AM Best has affirmed the credit ratings of the operating subsidiaries of Bermudian-based Essent Group Ltd.

The ratings agency affirmed the financial strength rating of A (Excellent) and the long-term issuer credit ratings of “a” (Excellent) of 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, which are analysed based on the company’s financial statements as of June 30, 2024.

AM Best said the balance sheet assessment of strongest is supported by 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 macroeconomic conditions, strong liquidity position and conservative investment portfolio, as well as the financial flexibility to raise capital.

It added that the operating performance assessment of strong is supported by low loss and combined ratios recorded over the past five years and Essent’s private mortgage insurance-only expense ratio has stabilised.

AM Best said: “Net income is on pace to exceed 2023 results. The company’s percentage of loans in default at June 30, 2024, is one of the lowest in the industry as Essent’s credit profile remains strong driven by its strict underwriting standards and the effect of the risk-based capital charges established by PMIERs 2.0.

“AM Best assesses Essent’s business profile as limited, as the company is a monoline [insurer and reinsurer]. Furthermore, it faces stiff competition from other private mortgage insurers and governmental agencies (eg, Federal Housing Administration and Veterans Affairs) providing mortgage insurance.

“In addition, product risk is considered high because the performance of the mortgage insurance industry is linked to the macroeconomic environment and the standards set by the government-sponsored enterprises (ie, Fannie Mae and Freddie Mac).

“The product risk is mitigated somewhat by continued use of reinsurance protection via the traditional reinsurance and MILS markets.”

The ratings agency said Essent’s overall ERM assessment is appropriate, as the company employs a robust ERM framework and infrastructure that is embedded across the company. Essent’s ERM framework is commensurate with the size, nature and complexity of its mortgage insurance business.

AM Best considers Essent’s risk assessment capabilities to be aligned appropriately with its risk profile.