AM Best has affirmed the financial strength rating of A (Excellent) and the long-term issuer credit ratings of “a” (Excellent) of the operating subsidiaries of Essent Group Ltd, the mortgage re/insurer based in Bermuda.

The subsidiaries are island-based Essent Reinsurance Ltd -- and Essent Guaranty Inc and Essent Guaranty of PA Inc, both of which are domiciled in Radnor, Pennsylvania.

The outlook of these credit ratings is stable.

The ratings reflect Essent’s balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, limited business profile and appropriate enterprise risk management.

Essent’s risk-adjusted capitalisation, as measured by Best’s capital adequacy ratio, is at the strongest level in base and stress scenarios.

The base scenario is analysed based on the company’s financial statements as of June 30, which reflects the improved housing market and the diminished impact from the Covid-19 pandemic.

The company’s compliance with Private Mortgage Insurer Eligibility Requirements, utilisation of traditional reinsurance and mortgage insurance-linked securities to reduce its earnings and capital volatility against potential unfavourable macro environment, strong liquidity position and conservative investment portfolio, as well as the financial flexibility to raise capital during the Covid-19 pandemic, support the balance sheet assessment of strongest.

AM Best assesses Essent’s operating performance as strong. In the period from 2015 through the first half of 2022, Essent recorded the lowest average combined ratio in the industry.

The strong performance in 2021 was fuelled by favourable macroeconomic conditions, which positively affected originations and the credit quality of borrowers, as well as significant embedded equity in the existing book of business due to home price growth since 2020.

Net income has shown consistent growth over the past five years except for a slight drop in 2020 as a result of the onset of Covid-19.

The company’s loss ratio, combined ratio and percentage of loans in default continued to decrease in 1H 2022. The loss and combined ratios in 1H 2022 were negative resulting from the release of reserves after better-than-expected cure activity on Covid-19 defaults.

The company’s expense ratio also has declined significantly over the past five years as the company has scaled up its production.