross gains
 
$
624

 
$
1,339

 
$
1,772

 
$
2,127

Realized gross losses
 
41

 
771

 
711

 
910

 

8

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


The fair value of investments in an unrealized loss position and the related unrealized losses were as follows:
 
 
 
Less than 12 months
 
12 months or more
 
Total
June 30, 2016 (In thousands)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities
 
$
1,726

 
$
(1
)
 
$

 
$

 
$
1,726

 
$
(1
)
U.S. agency mortgage-backed securities
 
997

 
(6
)
 
5,477

 
(20
)
 
6,474

 
(26
)
Municipal debt securities
 
6,409

 
(20
)
 
6,512

 
(29
)
 
12,921

 
(49
)
Corporate debt securities
 
16,708

 
(88
)
 
21,960

 
(197
)
 
38,668

 
(285
)
Mortgage-backed securities
 
6,178

 
(71
)
 
20,642

 
(408
)
 
26,820

 
(479
)
Asset-backed securities
 
50,049

 
(379
)
 
38,612

 
(704
)
 
88,661

 
(1,083
)
Total
 
$
82,067

 
$
(565
)
 
$
93,203

 
$
(1,358
)
 
$
175,270

 
$
(1,923
)
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2015 (In thousands)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities
 
$
110,699

 
$
(1,088
)
 
$

 
$

 
$
110,699

 
$
(1,088
)
U.S. agency securities
 
11,362

 
(178
)
 

 

 
11,362

 
(178
)
U.S. agency mortgage-backed securities
 
101,465

 
(915
)
 
3,683

 
(138
)
 
105,148

 
(1,053
)
Municipal debt securities
 
47,850

 
(255
)
 
1,254

 
(7
)
 
49,104

 
(262
)
Corporate debt securities
 
252,792

 
(3,447
)
 
9,404

 
(405
)
 
262,196

 
(3,852
)
Mortgage-backed securities
 
23,360

 
(458
)
 
26,075

 
(663
)
 
49,435

 
(1,121
)
Asset-backed securities
 
86,431

 
(871
)
 
26,364

 
(448
)
 
112,795

 
(1,319
)
Total
 
$
633,959

 
$
(7,212
)
 
$
66,780

 
$
(1,661
)
 
$
700,739

 
$
(8,873
)
 
The gross unrealized losses on these investment securities are principally associated with the changes in the interest rate environment subsequent to their purchase. Each issuer is current on its scheduled interest and principal payments. We assess our intent to sell these securities and whether we will be required to sell these securities before the recovery of their amortized cost basis when determining whether an impairment is other-than-temporary. We recorded an other-than-temporary impairment of $7 thousand in the six months ended June 30, 2016 for one security in an unrealized loss position that we sold in the three months ended June 30, 2016. There were no other-than-temporary impairments of investments in the six months ended June 30, 2015.
 
The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $8.6 million as of June 30, 2016 and $8.5 million as of December 31, 2015. In connection with its insurance and reinsurance activities, Essent Re is required to maintain assets in trusts for the benefit of its contractual counterparties. The fair value of the investments required to be on deposit in these trusts was $272.9 million at June 30, 2016 and $171.5 million at December 31, 2015.

Net investment income consists of: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Fixed maturities
 
$
7,197

 
$
5,115

 
$
13,852

 
$
9,768

Short-term investments
 
30

 
17

 
63

 
29

Gross investment income
 
7,227

 
5,132

 
13,915

 
9,797

Investment expenses
 
(526
)
 
(412
)
 
(1,031
)
 
(797
)
Net investment income
 
$
6,701

 
$
4,720

 
$
12,884

 
$
9,000

 

9

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


Note 4. Accounts Receivable
 
Accounts receivable consists of the following:
 
 
 
June 30,
 
December 31,
(In thousands)
 
2016
 
2015
Premiums receivable
 
$
18,441

 
$
16,034

Other receivables
 
2,684

 
603

Total accounts receivable
 
21,125

 
16,637

Less: Allowance for doubtful accounts
 

 

Accounts receivable, net
 
$
21,125

 
$
16,637

 
Premiums receivable consists of premiums due on our mortgage insurance policies. If mortgage insurance premiums are unpaid for more than 90 days, the receivable is written off against earned premium and the related insurance policy is cancelled. For all periods presented, no provision or allowance for doubtful accounts was required.
 
Note 5. Reserve for Losses and Loss Adjustment Expenses
 
The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses (“LAE”) for the six months ended June 30:
 
($ in thousands)
 
2016
 
2015
Reserve for losses and LAE at beginning of period
 
$
17,760

 
$
8,427

Less: Reinsurance recoverables
 

 

Net reserve for losses and LAE at beginning of period
 
17,760

 
8,427

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

 
 

Current period
 
9,568

 
6,079

Prior years
 
(2,873
)
 
(1,766
)
Net incurred losses during the current period
 
6,695

 
4,313

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

 
 

Current period
 
112

 
140

Prior years
 
1,869

 
669

Net loss and LAE payments during the current period
 
1,981

 
809

Net reserve for losses and LAE at end of period
 
22,474

 
11,931

Plus: Reinsurance recoverables
 

 

Reserve for losses and LAE at end of period
 
$
22,474

 
$
11,931

 
 
 
 
 
Loans in default at end of period
 
1,174

 
605

 
For the six months ended June 30, 2016, $1.9 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $2.9 million favorable prior year development during the six months ended June 30, 2016. Reserves remaining as of June 30, 2016 for prior years are $13.0 million as a result of re-estimation of unpaid losses and loss adjustment expenses. For the six months ended June 30, 2015, $0.7 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There had been a $1.8 million favorable prior year development during the six months ended June 30, 2015. Reserves remaining as of June 30, 2015 for prior years were $6.0 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.
 

10

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


Note 6. Debt Obligations
 
Revolving Credit Facility

On April 19, 2016, Essent Group and its subsidiaries, Essent Irish Intermediate Holdings Limited and Essent US Holdings, Inc., entered into a three-year, secured revolving credit facility with a committed capacity of $200 million (the “Facility”). Borrowings under the Facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to Essent’s insurance and reinsurance subsidiaries. Borrowings will accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. A commitment fee is due quarterly on the average daily amount of the undrawn revolving commitment. The applicable margin and the commitment fee are based on the senior unsecured debt rating or long-term issuer rating of Essent Group to the extent available, or the insurer financial strength rating of Essent Guaranty. The current annual commitment fee rate is 0.35%. The obligations under the Facility are secured by certain assets of Essent Group, excluding the stock and assets of its insurance and reinsurance subsidiaries. The Facility contains several covenants, including financial covenants relating to minimum net worth, capital and liquidity levels, maximum debt to capitalization level and PMIERS compliance. This description is not intended to be complete in all respects and is qualified in its entirety by the terms of the Facility, including its covenants. As of the date of this Quarterly Report, the Company was in compliance with the covenants and no amounts had been borrowed under the Facility.

Note 7. Commitments and Contingencies
 
Obligations under Guarantees
 
Under the terms of CUW Solutions' contract underwriting agreements with lenders and subject to contractual limitations on liability, we agree to indemnify certain lenders against losses incurred in the event that we make an error in determining whether loans processed meet specified underwriting criteria, to the extent that such error materially restricts or impairs the salability of such loan, results in a material reduction in the value of such loan or results in the lender repurchasing the loan. The indemnification may be in the form of monetary or other remedies. We paid $42,173 and $13,403 related to remedies for the six months ended June 30, 2016 and 2015. As of June 30, 2016, management believes any potential claims for indemnification related to contract underwriting services through June 30, 2016 are not material to our financial position or results of operations.
 
In addition to the indemnifications discussed above, in the normal course of business, we enter into agreements or other relationships with third parties pursuant to which we may be obligated under specified circumstances to indemnify the counterparties with respect to certain matters. Our contractual indemnification obligations typically arise in the context of agreements entered into by us to, among other things, purchase or sell services, finance our business and business transactions, lease real property and license intellectual property. The agreements we enter into in the normal course of business generally require us to pay certain amounts to the other party associated with claims or losses if they result from our breach of the agreement, including the inaccuracy of representations or warranties. The agreements we enter into may also contain other indemnification provisions that obligate us to pay amounts upon the occurrence of certain events, such as the negligence or willful misconduct of our employees, infringement of third-party intellectual property rights or claims that performance of the agreement constitutes a violation of law. Generally, payment by us under an indemnification provision is conditioned upon the other party making a claim, and typically we can challenge the other party’s claims. Further, our indemnification obligations may be limited in time and/or amount, and in some instances, we may have recourse against third parties for certain payments made by us under an indemnification agreement or obligation. As of June 30, 2016, contingencies triggering material indemnification obligations or payments have not occurred historically and are not expected to occur. The nature of the indemnification provisions in the various types of agreements and relationships described above are believed to be low risk and pervasive, and we consider them to have a remote risk of loss or payment. We have not recorded any provisions on the condensed consolidated balance sheets related to indemnifications.
 

11

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


Note 8. Stock-Based Compensation
 
The following table summarizes nonvested common share and nonvested common share unit activity for the six months ended June 30, 2016:
 
 
 
Time and Performance-
Based Share Awards
 
Time-Based Share
Awards
 
Share Units
(Shares in thousands)
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Share Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of year
 
1,294

 
$
15.15

 
890

 
$
12.31

 
544

 
$
19.84

Granted
 
209

 
17.01

 
181

 
17.01

 
203

 
17.73

Vested
 

 
N/A

 
(414
)
 
9.72

 
(249
)
 
19.61

Forfeited
 

 
N/A

 
(5
)
 
0.23

 
(8
)
 
18.36

Outstanding at June 30, 2016
 
1,503

 
$
15.41

 
652

 
$
15.36

 
490

 
$
19.11


In February 2016, certain members of senior management were granted nonvested common shares under the Essent Group Ltd. 2013 Long-Term Incentive Plan that were subject to time-based and performance-based vesting. The time-based share awards granted in February 2016 vest in three equal installments on March 1, 2017, 2018 and 2019. The performance-based share awards granted in February 2016 vest based upon our compounded annual book value per share growth percentage during a three-year performance period that commenced on January 1, 2016 and vest on March 1, 2019. The portion of the 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
%
 
25
%
 
 
 
14
%
 
50
%
 
 
 
15
%
 
75
%
Maximum
 
 
≥16
%
 
100
%
 
 
 
 
 
 
 
In the event that the compounded annual book value per share growth falls between the performance levels shown above, the nonvested common shares earned will be determined on a straight-line basis between the respective levels shown.
 
In connection with our incentive program covering bonus awards for performance year 2015, in February 2016, time-based share awards and share units were issued to certain employees that vest in three equal installments on March 1, 2017, 2018 and 2019. In May 2016, time-based share units were granted to non-employee directors that vest one year from the date of grant.

The total fair value on the vesting date of nonvested shares or share units that vested was $14.2 million and $20.6 million for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, there was $23.1 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at June 30, 2016 and we expect to recognize the expense over a weighted average period of 1.8 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 178,739 in the six months ended June 30, 2016. The tendered shares were recorded at cost, included in treasury stock and have been cancelled as of June 30, 2016.
 

12

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


Compensation expense, net of forfeitures, and related tax effects recognized in connection with nonvested shares was as follows:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Compensation expense
 
$
4,167

 
$
3,335

 
$
7,949

 
$
6,596

Income tax benefit
 
1,346

 
984

 
2,558

 
2,125

 
Note 9. Earnings per Share (EPS)
 
The following table reconciles the net income and the weighted average common shares outstanding used in the computations of basic and diluted earnings per common share:
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Net income
 
$
52,258

 
$
37,193

 
$
100,209

 
$
72,031

Less: dividends declared
 

 

 

 

Net income available to common shareholders
 
$
52,258


$
37,193


$
100,209


$
72,031

Basic earnings per share
 
$
0.57

 
$
0.41

 
$
1.10

 
$
0.80

Diluted earnings per share
 
$
0.57

 
$
0.41

 
$
1.09

 
$
0.79

Basic weighted average shares outstanding
 
90,912

 
90,344

 
90,848

 
90,265

Dilutive effect of nonvested shares
 
1,226


1,330


1,151


1,329

Diluted weighted average shares outstanding
 
92,138

 
91,674

 
91,999

 
91,594

 
There were 37,918 and 50,372 antidilutive shares for the three months ended June 30, 2016 and 2015, respectively and 192,765 and 150,718 antidilutive shares for the six months ended June 30, 2016 and 2015, respectively.
 
The nonvested performance-based share awards are considered contingently issuable for purposes of the EPS calculation. Based on the compounded annual book value per share growth as of June 30, 2016, 100% of the performance-based share awards would be issuable under the terms of the arrangements if June 30, 2016 was the end of the performance period. Based on the compounded annual book value per share growth as of June 30, 2015, 100% of the performance-based share awards would have been issuable under the terms of the arrangements if June 30, 2015 was the end of the performance period.
 
Note 10. 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, 2016 and 2015:
 
 
 
Three Months Ended June 30, 2016
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
19,734

 
$
(6,474
)
 
$
13,260

Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding gains arising during the period
 
16,334

 
(5,185
)
 
11,149

Less: Reclassification adjustment for gains included in net income (1)
 
(583
)
 
136

 
(447
)
Net unrealized gains on investments
 
15,751

 
(5,049
)
 
10,702

Other comprehensive income
 
15,751

 
(5,049
)
 
10,702

Balance at end of period
 
$
35,485

 
$
(11,523
)
 
$
23,962


13

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


 
 
Six Months Ended June 30, 2016
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
661

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

 
 

 
 

Unrealized holding gains arising during the period
 
35,885

 
(11,030
)
 
24,855

Less: Reclassification adjustment for gains included in net income (1)
 
(1,061
)
 
267

 
(794
)
Net unrealized gains on investments
 
34,824

 
(10,763
)
 
24,061

Other comprehensive income
 
34,824

 
(10,763
)
 
24,061

Balance at end of period
 
$
35,485

 
$
(11,523
)
 
$
23,962


 
 
Three Months Ended June 30, 2015
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
13,711

 
$
(4,155
)
 
$
9,556

Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding losses arising during the period
 
(12,203
)
 
3,888

 
(8,315
)
Less: Reclassification adjustment for gains included in net income (1)
 
(568
)
 
114

 
(454
)
Net unrealized losses on investments
 
(12,771
)
 
4,002

 
(8,769
)
Other comprehensive loss
 
(12,771
)
 
4,002

 
(8,769
)
Balance at end of period
 
$
940

 
$
(153
)
 
$
787


 
 
Six Months Ended June 30, 2015
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Balance at beginning of period
 
$
6,712

 
$
(2,045
)
 
$
4,667

Other comprehensive income (loss):
 
 

 
 

 
 

Unrealized holding losses arising during the period
 
(4,555
)
 
1,551

 
(3,004
)
Less: Reclassification adjustment for gains included in net income (1)
 
(1,217
)
 
341

 
(876
)
Net unrealized losses on investments
 
(5,772
)
 
1,892

 
(3,880
)
Other comprehensive loss
 
(5,772
)
 
1,892

 
(3,880
)
Balance at end of period
 
$
940

 
$
(153
)
 
$
787

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


14

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


Note 11. Fair Value of Financial Instruments
 
The estimated fair values and related carrying amounts of our financial instruments were as follows:
 
June 30, 2016 (In thousands)
 
Carrying
Amount
 
Fair 
Value
Financial Assets:
 
 

 
 

U.S. Treasury securities
 
$
201,802

 
$
201,802

U.S. agency securities
 
14,339

 
14,339

U.S. agency mortgage-backed securities
 
204,254

 
204,254

Municipal debt securities
 
330,203

 
330,203

Corporate debt securities
 
390,425

 
390,425

Mortgage-backed securities
 
50,604

 
50,604

Asset-backed securities
 
129,312

 
129,312

Money market funds
 
114,235

 
114,235

Total investments
 
$
1,435,174

 
$
1,435,174

Financial Liabilities:
 
 

 
 

Derivative liabilities
 
$
2,012

 
$
2,012

 
December 31, 2015 (In thousands)
 
Carrying
Amount
 
Fair 
Value
Financial Assets:
 
 

 
 

U.S. Treasury securities
 
$
177,607

 
$
177,607

U.S. agency securities
 
13,782

 
13,782

U.S. agency mortgage-backed securities
 
159,602

 
159,602

Municipal debt securities
 
279,828

 
279,828

Corporate debt securities
 
396,732

 
396,732

Mortgage-backed securities
 
55,356

 
55,356

Asset-backed securities
 
126,629

 
126,629

Money market funds
 
67,098

 
67,098

Total investments
 
$
1,276,634

 
$
1,276,634

Financial Liabilities:
 
 

 
 

Derivative liabilities
 
$
1,232

 
$
1,232

 
Fair Value Hierarchy
 
ASC No. 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The level within the fair value hierarchy to measure the financial instrument shall be determined based on the lowest level input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

Level 1 — Quoted prices for identical instruments in active markets accessible at the measurement date.
 
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and valuations in which all significant inputs are observable in active markets. Inputs are observable for substantially the full term of the financial instrument.

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

15

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


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

Investments available for sale — Investments available for sale are valued using quoted market prices in active markets, when available, and those investments are classified as Level 1 of the fair value hierarchy. Level 1 investments available for sale include investments such as U.S. Treasury securities and money market funds. Investments available for sale are classified as Level 2 of the fair value hierarchy if quoted market prices are not available and fair values are estimated using quoted prices of similar securities or recently executed transactions for the securities. U.S. agency securities, U.S. agency mortgage-backed securities, municipal debt securities, corporate debt securities, mortgage-backed 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 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. Mortgage-backed and asset-backed securities are valued by our primary vendor using proprietary models based on observable inputs, such as interest rate spreads, prepayment speeds and credit risk. As part of our evaluation of investment prices provided by our primary pricing service, we obtained and reviewed their pricing methodologies which include a description of how each security type is evaluated and priced. We review the reasonableness of prices received from our primary pricing service by comparison to prices obtained from additional pricing sources. We have not made any adjustments to the prices obtained from our primary pricing service.
 
Derivative liabilities — 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. Certain of our Freddie Mac Agency Credit Insurance Structure ("ACIS") contracts are accounted for as derivatives. In determining an exit market, we consider the fact that there is not a principal market for these contracts. In the absence of a principal market, we value these ACIS contracts in a hypothetical market where market participants, and potential counterparties, include other mortgage guaranty insurers or reinsurers with similar credit quality to us. We believe that in the absence of a principal market, this hypothetical market provides the most relevant information with respect to fair value estimates. These ACIS contracts are classified as Level 3 of the fair value hierarchy.
 
We determine the fair value of our derivative instruments primarily using internally-generated models. We utilize market observable inputs, such as the performance of the underlying pool of mortgages, mortgage prepayment speeds and pricing spreads on the reference STACR notes issued by Freddie Mac, whenever they are available. There is a high degree of uncertainty about our fair value estimates since our contracts are not traded or exchanged, which makes external validation and corroboration of our estimates difficult. Considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates may not be indicative of amounts we could realize in a current market exchange or negotiated termination. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
 

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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.
 
June 30, 2016 (In thousands)
 
Quoted Prices
in Active 
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Recurring fair value measurements
 
 

 
 

 
 

 
 

Financial Assets:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
201,802

 
$

 
$

 
$
201,802

U.S. agency securities
 

 
14,339

 

 
14,339

U.S. agency mortgage-backed securities
 

 
204,254

 

 
204,254

Municipal debt securities
 

 
330,203

 

 
330,203

Corporate debt securities
 

 
390,425

 

 
390,425

Mortgage-backed securities
 

 
50,604

 

 
50,604

Asset-backed securities
 

 
129,312

 

 
129,312

Money market funds
 
114,235

 

 

 
114,235

Total assets at fair value
 
$
316,037

 
$
1,119,137

 
$

 
$
1,435,174

Financial Liabilities:
 
 

 
 

 
 

 
 
Derivative liabilities
 
$

 
$

 
$
2,012

 
$
2,012

Total liabilities at fair value
 
$

 
$

 
$
2,012

 
$
2,012

 
December 31, 2015 (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
 
$
177,607

 
$

 
$

 
$
177,607

U.S. agency securities
 

 
13,782

 

 
13,782

U.S. agency mortgage-backed securities
 

 
159,602

 

 
159,602

Municipal debt securities
 

 
279,828

 

 
279,828

Corporate debt securities
 

 
396,732

 

 
396,732

Mortgage-backed securities
 

 
55,356

 

 
55,356

Asset-backed securities
 

 
126,629

 

 
126,629

Money market funds
 
67,098

 

 

 
67,098

Total assets at fair value
 
$
244,705

 
$
1,031,929

 
$

 
$
1,276,634

Financial Liabilities:
 
 

 
 

 
 

 
 

Derivative liabilities
 
$

 
$

 
$
1,232

 
$
1,232

Total liabilities at fair value
 
$

 
$

 
$
1,232

 
$
1,232



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


Changes in Level 3 Recurring Fair Value Measurements
 
The following table presents changes during the three and six months ended June 30, 2016 and 2015 in Level 3 liabilities measured at fair value on a recurring basis, and the net realized and unrealized losses related to the Level 3 liabilities in the condensed consolidated balance sheets at June 30, 2016 and 2015. During the six months ended June 30, 2016, and in the year ended December 31, 2015, we had no Level 3 assets.

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Level 3 Liabilities
 
 
 
 
 
 
 
 
Fair value of derivative liabilities at beginning of period
 
$
898

 
$
1,959

 
$
1,232

 
$
661

Net realized and unrealized losses included in income
 
755

 
391

 
78

 
1,140

Other comprehensive income (loss)
 

 

 

 

Purchases, sales, issues and settlements, net
 
359

 
370

 
702

 
919

Gross transfers in
 

 

 

 

Gross transfers out
 

 

 

 

Fair value of derivative liabilities at end of period
 
$
2,012

 
$
2,720

 
$
2,012

 
$
2,720

 
 
 
 
 
 
 
 
 
Changes in net unrealized losses included in income on instruments held at end of period
 
$
755

 
$
391

 
$
78

 
$
1,140


The following table summarizes the significant unobservable inputs used in our recurring Level 3 fair value measurements as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
 
 
 
 
 
 
 
($ in thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Weighted
Average
Derivative Liabilities
 
$
2,012

 
Discounted cash flows
 
Constant prepayment rate
 
14.81
%
 
 
 

 
 
 
Default rate
 
0.30
%
 
 
 

 
 
 
Reference STACR credit spread
 
3.69
%

December 31, 2015
 
 
 
 
 
 
 
 
($ in thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Weighted
Average
Derivative Liabilities
 
$
1,232

 
Discounted cash flows
 
Constant prepayment rate
 
10.60
%
 
 
 

 
 
 
Default rate
 
0.50
%
 
 
 

 
 
 
Reference STACR credit spread
 
3.93
%

The significant unobservable inputs used for derivative liabilities are constant prepayment rates (“CPR”) and default rates on the reference pool of mortgages and the credit spreads on the reference STACR notes. An increase in the CPR, default rate or reference STACR credit spread will increase the fair value of the liability.
 

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


Note 12. 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 months ended June 30:
 
(In thousands)
 
2016
 
2015
Essent Guaranty
 
 

 
 

Statutory net income
 
$
100,026

 
$
84,386

Statutory surplus
 
545,665

 
502,997

Contingency reserve liability
 
392,928

 
244,320

 
 
 
 
 
Essent PA
 
 

 
 

Statutory net income
 
$
6,980

 
$
8,090

Statutory surplus
 
45,516

 
45,087

Contingency reserve liability
 
32,198

 
22,469

 
Net income determined in accordance with statutory accounting practices differs from GAAP. In 2016 and 2015, 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, 2016 and 2015, 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 ("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. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. As of June 30, 2016 and December 31, 2015, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs.
 
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 months ended June 30, 2016, Essent Guaranty increased its contingency reserve by $77.9 million and Essent PA increased its contingency reserve by $4.7 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. Essent Guaranty and Essent PA did not release any amounts from their contingency reserves in the six months ended June 30, 2016 or 2015.


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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 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, 2015, all such requirements were met.

The statutory capital and surplus and statutory income for Essent Re at June 30, 2016 was as follows:

(In thousands)
 
Actual
 
Required
 
Statutory capital and surplus:
 
$
269,358

 
$
1,000

 
 
 
 
 
 
 
Statutory net income:
 
$
21,396

 
 
 

Statutory capital and surplus and net income determined in accordance with statutory accounting practices differs from GAAP. In the six months ended June 30, 2016, the more significant differences from GAAP for Essent Re relate to policy acquisition costs and accounting for insurance and certain reinsurance policies issued in connection with the ACIS program. Under statutory accounting practices, policy acquisition costs are charged to expense when the related premiums are written while such costs are capitalized and amortized to expense over the life of the policy under GAAP. Under statutory accounting practices, the insurance and reinsurance policies issued in connection with the ACIS program are accounted for as insurance with premium received recorded as premiums earned. Under GAAP, the insurance and certain reinsurance policies for the ACIS program are accounted for as derivatives with the fair value of these policies reported as an asset or liability and changes in the fair value of these policies reported in earnings as a component of other income.


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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, 2015 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, 2016 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. 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.
 
Except as otherwise indicated, “Market Share” means our market share as measured by our share of total new insurance written (“NIW”) on a flow basis (in which loans are insured in individual, loan-by-loan transactions) in the private mortgage insurance industry, and excludes both NIW under the Home Affordable Refinance Program (“HARP” and such NIW, the “HARP NIW”) and bulk insurance (in which each loan in a portfolio of loans is insured in a single transaction).
 
Overview
 
We are an established and growing private mortgage insurance company. We were formed to serve the U.S. housing finance industry at a time when the demands of the financial crisis and a rapidly changing business environment created the need for a new, privately funded mortgage insurance company. We had an estimated 12.1% Market Share for the six months ended June 30, 2016. We believe that our success in acquiring customers and growing our insurance in force has been driven by the unique opportunity we offer lenders to partner with a well-capitalized mortgage insurer, unencumbered by business originated prior to the financial crisis, that provides fair and transparent claims payment practices, and consistency and speed of service.
 
In 2010, Essent became the first private mortgage insurer to be approved by the GSEs since 1995, and we are licensed to write coverage in all 50 states and the District of Columbia. We completed our initial public offering in November 2013. The financial strength of Essent Guaranty, Inc. ("Essent Guaranty"), our wholly-owned insurance subsidiary, is rated Baa2 with a stable outlook by Moody’s Investor Services (“Moody's”) and is rated BBB+ with a stable outlook by Standard & Poor’s Rating Services (“S&P”). 
 
We had master policy relationships with approximately 1,340 customers as of June 30, 2016. 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 362 employees as of June 30, 2016. We generated new insurance written of approximately $8.7 billion and $14.2 billion for the three and six months ended June 30, 2016, respectively, compared to approximately $7.3 billion and $12.6 billion for the three and six months ended June 30, 2015, respectively. As of June 30, 2016, we had approximately $72.3 billion of insurance in force.
 
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, 2016, Essent Re provides insurance or reinsurance in connection with GSE risk-share transactions covering approximately $305.4 million of risk on mortgage loans in reference pools associated with Freddie Mac's Agency Credit Insurance Structure ("ACIS") and Fannie Mae's Credit Insurance Risk Transfer ("CIRT") programs. Essent Re has also reinsured 25% of Essent Guaranty’s GSE-eligible mortgage insurance NIW originated since July 1, 2014 under a quota share reinsurance agreement.
 
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.
 

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Effective December 31, 2015, Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency ("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. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. As of June 30, 2016, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs. See additional discussion in “— Liquidity and Capital Resources —Private Mortgage Insurer Eligibility Requirements.”
 
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 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 and the competition to provide credit enhancement on those mortgages;
 
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. To date, we have not ceded any premiums under third-party reinsurance contracts.
 
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 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, 2016 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 months ended June 30, 2016, monthly and single premium policies comprised 78.7% and 21.3% of our NIW, respectively.

Premiums associated with our GSE risk share transactions are based on the level of risk in force.
 
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, changes in persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 81.0% at June 30, 2016. Generally, higher prepayment speeds lead to lower persistency.
 

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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, 2016. 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 “other-than-temporary” 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
 
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. This fee is adjusted monthly based on the number of Triad’s mortgage insurance policies in force and, accordingly, will decrease over time as Triad’s existing policies are cancelled. The services agreement was automatically extended until November 30, 2016 and provides for three subsequent one-year renewals at Triad’s option.
 
Other income also includes revenues associated with contract underwriting services and changes in the fair value of derivative instruments. 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. The insurance and certain of the reinsurance policies issued by Essent Re in connection with the ACIS program are accounted for as derivatives under U.S. generally accepted accounting principles ("GAAP") with the fair value of these policies reported as an asset or liability and changes in the fair value of these policies reported in earnings. Changes in the fair value of these policies are impacted by changes in market observable factors.
 
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;


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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 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. The average age of our insurance portfolio is young with 77% of our IIF as of June 30, 2016 having been originated since January 1, 2014. 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, to increase as our portfolio further 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 (“LAE”), 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 upon our experience and industry data, that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. As of June 30, 2016, 77% of our IIF relates to business written since January 1, 2014 and substantially all of our policies in force are 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.
 
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 65% of other underwriting and operating expenses for each of the three and six months ended June 30, 2016, compared to 64% and 65% of other underwriting and operating expenses for the three and six months ended June 30, 2015, respectively. Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes. Compensation and benefits expense has steadily increased as we have increased our staffing from 332 employees at January 1, 2015 to 362 at June 30, 2016, primarily in our business development and operations functions to support the growth of our business. The growth in our sales organization contributed to the growth of our active customers and NIW. We also expanded our underwriting and customer service teams to support this new business.
 
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 customers and increase our IIF, our expenses will also continue to increase. In addition, as a result of the increase in our IIF, we expect that our net premiums earned will grow faster than our underwriting and other expenses resulting in a decline in our expense ratio for the full year 2016 as compared to 2015.
 

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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. and its wholly-owned subsidiary, Essent Re, are domiciled in Bermuda, which does not have a corporate income tax. Effective July 2014, Essent Re began to reinsure 25% of GSE-eligible new insurance written of Essent Guaranty, an affiliate. 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, 2016 and 2015 for our U.S. mortgage insurance portfolio. In addition, this table includes our risk in force ("RIF") at the end of each period.
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
IIF, beginning of period
 
$
67,716,741

 
$
53,253,632

 
$
65,242,453

 
$
50,762,594

NIW - Flow
 
8,715,171

 
7,225,401

 
14,081,846

 
12,572,221

NIW - Bulk
 

 
61,258

 
93,054

 
61,258

Cancellations
 
(4,164,813
)
 
(3,104,432
)
 
(7,150,254
)
 
(5,960,214
)
IIF, end of period
 
$
72,267,099

 
$
57,435,859

 
$
72,267,099

 
$
57,435,859

Average IIF during the period
 
$
69,746,972

 
$
55,224,827

 
$
68,145,618

 
$
53,649,683

RIF, end of period
 
$
17,937,364

 
$
13,992,701

 
$
17,937,364

 
$
13,992,701

 
Our cancellation activity has been relatively low to date because the average age of our insurance portfolio is young. The following is a summary of our IIF at June 30, 2016 by vintage:
 
($ in thousands)
 
$
 
%
2016 (through June 30)
 
$
13,972,443

 
19.3
%
2015
 
23,791,225

 
32.9

2014
 
17,543,691

 
24.3

2013
 
11,480,248

 
15.9

2012
 
4,711,211

 
6.5

2011
 
727,498

 
1.0

2010
 
40,783

 
0.1

 
 
$
72,267,099

 
100.0
%
 

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Average Premium Rate
 
Our average 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; and (4) changes to our pricing. For the three and six months ended June 30, 2016, our average premium rate was 0.57% and 0.56%, respectively, as compared to 0.57% for each of the three and six months ended June 30, 2015
 
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, 2016, our combined net risk in force for our U.S. insurance companies was $15.0 billion and our combined statutory capital was $1.0 billion, resulting in a risk-to-capital ratio of 14.8 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.
 
During the six months ended June 30, 2016, no capital contributions were made by Essent Group Ltd. to our U.S. insurance subsidiaries. During the six months ended June 30, 2015, capital contributions of $20.0 million were made by Essent Group Ltd. to our U.S. insurance subsidiaries.
 

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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,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 

 
 

 
 
 
 
Net premiums written
 
$
108,513

 
$
92,399

 
$
208,979

 
$
174,656

Increase in unearned premiums
 
(7,802
)
 
(14,038
)
 
(13,865
)
 
(21,257
)
Net premiums earned
 
100,711

 
78,361

 
195,114

 
153,399

Net investment income
 
6,701

 
4,720

 
12,884

 
9,000

Realized investment gains, net
 
583

 
568

 
1,054

 
1,217

Other income
 
170

 
418

 
1,579

 
462

Total revenues
 
108,165

 
84,067

 
210,631

 
164,078

 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 

 
 

 
 
 
 
Provision for losses and LAE
 
2,964

 
2,314

 
6,695

 
4,313

Other underwriting and operating expenses
 
31,409

 
27,148

 
62,797

 
54,646

Total losses and expenses
 
34,373

 
29,462

 
69,492

 
58,959

Income before income taxes
 
73,792

 
54,605

 
141,139

 
105,119

Income tax expense
 
21,534

 
17,412

 
40,930

 
33,088

Net income
 
$
52,258

 
$
37,193

 
$
100,209

 
$
72,031

 
Three and Six Months Ended June 30, 2016 Compared to the Three and Six Months Ended June 30, 2015
 
For the three months ended June 30, 2016, we reported net income of $52.3 million, compared to net income of $37.2 million for the three months ended June 30, 2015. For the six months ended June 30, 2016, we reported net income of $100.2 million, compared to net income of $72.0 million for the six months ended June 30, 2015. The increase in our operating results in 2016 over the same periods in 2015 was primarily due to the increase in net premiums earned associated with the growth of our IIF and the increase in net investment income, partially offset by increases in other underwriting and operating expenses, the provision for losses and loss adjustment expenses and income taxes.

Net Premiums Written and Earned
 
Net premiums earned increased in the three months ended June 30, 2016 by 29% compared to the three months ended June 30, 2015 primarily due to the increase in our average IIF from $55.2 billion at June 30, 2015 to $69.7 billion at June 30, 2016. The average premium rate was 0.57% for the three months ended June 30, 2016 and 2015. Net premiums earned increased in the six months ended June 30, 2016 by 27% compared to the six months ended June 30, 2015 due to the increase in our average IIF from $53.6 billion at June 30, 2015 to $68.1 billion at June 30, 2016, partially offset by a decrease in the average premium rate from 0.57% in the six months ended June 30, 2015 to 0.56% in the six months ended June 30, 2016. The decrease in the average premium rate is due primarily to a decrease in premium earned on the cancellation of non-refundable single premium policies relative to average IIF in the respective periods.
 
The increase in net premiums written was due primarily to the increase in average IIF of 26% for the three months ended June 30, 2016 and 27% for the six months ended June 30, 2016 as compared to the same periods in 2015. Net premiums written increased in the three and six months ended June 30, 2016 by 17% and 20%, respectively, over the three and six months ended June 30, 2015.
 
In the three months ended June 30, 2016 and 2015, unearned premiums increased by $7.8 million and $14.0 million, respectively. The change in unearned premiums was a result of net premiums written on single premium policies of $27.0 million and $28.2 million, respectively, which was partially offset by $19.2 million and $14.2 million, respectively, of unearned premium that was recognized in earnings during the periods. In the six months ended June 30, 2016 and 2015, unearned premiums increased by $13.9 million and $21.3 million, respectively. This was a result of net premiums written on single premium policies of $50.2 million and $49.4 million, respectively, which was partially offset by $36.3 million and $28.1 million, respectively, of unearned premium that was recognized in earnings during the period.

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Net Investment Income
 
Our net investment income was derived from the following sources for the period indicated:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Fixed maturities
 
$
7,197

 
$
5,115

 
$
13,852

 
$
9,768

Short-term investments
 
30

 
17

 
63

 
29

Gross investment income
 
7,227

 
5,132

 
13,915

 
9,797

Investment expenses
 
(526
)
 
(412
)
 
(1,031
)
 
(797
)
Net investment income
 
$
6,701

 
$
4,720

 
$
12,884

 
$
9,000

 
The increase in net investment income for the three and six months ended June 30, 2016 as compared to the same periods in 2015 was due to the increase in the weighted average balance of our investment portfolio and the increase in the pre-tax investment income yield. The average cash and investment portfolio balance was $1.4 billion for the three months ended June 30, 2016 compared to $1.1 billion for the three months ended June 30, 2015. The average cash and investment portfolio balance was $1.3 billion for the six months ended June 30, 2016 compared to $1.1 billion for the six months ended June 30, 2015. The pre-tax investment income yield increased from 1.8% in each of the three and six months ended June 30, 2015 to 2.1% in each of the three and six months ended June 30, 2016 primarily due to an increase in our longer duration investment positions. The pre-tax investment income yields are calculated based on amortized cost. See “— Liquidity and Capital Resources” below for further details of our investment portfolio.
 
Other Income
 
Other income includes fees earned for information technology and customer support services provided to Triad, contract underwriting revenues and changes in the fair value of the insurance and certain reinsurance policies issued by Essent Re under the ACIS program. The decrease in other income for the three months ended June 30, 2016 was primarily due to a $0.8 million decrease in the estimated fair value of our ACIS contracts resulting from the increase in observed prepayment speeds associated with the underlying pool of mortgages on the reference STACR notes issued by Freddie Mac, partially offset by an increase in contract underwriting revenue. For the same period in 2015, other income includes a $0.4 million decrease in the estimated fair value of our ACIS contracts resulting from the increase in observed prepayment speeds associated with the underlying pool of mortgages on the reference STACR notes. The increase in other income for the six months ended June 30, 2016 compared to the same period in 2015 was primarily due to a $1.1 million decrease in the estimated fair value of our ACIS contracts recorded in 2015 resulting from the increase in observed prepayment speeds associated with the underlying pool of mortgages on the reference STACR notes issued by Freddie Mac.
 
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, 2016 as compared to the same periods in 2015 was primarily due to increases in the number of insured loans in default, partially offset by previously identified defaults that cured.

The following table presents a rollforward of insured loans in default for the periods indicated:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Beginning default inventory
 
1,060

 
505

 
1,028

 
457

Plus: new defaults
 
754

 
385

 
1,523

 
766

Less: cures
 
(608
)
 
(270
)
 
(1,314
)
 
(590
)
Less: claims paid
 
(31
)
 
(15
)
 
(61
)
 
(28
)
Less: rescissions and denials
 
(1
)
 

 
(2
)
 

Ending default inventory
 
1,174

 
605

 
1,174

 
605

 

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The increase in the number of defaults at June 30, 2016 compared to June 30, 2015 was primarily due to the increase in our IIF and policies in force, as well as further seasoning of our insurance portfolio.
 
The following table includes additional information about our loans in default as of the dates indicated:
 
 
 
As of June 30,
 
 
2016
 
2015
Case reserves (in thousands)
 
$
20,625

 
$
10,958

Ending default inventory
 
1,174

 
605

Average case reserve per default (in thousands)
 
$
17.6


$
18.1

Default rate
 
0.36
%
 
0.23
%
Claims received included in ending default inventory
 
37

 
15

 
The decrease in the average reserve per default was primarily due to changes in the composition (such as mark-to-market loan-to-value ratios, risk in force, and number of months past due) of the underlying loans in default.

The following tables provide a reconciliation of the beginning and ending reserve balances for losses and LAE and a detail of reserves and defaulted RIF by the number of missed payments and pending claims:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Reserve for losses and LAE at beginning of period
 
$
20,470

 
$
10,065

 
$
17,760

 
$
8,427

Add provision for losses and LAE occurring in:
 
 
 
 
 
 
 
 
Current period
 
4,488

 
3,374

 
9,568

 
6,079

Prior years
 
(1,524
)
 
(1,060
)
 
(2,873
)
 
(1,766
)
Incurred losses during the current period
 
2,964

 
2,314

 
6,695

 
4,313

Deduct payments for losses and LAE occurring in:
 
 
 
 
 
 
 
 
Current period
 
111

 
140

 
112

 
140

Prior years
 
849

 
308

 
1,869

 
669

Loss and LAE payments during the current period
 
960

 
448

 
1,981

 
809

Reserve for losses and LAE at end of period
 
$
22,474

 
$
11,931

 
$
22,474

 
$
11,931

 
 
 
As of June 30, 2016
($ 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
 
565

 
48
%
 
$
4,494

 
22
%
 
$
30,478

 
15
%
Four to eleven payments
 
446

 
38

 
10,196

 
49

 
24,520

 
42

Twelve or more payments
 
126

 
11

 
4,431

 
22

 
6,703

 
66

Pending claims
 
37

 
3

 
1,504

 
7

 
1,693

 
89

Total case reserves
 
1,174

 
100
%
 
20,625

 
100
%
 
$
63,394

 
33

IBNR
 
 

 
 

 
1,547

 
 

 
 

 
 

LAE and other
 
 

 
 

 
302

 
 

 
 

 
 

Total reserves for losses and LAE
 
 

 
 

 
$
22,474

 
 

 
 

 
 


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As of June 30, 2015
($ 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
 
289

 
48
%
 
$
2,797

 
26
%
 
$
16,188

 
17
%
Four to eleven payments
 
243

 
40

 
5,680

 
52

 
12,715

 
45

Twelve or more payments
 
58

 
10

 
2,003

 
18

 
2,500

 
80

Pending claims
 
15

 
2

 
478

 
4

 
540

 
89

Total case reserves
 
605

 
100
%
 
10,958

 
100
%
 
$
31,943

 
34

IBNR
 
 

 
 

 
822

 
 

 
 

 
 

LAE and other
 
 

 
 

 
151

 
 

 
 

 
 

Total reserves for losses and LAE
 
 

 
 

 
$
11,931

 
 

 
 

 
 

 
During the three months ended June 30, 2016, the provision for losses and LAE was $3.0 million, comprised of $4.5 million of current year losses partially offset by $1.5 million of favorable prior years’ loss development. During the three months ended June 30, 2015, the provision for losses and LAE was $2.3 million, comprised of $3.4 million of current year losses partially offset by $1.1 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.

During the six months ended June 30, 2016, the provision for losses and LAE was $6.7 million, comprised of $9.6 million of current year losses partially offset by $2.9 million of favorable prior years’ loss development. During the six months ended June 30, 2015, the provision for losses and LAE was $4.3 million, comprised of $6.1 million of current year losses partially offset by $1.8 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 as of the dates indicated:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in thousands)
 
2016
 
2015
 
2016
 
2015
Number of claims paid
 
31

 
15

 
61

 
28

Amount of claims paid
 
$
924

 
$
431

 
$
1,922

 
$
780

Claim severity
 
71
%
 
88
%
 
81
%
 
81
%
 
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,
 
 
2016
 
2015
 
2016
 
2015
($ in thousands)
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Compensation and benefits
 
$
20,396

 
65
%
 
$
17,477

 
64
%
 
$
40,702

 
65
%
 
$
35,663

 
65
%
Other
 
11,013

 
35

 
9,671

 
36

 
22,095

 
35

 
18,983

 
35

 
 
$
31,409

 
100
%
 
$
27,148

 
100
%
 
$
62,797

 
100
%
 
$
54,646

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of employees at end of period
 
 

 
 
 
 
 
 
 
 
 
362

 
 

 
355

 
The significant factors contributing to the change in other underwriting and operating expenses are:
 
Compensation and benefits increased primarily due to the increase in our workforce to 362 at June 30, 2016 from 332 at January 1, 2015. Additional employees were hired to support the growth in our business, particularly in our sales

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organization, as well as our underwriting and customer service teams. Compensation and benefits includes salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.

Other expenses increased as a result of the continued expansion of our business. Other expenses include premium taxes, travel, marketing, hardware, software, rent, depreciation and amortization and other facilities expenses.

Income Taxes
 
Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax expense was $21.5 million and $17.4 million for the three months ended June 30, 2016 and 2015, respectively. Our income tax expense was $40.9 million and $33.1 million for the six months ended June 30, 2016 and 2015, respectively. Our effective tax rate was 29.2% and 31.9% for the three months ended June 30, 2016 and 2015, respectively, and 29.0% and 31.5% for the six months ended June 30, 2016 and 2015, respectively. For interim reporting periods, we use an annualized effective tax rate method required under GAAP to calculate the income tax provision. In the three months ended June 30, 2016 and 2015, our effective tax rate reflects the impact of the change in our expectations for the proportion of consolidated earnings to be generated in the United States compared to Bermuda in each year. We expect the proportion of our consolidated earnings generated in Bermuda to be higher in 2016 than in 2015 as a result of insurance and reinsurance contracts executed with Freddie Mac and Fannie Mae and the quota share reinsurance agreement between Essent Guaranty and Essent Re. Bermuda does not have a corporate income tax. 
 
Liquidity and Capital Resources
 
Overview
 
Our sources of funds consist primarily of:
 
our investment portfolio and interest income on the portfolio;

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

borrowings under our revolving credit facility; and

issuance of capital shares.
 

Our obligations consist primarily of:

claim payments under our policies; and

the other costs and operating expenses of our business.
 
As of June 30, 2016, we had substantial liquidity with cash of $16.2 million, short-term investments of $129.2 million and fixed maturity investments of $1.3 billion. We also had $200 million available under our revolving credit facility and had no debt outstanding. At June 30, 2016, net cash and investments at the holding company was $42.3 million.  

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 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.
 
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;

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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, 2016, Essent Guaranty had negative unassigned surplus of approximately $19.6 million and therefore would require prior approval by the Pennsylvania Insurance Commissioner to make any dividend payment or other distributions in 2016. Essent Guaranty has paid no dividends since its inception. Essent PA had unassigned surplus of approximately $6.5 million as of June 30, 2016. During the six months ended June 30, 2016, Essent PA paid to its parent company, Essent US Holdings, Inc., a $3.75 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 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, 2016, Essent Re had total equity of $276.5 million. At June 30, 2016, our insurance subsidiaries were in compliance with these rules, regulations and agreements. 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.
 
Cash Flows
 
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
 
 
 
Six Months Ended June 30,
(In thousands)
 
2016
 
2015
Net cash provided by operating activities
 
$
122,067

 
$
89,846

Net cash used in investing activities
 
(125,550
)
 
(85,418
)
Net cash used in financing activities
 
(4,951
)
 
(3,249
)
Net (decrease) increase in cash
 
$
(8,434
)
 
$
1,179

 
Operating Activities
 
Cash flow provided by operating activities totaled $122.1 million for the six months ended June 30, 2016 as compared to $89.8 million for the six months ended June 30, 2015. The increase in cash flow from operating activities of $32.2 million in 2016 was primarily a result of increases in premiums collected and net investment income, partially offset by increases in expenses paid.
 
Investing Activities
 
Cash flow used in investing activities totaled $125.6 million for the six months ended June 30, 2016 as compared to $85.4 million for the six months ended June 30, 2015. The increase in cash flow used in investing activities primarily related to investing cash flows from the business.
 
Financing Activities
 
Cash flow used in financing activities totaled $5.0 million for the six months ended June 30, 2016, as compared to $3.2 million for the six months ended June 30, 2015. The increase in cash flow used in financing activities was primarily related to the payment of issuance costs for the revolving line of credit.
 

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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 months ended June 30, 2016, no capital contributions were made by Essent Group Ltd. to our U.S. insurance subsidiaries. During the six months ended June 30, 2015, capital contributions of $20.0 million were made by Essent Group Ltd. to our U.S. insurance subsidiaries.
 
Our combined risk-to-capital calculation for our U.S. insurance subsidiaries as of June 30, 2016 is as follows:
 
Combined statutory capital:
($ in thousands)
 
Policyholders’ surplus
$
592,221

Contingency reserves
425,126

Combined statutory capital
$
1,017,347

Combined net risk in force
$
15,023,472

Combined risk-to-capital ratio
14.8:1

 
For additional information regarding regulatory capital, see Note 12 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. Such practices vary from accounting principles generally accepted in the United States.
 
Essent Re has entered into risk-share insurance and reinsurance transactions with Freddie Mac and Fannie Mae. Essent Re also executed a quota share reinsurance transaction with Essent Guaranty to reinsure 25% of Essent Guaranty’s GSE-eligible NIW effective July 1, 2014.  During the six months ended June 30, 2016, Essent Group Ltd. made capital contributions to Essent Re of $30.0 million to support new business. As of June 30, 2016, Essent Re had total stockholders’ equity of $276.5 million and net risk in force of $3.2 billion.
 
Financial Strength Ratings
 
The insurer financial strength rating of Essent Guaranty, our principal mortgage insurance subsidiary, is Baa2 with a stable outlook by Moody's and BBB+ with a stable outlook by S&P.
 
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. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. As of June 30, 2016, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs. As of June 30, 2016, Essent Guaranty's Available Assets were $1.06 billion and its Minimum Required Assets were $993 million based on our interpretation of the PMIERs.

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Table of Contents

 
Financial Condition
 
Stockholders’ Equity
 
As of June 30, 2016, stockholders’ equity was $1.2 billion compared to $1.1 billion as of December 31, 2015. This increase was primarily due to net income generated in 2016, as well as an increase in accumulated other comprehensive income related to an increase in our unrealized investment gains.

Investments
 
The total fair value of our investment portfolio was $1.4 billion as of June 30, 2016 and $1.3 billion as of December 31, 2015. In addition, our total cash was $16.2 million as of June 30, 2016, compared to $24.6 million as of December 31, 2015.
 
Investment Portfolio by Asset Class
 
Asset Class
 
June 30, 2016
 
December 31, 2015
($ in thousands)
 
Fair Value
 
Percent
 
Fair Value
 
Percent
U.S. Treasury securities
 
$
201,802

 
14.1
%
 
$
177,607

 
13.9
%
U.S. agency securities
 
14,339

 
1.0

 
13,782

 
1.1

U.S. agency mortgage-backed securities
 
204,254

 
14.2

 
159,602

 
12.5

Municipal debt securities(1)
 
330,203

 
23.0

 
279,828

 
21.9

Corporate debt securities(2)
 
390,425

 
27.2

 
396,732

 
31.1

Mortgage-backed securities
 
50,604

 
3.5

 
55,356

 
4.3

Asset-backed securities
 
129,312

 
9.0

 
126,629

 
9.9

Money market funds
 
114,235

 
8.0

 
67,098

 
5.3

Total Investments
 
$
1,435,174

 
100.0
%
 
$
1,276,634

 
100.0
%
 

 
 
June 30,
 
December 31,
(1) The following table summarizes municipal debt securities as of :
 
2016
 
2015
Special revenue bonds
 
65.4
%
 
70.4
%
General obligation bonds
 
30.2

 
24.5

Certificate of participation bonds
 
3.5

 
4.0

Tax allocation bonds
 
0.9

 
1.1

Total
 
100.0
%
 
100.0
%

 
 
 
June 30,
 
December 31,
(2) The following table summarizes corporate debt securities as of :
 
2016
 
2015
Financial
 
42.1
%
 
44.9
%
Consumer, non-cyclical
 
19.3

 
14.8

Energy
 
6.6

 
9.0

Utilities
 
6.5

 
5.0

Communications
 
6.2

 
7.1

Consumer, cyclical
 
6.2

 
6.2

Industrial
 
5.3

 
5.2

Technology
 
4.8

 
3.8

Basic materials
 
3.0

 
4.0

Total
 
100.0
%
 
100.0
%


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Table of Contents

Investment Portfolio by Rating
 
Rating(1)
 
June 30, 2016
 
December 31, 2015
($ in thousands)
 
Fair Value
 
Percent
 
Fair Value
 
Percent
Aaa
 
$
680,656

 
47.4
%
 
$
554,789

 
43.5
%
Aa1
 
89,465

 
6.2

 
74,322

 
5.8

Aa2
 
94,692

 
6.6

 
89,533

 
7.0

Aa3
 
78,288

 
5.5

 
68,587

 
5.4

A1
 
128,307

 
8.9

 
126,920

 
9.9

A2
 
103,730

 
7.2

 
122,745

 
9.6

A3
 
85,951

 
6.0

 
87,781

 
6.9

Baa1
 
77,687

 
5.4

 
80,137

 
6.3

Baa2
 
74,956

 
5.2

 
51,528

 
4.0

Baa3
 
16,414

 
1.2

 
19,662

 
1.5

Below Baa3 / Unrated
 
5,028

 
0.4

 
630

 
0.1

Total Investments
 
$
1,435,174

 
100.0
%
 
$
1,276,634

 
100.0
%
 
(1)
Based on ratings issued by Moody’s, if available. S&P rating utilized if Moody’s not available.
 
Investment Portfolio by Effective Duration
 
Effective Duration
 
June 30, 2016
 
December 31, 2015
($ in thousands)
 
Fair Value
 
Percent
 
Fair Value
 
Percent
< 1 Year
 
$
326,315

 
22.8
%
 
$
235,001

 
18.4
%
1 to < 2 Years
 
193,781

 
13.5

 
141,995

 
11.1

2 to < 3 Years
 
164,836

 
11.5

 
214,274

 
16.8

3 to < 4 Years
 
137,933

 
9.6

 
104,772

 
8.2

4 to < 5 Years
 
138,221

 
9.6

 
141,428

 
11.1

5 or more Years
 
474,088

 
33.0

 
439,164

 
34.4

Total Investments
 
$
1,435,174

 
100.0
%
 
$
1,276,634

 
100.0
%


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Table of Contents

Top Ten Portfolio Holdings
 
 
 
June 30, 2016
Rank
($ in thousands)
 
Security
 
Fair Value
 
Amortized
Cost
 
Unrealized
Gain (Loss)(1)
 
Credit
Rating(2)
1
 
U.S. Treasury 2.125% 5/15/2025
 
$
21,238

 
$
19,728

 
$
1,510

 
Aaa
2
 
Ginnie Mae 4.000% 8/20/2045
 
18,321

 
18,192

 
129

 
Aaa
3
 
U.S. Treasury 2.250% 11/15/2024
 
17,606

 
16,861

 
745

 
Aaa
4
 
U.S. Treasury 5.250% 11/15/2028
 
15,766

 
15,044

 
722

 
Aaa
5
 
U.S. Treasury 0.000% 7/7/2016
 
15,000

 
15,000

 

 
Aaa
6
 
Freddie Mac 2.500% 10/1/2030
 
14,759

 
14,583

 
176

 
Aaa
7
 
U.S. Treasury 1.625% 2/15/2026
 
13,280

 
12,843

 
437

 
Aaa
8
 
Fannie Mae 1.500% 6/22/2020
 
12,335

 
12,137

 
198

 
Aaa
9
 
Fannie Mae 3.000% 7/25/2045
 
12,173

 
11,950

 
223

 
Aaa
10
 
U.S. Treasury 1.625% 7/31/2020
 
11,478

 
11,232

 
246

 
Aaa
Total
 
 
 
$
151,956

 
$
147,570

 
$
4,386

 
 
Percent of Investment Portfolio
 
 
 
10.6
%
 
 

 
 

 
 
 
(1)
As of June 30, 2016, for securities in unrealized loss positions, management believes decline in fair values is principally associated with the changes in the interest rate environment subsequent to their purchase and there are no other-than-temporary impairments. 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 has been less than cost for less than 12 months and for 12 months or more.

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

 
Rank
 
December 31, 2015
($ in thousands)
 
Security
 
Fair Value
1
 
U.S. Treasury 2.125% 5/15/2025
 
$
24,974

2
 
Ginnie Mae 4.000% 8/20/2045
 
21,711

3
 
U.S. Treasury 2.250% 11/15/2024
 
16,495

4
 
Freddie Mac 2.500% 10/1/2030
 
15,697

5
 
U.S. Treasury 2.125% 6/30/2022
 
15,080

6
 
U.S. Treasury 0.000% 3/3/2016
 
14,997

7
 
Fannie Mae 1.500% 6/22/2020
 
11,362

8
 
U.S. Treasury 2.250% 11/15/2025
 
10,329

9
 
U.S. Treasury 1.000% 9/30/2016
 
10,020

10
 
U.S. Treasury 0.750% 3/15/2017
 
9,987

Total
 
 
 
$
150,652

Percent of Investment Portfolio
 
 
 
11.8
%


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Table of Contents

The following table includes municipal debt securities for states that represent more than 10% of the total municipal bond position as of June 30, 2016:
 
($ in thousands)
 
Fair Value
 
Amortized
Cost
 
Credit
Rating (1), (2)
Texas
 
 

 
 

 
 
State of Texas
 
$
8,891

 
$
8,488

 
Baa1
City of Houston
 
5,895

 
5,621

 
Aa3
University of Houston System
 
3,493

 
3,382

 
Aa2
Dallas/Fort Worth International Airport
 
3,135

 
2,764

 
A1
City of El Paso
 
2,623

 
2,548

 
Aa2
City of Austin
 
2,474

 
2,234

 
A1
Harris County Cultural Education
 
1,987

 
2,000

 
A1
City of Dallas
 
1,918

 
1,763

 
Aa1
Alamo Community College District
 
1,729

 
1,690

 
Aaa
Tarrant Regional Water District
 
1,657

 
1,557

 
Aaa
City of College Station
 
1,518

 
1,512

 
Aa2
Bryan Independent School District
 
1,389

 
1,368

 
Aaa
City of San Antonio
 
1,370

 
1,239

 
A1
Spring Independent School District
 
1,315

 
1,283

 
Aaa
Alvin Independent School District
 
1,245

 
1,247

 
Aaa
City of Corpus Christi
 
1,234

 
1,128

 
A1
Pharr-San Juan-Alamo Independent School District
 
1,131

 
1,132

 
Aaa
Pasadena Independent School District
 
1,054

 
1,046

 
Aaa
Tarrant County Cultural Education
 
1,028

 
1,023

 
Aa2
San Jacinto Community College District
 
933

 
868

 
Aa3
Harlandale Independent School District
 
889

 
882

 
Aaa
 
 
$
46,908

 
$
44,775

 
 
 
(1)
None of the above securities include financial guaranty insurance. Certain securities include state enhancements. The above ratings exclude the effect of such state enhancements.

(2)
Based on ratings issued by Moody’s, if available. S&P rating utilized if Moody’s not available.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements or financing activities with special-purpose entities.

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 2015 Form 10-K. See Note 2 to our condensed consolidated financial statements for recently issued accounting standards under evaluation.


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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.

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, 2016, the effective duration of our investment portfolio, including cash, was 3.6 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 3.6% in fair value of our investment portfolio. Excluding cash, our investment portfolio effective duration was 4.0 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 4.0% in fair value of our investment portfolio.
 
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, 2016, 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.


38

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, 2015. 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 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.
 
Item 2.                                                         Unregistered Sales of Equity Securities and Use of Proceeds
 
Repurchases of Securities
 
The table below sets forth information regarding repurchases of our common shares during the three months ended June 30, 2016. 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
April 1 - April 30, 2016
 

 

N/A

 

 

May 1 - May 31, 2016
 
1,260

 
$
20.55

 

 

June 1 - June 30, 2016
 

 

N/A

 

 

Total
 
1,260

 
 

 

 



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Table of Contents

Item 6.                   Exhibits
 
(a)                                 Exhibits:
 
Exhibit
No.
 
Description
10.1*
 
Agreement dated August 4, 2016 between Essent Guaranty, Inc. and Adolfo Marzol (filed herewith)
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, 2016, formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (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), tagged as blocks of text.
 
*
 
Management contract or compensatory plan or arrangement.
 
Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.


40

Table of Contents

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 5, 2016
/s/ MARK A. CASALE
 
 
Mark A. Casale
 
 
President, Chief Executive Officer and Chairman
(Principal Executive Officer)
 
 
 
 
 
 
Date:
August 5, 2016
/s/ LAWRENCE E. MCALEE
 
 
Lawrence E. McAlee
 
 
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
 
Date:
August 5, 2016
/s/ DAVID B. WEINSTOCK
 
 
David B. Weinstock
 
 
Vice President and Chief Accounting Officer
(Principal Accounting Officer)


41

Table of Contents

EXHIBIT INDEX
 
Exhibit
No.
 
Description
10.1*
 
Agreement dated August 4, 2016 between Essent Guaranty, Inc. and Adolfo Marzol (filed herewith)
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, 2016, formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (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), tagged as blocks of text.
 
 
*
 
Management contract or compensatory plan or arrangement.
 
Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.



42