Essent Group Earnings 2019-12-31
ESNT 10K Annual Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
| Comparables ($MM TTM) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Ticker | M Cap | Assets | Liab | Rev | G Profit | Net Inc | EBITDA | EV | G Margin | EV/EBITDA | ROA |
| THG | 5,247 | 12,160 | 9,219 | 4,688 | 0 | 442 | 533 | 5,720 | 0% | 10.7 | 4% |
| KMPR | 5,145 | 12,616 | 8,933 | 4,802 | 0 | 376 | 690 | 5,914 | 0% | 8.6 | 3% |
| AXS | 5,046 | 25,870 | 20,304 | 3,877 | 0 | 152 | 241 | 3,952 | 0% | 16.4 | 1% |
| MTG | 5,036 | 6,056 | 2,020 | 1,160 | 0 | 659 | 880 | 5,643 | 0% | 6.4 | 11% |
| RDN | 4,834 | 6,592 | 2,809 | 1,421 | 1,318 | 620 | 849 | 4,755 | 93% | 5.6 | 9% |
| ESNT | 4,820 | 3,540 | 836 | 791 | 0 | 509 | 606 | 5,020 | 0% | 8.3 | 14% |
| SIGI | 4,547 | 8,576 | 6,516 | 2,715 | 0 | 241 | 322 | 5,164 | 0% | 16.1 | 3% |
| AGO | 4,405 | 13,581 | 6,859 | 949 | 0 | 445 | 607 | 5,444 | 0% | 9.0 | 3% |
| RLI | 3,877 | 3,375 | 2,415 | 915 | 0 | 125 | 144 | 4,001 | 0% | 27.7 | 4% |
| ESGR | 3,689 | 18,225 | 13,262 | 2,012 | 0 | 491 | 572 | 3,662 | 0% | 6.4 | 3% |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2019
For the transition period from to
Commission file number 001-36157
(Exact name of registrant as specified in its charter)
Not Applicable | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
(Address of principal executive offices and zip code)
(441 ) 297-9901
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2019, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of common shares held by non-affiliates of the registrant was approximately $4,489,438,603 (based upon the last reported sales price on The New York Stock Exchange on such date).
The number of the registrant's common shares outstanding as of February 10, 2020 was 98,450,053 .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 2020 Annual General Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2019.
TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or Annual 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 Annual Report reflect our views as of the date of this Annual Report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described below, in Part I, Item 1A "Risk Factors," and in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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; |
• | recently enacted U.S. Federal tax reform and its impact on us, our shareholders and our operations; |
• | the definition of "Qualified Mortgage" reducing the size of the mortgage origination market or creating incentives to use government mortgage insurance programs; |
• | the definition of "Qualified Residential Mortgage" reducing the number of low down payment loans or lenders and investors seeking alternatives to private mortgage insurance; |
• | the implementation of the Basel III Capital Accord, which may discourage the use of private mortgage insurance; |
• | management of risk in our investment portfolio; |
• | fluctuations in interest rates; |
• | inadequacy of the premiums we charge to compensate for our losses incurred; |
• | dependence on management team and qualified personnel; |
• | disturbance to our information technology systems; |
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• | change in our customers' capital requirements discouraging the use of mortgage insurance; |
• | declines in the value of borrowers' homes; |
• | limited availability of capital or reinsurance; |
• | unanticipated claims arise under and risks associated with our contract underwriting program; |
• | industry practice that loss reserves are established only upon a loan default; |
• | disruption in mortgage loan servicing; |
• | risk of future legal proceedings; |
• | customers' technological demands; |
• | our non-U.S. operations becoming subject to U.S. Federal income taxation; |
• | becoming considered a passive foreign investment company for U.S. Federal income tax purposes; and |
• | potential restrictions on the ability of our insurance subsidiaries to pay dividends. |
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Annual Report are based on information available to us on the date of this Annual 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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Unless the context otherwise indicates or requires, the terms "we," "our," "us," "Essent," and the "Company," as used in this Annual Report, refer to Essent Group Ltd. and its directly and indirectly owned subsidiaries, including our primary operating subsidiaries, Essent Guaranty, Inc. and Essent Reinsurance Ltd., as a combined entity, except where otherwise stated or where it is clear that the terms mean only Essent Group Ltd. exclusive of its subsidiaries.
PART I
ITEM 1. BUSINESS
Overview
We are an established and growing private mortgage insurance company. Private mortgage insurance plays a critical role in the U.S. housing finance system. Essent and other private mortgage insurers provide credit protection to lenders and mortgage investors by covering a portion of the unpaid principal balance of a mortgage and certain related expenses in the event of a default. In doing so, we provide private capital to mitigate mortgage credit risk, allowing lenders to make additional mortgage financing available to prospective homeowners.
Private mortgage insurance helps extend affordable home ownership by facilitating the sale of low down payment loans into the secondary market. The GSEs, which are U.S. Federal government-sponsored enterprises, purchase residential mortgages from banks and other lenders and guaranty mortgage-backed securities that are offered to investors in the secondary mortgage market. The GSEs are restricted by their charters from purchasing or guaranteeing low down payment loans, defined as loans with less than a 20% down payment, that are not covered by certain credit protections. Private mortgage insurance satisfies the GSEs' credit protection requirements for low down payment loans, supporting a robust secondary mortgage market in the United States.
Our primary U.S. mortgage insurance subsidiary, Essent Guaranty, Inc., which we refer to as "Essent Guaranty," received its certificate of authority from the Pennsylvania Insurance Department in July 2009. We subsequently acquired our mortgage insurance platform from a former private mortgage insurance industry participant and, in 2010, became the first private mortgage insurer to be approved since 1995 by Fannie Mae and Freddie Mac, which we refer to collectively as the GSEs. We are licensed to write coverage in all 50 states and the District of Columbia.
For the years ended December 31, 2019, 2018 and 2017, we generated new insurance written, or NIW, of approximately $63.6 billion, $47.5 billion and $43.9 billion, respectively. As of December 31, 2019, we had approximately $164.0 billion of insurance in force. Our top ten customers represented approximately 42.8%, 43.5% and 45.8% of our NIW on a flow basis for the years ended December 31, 2019, 2018 and 2017, respectively. The financial strength ratings of Essent Guaranty are A3 with a stable outlook by Moody's Investors Service ("Moody's"), BBB+ with a stable outlook by S&P Global Ratings ("S&P") and A (Excellent) with a stable outlook by A.M. Best.
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 December 31, 2019, Essent Re provided insurance or reinsurance relating to GSE risk share and other reinsurance transactions covering approximately $895.4 million of risk. Essent Re also reinsures 25% of Essent Guaranty, Inc.'s NIW under a quota share reinsurance agreement. The financial strength ratings of Essent Re are BBB+ with a stable outlook by S&P and A (Excellent) with a stable outlook by A.M. Best.
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 of 387 employees as of December 31, 2019.
Our Industry
U.S. Mortgage Market
The U.S. residential mortgage market is one of the largest in the world, with over $11.1 trillion of debt outstanding as of September 30, 2019, and includes a range of private and government-sponsored participants. Private industry participants include mortgage banks, mortgage brokers, commercial, regional and investment banks, savings institutions, credit unions, REITs, mortgage insurers and other financial institutions. Public participants include government agencies such as the Federal Housing Administration, or FHA, the Veterans Administration, or VA, the U.S. Department of Agriculture Rural Development program and the Government National Mortgage Association, or Ginnie Mae, as well as government-sponsored enterprises such as Fannie Mae and Freddie Mac. The overall U.S. residential mortgage market encompasses both primary and secondary
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markets. The primary market consists of lenders originating home loans to borrowers, and includes loans made to support home purchases, which are referred to as purchase originations, and loans made to refinance existing mortgages, which are referred to as refinancing originations. The secondary market includes institutions buying and selling mortgages in the form of whole loans or securitized assets, such as mortgage-backed securities.
GSEs
The GSEs are the largest participants in the secondary mortgage market, buying residential mortgages from banks and other primary lenders as part of their government mandate to provide liquidity and stability in the U.S. housing finance system. According to the Federal Reserve, the GSEs held or guaranteed approximately $4.9 trillion, or 44.1%, of total U.S. residential mortgage debt outstanding as of September 30, 2019. Their charters generally prohibit the GSEs from purchasing a low down payment loan unless that loan is insured by a GSE-approved mortgage insurer, the mortgage seller retains at least a 10% participation in the loan or the seller agrees to repurchase or replace the loan in the event of a default. Historically, private mortgage insurance has been the preferred method utilized to meet this GSE charter requirement. As a result, the private mortgage insurance industry in the United States is driven in large part by the business practices and mortgage insurance requirements of the GSEs.
Mortgage Insurance
Mortgage insurance plays a critical role in the U.S. residential mortgage market by facilitating secondary market sales and by providing lenders and investors a means to diversify their exposures and mitigate mortgage credit risk. Mortgage insurance is provided by both private companies, such as Essent, and government agencies, such as the FHA and the VA. From 2000 through 2019, an average of 24.7% of total annual mortgage origination volume utilized mortgage insurance.
Mortgage insurance industry volumes are influenced by total mortgage originations, and the mix between purchase and refinancing originations. Historically, mortgage insurance utilization has been meaningfully higher in purchase originations compared to refinancing originations. In 2019, total U.S. residential mortgage origination volume was estimated at $2.07 trillion, comprised of $1.27 trillion of purchase originations and $796 billion of refinancing originations. In the years immediately following the 2007-2008 financial crisis, historically low interest rates and special refinance programs, such as the Home Affordable Refinance Program, or HARP, caused refinancing volume to significantly outpace purchase originations. Purchase originations, however, have accounted for an increasing percentage of the overall mortgage market in recent years as favorable housing market fundamentals have stimulated growth in home buying activity and a general trend over the past 10 years of rising interest rates has slowed refinancing volume over that period.
The following graph provides detail on trends in total residential mortgage originations and the breakdown of the market between purchase and refinancing volume.
Residential Purchase vs. Refinancing Mortgage Originations ($ in billions)
_______________________________________________________________________________
Source: Mortgage Bankers Association
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Financial Crisis and Recovery
The severe economic and housing market dislocation experienced as a result of the 2007-2008 financial crisis had a profound impact on our industry. Incumbent insurers experienced record high claims activity and sustained significant financial losses, resulting in depleted capital positions. Three private mortgage insurers who wrote more than $125 billion of NIW in 2007, accounting for approximately 36% of total private mortgage insurance market NIW that year, have since exited the market, and several other insurers were forced, in the years following the crisis, to raise capital to repair their balance sheets and remain in operation. Although certain remaining incumbent insurers continue to deal with legacy, pre-crisis, challenges, improved housing market fundamentals and the high credit quality of post-crisis new business have, and we expect will continue to, support improved growth and profitability in the private mortgage insurance sector.
Prior to the financial crisis, private mortgage insurers accounted for the majority of the insured mortgage origination market. In 2007, private mortgage insurance represented 77.3% of insured mortgages and covered 15.5% of the total residential mortgage origination volume. As a result of the 2007-2008 financial crisis, government agencies began to insure an increasing percentage of the market as incumbent private insurers came under significant financial stress. By 2009, private mortgage insurance represented only 15.4% of the insured mortgage market and covered 4.1% of the total residential mortgage origination volume.
The private mortgage insurance industry, however, has more than doubled its share of the total insured market since 2009, leading to higher private mortgage insurance penetration of the total mortgage origination market. In 2019, private mortgage insurance increased to an estimated 46% of the total insured market and covered 19% of the total mortgage origination volume. These gains have been driven in part by the improved financial position of incumbent insurers, the influx of private capital into the sector to support post-crisis entrants such as Essent, and aggregate increase since 2010 in the mortgage insurance premium rates and upfront fees charged for FHA insurance.
The charts below detail the relative share of the insured mortgage market covered by public and private participants, and historical NIW trends in the mortgage insurance market and private mortgage insurance penetration rates, which represents private mortgage insurance NIW to total U.S. residential mortgage origination volume.
Relative Share of Private and Public Mortgage Insurance
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Source: Inside Mortgage Finance
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Private mortgage insurance NIW ($ in billions)
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Source: Inside Mortgage Finance, except for total originations for the purpose of calculating private mortgage insurance penetration, which is based on Mortgage Bankers Association. For 2011 through 2019, private mortgage insurance penetration includes private mortgage insurance NIW originated under HARP.
Competition
The private mortgage insurance industry is highly competitive. Private mortgage insurers generally compete on the basis of pricing, customer relationships, underwriting guidelines, terms and conditions, financial strength, reputation, the strength of management and field organizations, the effective use of technology, and innovation in the delivery and servicing of insurance products. The private mortgage insurance industry currently consists of six active private mortgage insurers: Essent Guaranty, Arch Mortgage Insurance Company, Genworth Financial, Inc., Mortgage Guaranty Insurance Corporation, National Mortgage Insurance Corporation and Radian Guaranty Inc.
We and other private mortgage insurers compete directly with Federal and state governmental and quasi-governmental agencies that provide mortgage insurance, principally, the FHA and, to a lesser degree, the VA. As discussed above, the FHA's share of the mortgage insurance market increased as a result of the 2007-2008 financial crisis, and since 2009 has decreased as the private mortgage insurance industry has recovered and FHA premiums have increased in the aggregate. In addition to competition from the FHA and the VA, we and other private mortgage insurers currently face limited competition from state-sponsored mortgage insurance funds in several states, including California and New York. From time to time, other state legislatures and agencies consider expanding the authority of their state governments to insure residential mortgages.
Our industry also competes with products designed to eliminate the need for private mortgage insurance, such as "piggyback loans," which combine a first lien loan with a second lien in order to meet the 80% loan-to-value threshold required for sale to the GSEs without certain credit protections. In addition, we compete with investors willing to hold credit risk on their own balance sheets without credit enhancement and, in some markets, with alternative forms of credit enhancement such as structured finance products and derivatives.
Our Products and Services
Mortgage Insurance
In general, there are two principal types of private mortgage insurance, primary and pool.
Primary Mortgage Insurance
Primary mortgage insurance provides protection on individual loans at specified coverage percentages. Primary mortgage insurance is typically offered to customers on individual loans at the time of origination on a flow (i.e., loan-by-loan) basis, but can also be written in bulk transactions (in which each loan in a portfolio of loans is insured in a single transaction). A substantial majority of our policies are primary mortgage insurance.
Customers that purchase our primary mortgage insurance select a specific coverage level for each insured loan. To be eligible for purchase by a GSE, a low down payment loan must comply with the coverage percentages established by that GSE. For loans not sold to the GSEs, the customer determines its desired coverage percentage. Generally, our risk across all policies written is approximately 25% of the underlying primary insurance in force, but may vary from policy to policy between 6% and 35% coverage.
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We file our premium rates with the insurance departments of the 50 states and the District of Columbia as required. Premium rates cannot be changed after the issuance of coverage and premiums applicable to an individual loan are based on a broad spectrum of risk variables including coverage percentages, loan-to-value, or LTV, loan and property attributes, and borrower risk characteristics. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Net Premiums Written and Earned" and "—Key Performance Indicators—Average Net Premium Rate."
Premium payments for primary mortgage insurance coverage are typically made by the borrower. Mortgage insurance paid directly by the borrower is referred to as borrower-paid mortgage insurance, or "BPMI." If the borrower is not required to pay the premium, then the premium is paid by the lender, who may recover the premium through an increase in the note rate on the mortgage or higher origination fees. Loans for which premiums are paid by the lender are referred to as lender-paid mortgage insurance, or "LPMI." In either case, the payment of premium to us generally is the legal responsibility of the insured.
Premiums are generally calculated as a percentage of the original principal balance and may be paid as follows:
•monthly, where premiums are collected on a monthly basis over the life of the policy;
•in a single payment, where the entire premium is paid upfront at the time the mortgage loan is originated;
•annually, where premiums are paid in advance for the subsequent 12 months; or
•on a "split" basis, where an initial premium is paid upfront along with subsequent monthly payments.
As of December 31, 2019, substantially all of our policies are monthly or single premium policies.
In general, we may not terminate mortgage insurance coverage except in the event there is non-payment of premiums or certain material violations of our mortgage insurance policies. The insured may cancel mortgage insurance coverage at any time at their option or upon mortgage repayment. GSE guidelines generally provide that a borrower meeting certain conditions may require the mortgage servicer to cancel mortgage insurance coverage upon the borrower's request when the principal balance of the loan is 80% or less of the property's current value. The Homeowners Protection Act of 1998, or HOPA, also requires the automatic termination of BPMI on most loans when the LTV ratio, based upon the original property value and amortized loan balance, reaches 78%, and provides for cancellation of BPMI upon a borrower's request when the LTV ratio, based on the current value of the property, reaches 80%, upon satisfaction of the conditions set forth in HOPA. See "—Regulation—Federal Mortgage—Related Laws and Regulations—Homeowners Protection Act of 1988" below. In addition, some states impose their own mortgage insurance notice and cancellation requirements on mortgage loan servicers.
The GSEs have implemented certain guidelines that may provide more flexibility to certain borrowers to cancel mortgage insurance than is required for such loans under HOPA. For example, borrowers may request termination of mortgage insurance based on the current value of the property if certain loan-to-value and seasoning requirements are met and the borrower has an acceptable payment history. For loans seasoned between two and five years, the loan-to-value ratio must be 75% or less, and for loans seasoned more than five years, the loan-to-value ratio must be 80% or less. If the borrower has made substantial improvements to the property, the GSEs allow for cancellation once the loan-to-value ratio reaches 80% or less with no minimum seasoning requirement. In addition, GSE servicing guidelines currently require servicers to cancel BPMI on second homes with a 78% loan-to-value ratio, whereas HOPA applies to principal residences and excludes second homes.
Pool Insurance
Pool insurance is typically used to provide additional credit enhancement for certain secondary market and other mortgage transactions. Pool insurance generally covers the excess of the loss on a defaulted mortgage loan that exceeds the claim payment under the primary coverage, if such loan has primary coverage, as well as the total loss on a defaulted mortgage loan that did not have primary coverage. Pool insurance may have a stated aggregate loss limit for a pool of loans and may also have a deductible under which no losses are paid by the insurer until losses on the pool of loans exceed the deductible. In another variation, generally referred to as modified pool insurance, policies are structured to include an exposure limit for each individual loan as well as an aggregate loss limit or a deductible for the entire pool.
Master Policy
We issue a master policy to each customer approved as a counterparty by our risk department before accepting their applications for insurance. The master policy, along with its related endorsements and certificates, sets forth the general terms and conditions of our mortgage insurance coverage, including loan eligibility requirements, coverage terms, policy
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administration, premium payment obligations, exclusions or reductions in coverage, conditions precedent to payment of a claim, claim payment requirements, subrogation and other matters attendant to our coverage.
Mortgage insurance master policies generally protect mortgage insurers from the risk of material misrepresentations and fraud in the origination of an insured loan by establishing the right to rescind coverage in such event. Pursuant to the current minimum standards for mortgage insurer master policies, which we refer to as the "Rescission Relief Principles," instituted by the GSEs and the Federal Housing Finance Agency, or FHFA, master policies provide rescission relief for loans that remain current up to 36 months after origination and that have not experienced more than two late payments of 30 days or more and have never been 60 days late, and are permitted to provide rescission relief after 12 payments provided the mortgage insurer can independently validate the representations for which it provides rescission relief. The current Rescission Relief Principles require that the master policies reserve rescission rights with respect to fraud committed by the insured or those under its control and certain patterns of fraud.
The GSEs and the FHFA have adopted revised Rescission Relief Principles which require mortgage insurers to implement conforming master policies in 2020. Effective March 1, 2020, we will implement a new master policy that will implement the revised Rescission Relief Principles. The new master policy will add requirements that rescission relief be provided for loans that are current after 60 payments and permit provision of rescission relief concurrent with independent validation of representations, including validation by use of duly approved automated tools. The new master policy will also reserve rescission rights with respect to fraud committed by any party in connection with the origination or closing of a loan or application for mortgage insurance (provided, however, that the exclusion for fraud by borrowers may be sunset after the borrower has made 12 timely payments) and certain patterns of fraud or data inaccuracies and permit the mortgage insurer to offer certain alternatives to rescission. See "Risk Factors—Risks Relating to Our Business—Changes in the business practices of the GSEs, including actions or decisions to decrease or discontinue the use of mortgage insurance or changes in the GSEs' eligibility requirements for mortgage insurers, could reduce our revenues or adversely affect our profitability and returns" elsewhere in this Annual Report and "—Regulation—Direct U.S. Regulation—GSE Qualified Mortgage Insurer Requirements" below.
Contract Underwriting
In addition to offering mortgage insurance, we provide contract underwriting services on a limited basis. As a part of these services, we assess whether data provided by the customer relating to a mortgage application complies with the customer's loan underwriting guidelines. These services are provided for loans that require private mortgage insurance, as well as for loans that do not require private mortgage insurance. Under the terms of our contract underwriting agreements with customers and subject to contractual limitations on liability, we agree to indemnify the customer against losses incurred in the event that we make an underwriting error which materially restricts or impairs the saleability of a loan, results in a material reduction in the value of a loan or results in the customer being required to repurchase a loan. The indemnification may be in the form of monetary or other remedies, subject to per loan and annual limitations. See "Risk Factors—Risks Relating to Our Business—We face risks associated with our contract underwriting business."
Bermuda-Based Insurance and Reinsurance
We offer mortgage-related insurance and reinsurance through Essent Re, a Class 3A insurance company licensed pursuant to Section 4 of the Bermuda Insurance Act 1978. Essent Re provides insurance or reinsurance relating to the GSE risk share and other reinsurance transactions. Essent Re also reinsures 25% of Essent Guaranty's NIW under a quota share reinsurance agreement. Essent Re also provides underwriting consulting services to third-party reinsurers through its wholly-owned subsidiary, Essent Agency (Bermuda) Ltd.
Our Mortgage Insurance Portfolio
All of our policies in force were written since May 2010. The following data presents information on our primary mortgage insurance portfolio for policies written by Essent Guaranty.
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Insurance in Force by Policy Year
The following table sets forth our insurance in force, or IIF, as of December 31, 2019, by year of policy origination. IIF refers to the unpaid principal balance of mortgage loans that we insure.
($ in thousands) | $ | % | |||||
2019 | $ | 59,475,337 | 36.3 | % | |||
2018 | 35,318,382 | 21.5 | |||||
2017 | 29,606,165 | 18.1 | |||||
2016 | 19,022,616 | 11.6 | |||||
2015 | 9,896,050 | 6.0 | |||||
2014 and prior | 10,687,303 | 6.5 | |||||
$ | 164,005,853 | 100.0 | % | ||||
Portfolio Characteristics
The following tables reflect our IIF and risk in force, or RIF, amounts by borrower credit scores at origination, LTV at origination, and IIF by loan type and amortization, each as of December 31, 2019 and 2018. RIF refers to the product of the coverage percentage applied to the unpaid principal balance of mortgage loans that we insure.
Portfolio by Credit Score
December 31, | ||||||||||||||
IIF by FICO score ($ in thousands) | 2019 | 2018 | ||||||||||||
>=760 | $ | 68,123,523 | 41.5 | % | $ | 59,249,659 | 43.0 | % | ||||||
740-759 | 27,886,603 | 17.0 | 22,843,145 | 16.6 | ||||||||||
720-739 | 24,069,139 | 14.7 | 19,898,885 | 14.5 | ||||||||||
700-719 | 19,183,219 | 11.7 | 15,714,206 | 11.4 | ||||||||||
680-699 | 13,713,164 | 8.4 | 11,299,829 | 8.2 | ||||||||||
<=679 | 11,030,205 | 6.7 | 8,715,062 | 6.3 | ||||||||||
Total | $ | 164,005,853 | 100.0 | % | $ | 137,720,786 | 100.0 | % | ||||||
December 31, | ||||||||||||||
Gross RIF (1) by FICO score ($ in thousands) | 2019 | 2018 | ||||||||||||
>=760 | $ | 17,082,683 | 41.3 | % | $ | 14,789,783 | 42.9 | % | ||||||
740-759 | 7,056,654 | 17.0 | 5,736,432 | 16.6 | ||||||||||
720-739 | 6,150,334 | 14.9 | 5,036,063 | 14.6 | ||||||||||
700-719 | 4,873,597 | 11.8 | 3,943,925 | 11.4 | ||||||||||
680-699 | 3,491,755 | 8.4 | 2,846,297 | 8.3 | ||||||||||
<=679 | 2,747,927 | 6.6 | 2,129,948 | 6.2 | ||||||||||
Total | $ | 41,402,950 | 100.0 | % | $ | 34,482,448 | 100.0 | % | ||||||
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(1) | Gross RIF includes risk ceded under third-party reinsurance. |
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Portfolio by LTV
December 31, | ||||||||||||||
IIF by LTV ($ in thousands) | 2019 | 2018 | ||||||||||||
85.00% and below | $ | 17,128,008 | 10.5 | % | $ | 15,123,578 | 11.0 | % | ||||||
85.01% to 90.00% | 46,771,386 | 28.5 | 41,020,839 | 29.8 | ||||||||||
90.01% to 95.00% | 76,611,494 | 46.7 | 66,028,990 | 47.9 | ||||||||||
95.01% and above | 23,494,965 | 14.3 | 15,547,379 | 11.3 | ||||||||||
Total | $ | 164,005,853 | 100.0 | % | $ | 137,720,786 | 100.0 | % | ||||||
December 31, | ||||||||||||||
Gross RIF (1) by LTV ($ in thousands) | 2019 | 2018 | ||||||||||||
85.00% and below | $ | 1,977,361 | 4.8 | % | $ | 1,741,823 | 5.1 | % | ||||||
85.01% to 90.00% | 11,249,383 | 27.2 | 9,819,171 | 28.5 | ||||||||||
90.01% to 95.00% | 21,981,598 | 53.1 | 18,912,421 | 54.8 | ||||||||||
95.01% and above | 6,194,608 | 14.9 | 4,009,033 | 11.6 | ||||||||||
Total | $ | 41,402,950 | 100.0 | % | $ | 34,482,448 | 100.0 | % | ||||||
_______________________________________________________________________________
(1) | Gross RIF includes risk ceded under third-party reinsurance. |
Portfolio by Loan Amortization Period
December 31, | ||||||||||||||
IIF by Loan Amortization Period ($ in thousands) | 2019 | 2018 | ||||||||||||
FRM 30 years and higher | $ | 154,905,519 | 94.5 | % | $ | 128,083,429 | 93.0 | % | ||||||
FRM 20-25 years | 2,854,560 | 1.7 | 2,965,782 | 2.2 | ||||||||||
FRM 15 years | 3,300,715 | 2.0 | 3,445,447 | 2.5 | ||||||||||
ARM 5 years and higher | 2,945,059 | 1.8 | 3,226,128 | 2.3 | ||||||||||
Total | $ | 164,005,853 | 100.0 | % | $ | 137,720,786 | 100.0 | % | ||||||
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Portfolio by Geography
Our in force portfolio is geographically diverse. As of December 31, 2019, only three states accounted for greater than 5% of our portfolio and no single metropolitan statistical area accounted for greater than 3% of our portfolio, as measured by either IIF or Gross RIF. The following tables provide detail of the IIF and Gross RIF in our top ten most concentrated states and our top ten most concentrated U.S. metropolitan statistical areas as of December 31, 2019 and 2018.
Top Ten States
December 31, | ||||||
2019 | 2018 | |||||
IIF by State | ||||||
CA | 10.0 | % | 9.1 | % | ||
TX | 8.6 | 7.9 | ||||
FL | 7.9 | 7.4 | ||||
WA | 4.4 | 4.7 | ||||
CO | 3.7 | 3.4 | ||||
IL | 3.7 | 3.8 | ||||
NJ | 3.6 | 3.8 | ||||
OH | 3.4 | 3.3 | ||||
NC | 3.3 | 3.5 | ||||
AZ | 3.3 | 3.1 | ||||
All Others | 48.1 | 50.0 | ||||
Total | 100.0 | % | 100.0 | % | ||
December 31, | |||||
2019 | 2018 | ||||
Gross RIF by State | |||||
CA | 9.8 | % | 8.9 | % | |
TX | 8.9 | 8.1 | |||
FL | 8.0 | 7.5 | |||
WA | 4.4 | 4.7 | |||
CO | 3.6 | 3.3 | |||
NJ | 3.6 | 3.7 | |||
IL | 3.5 | 3.8 | |||
OH | 3.3 | 3.3 | |||
NC | 3.3 | 3.5 | |||
GA | 3.3 | 3.5 | |||
All Others | 48.3 | 49.7 | |||
Total | 100.0 | % | 100.0 | % | |
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Top Ten Metropolitan Statistical Areas
December 31, | ||||||
2019 | 2018 | |||||
IIF by Metropolitan Statistical Area | ||||||
Phoenix-Mesa-Chandler, AZ | 2.7 | % | 2.6 | % | ||
Washington-Arlington-Alexandria, DC-VA-MD-WV | 2.5 | 2.5 | ||||
Chicago-Naperville-Evanston, IL | 2.5 | 2.6 | ||||
Houston-The Woodlands-Sugar Land, TX | 2.4 | 2.2 | ||||
Atlanta-Sandy Springs-Alpharetta, GA | 2.4 | 2.5 | ||||
Denver-Aurora-Lakewood, CO | 2.3 | 2.1 | ||||
Minneapolis-St. Paul-Bloomington, MN-WI | 2.3 | 2.4 | ||||
Los Angeles-Long Beach-Glendale, CA | 2.0 | 1.9 | ||||
Seattle-Bellevue-Kent, WA | 2.0 | 2.2 | ||||
Dallas-Plano-Irving, TX | 2.0 | 1.8 | ||||
All Others | 76.9 | 77.2 | ||||
Total | 100.0 | % | 100.0 | % | ||
December 31, | ||||||
2019 | 2018 | |||||
Gross RIF by Metropolitan Statistical Area | ||||||
Phoenix-Mesa-Chandler, AZ | 2.7 | % | 2.5 | % | ||
Washington-Arlington-Alexandria, DC-VA-MD-WV | 2.5 | 2.4 | ||||
Houston-The Woodlands-Sugar Land, TX | 2.5 | 2.3 | ||||
Atlanta-Sandy Springs-Alpharetta, GA | 2.4 | 2.6 | ||||
Chicago-Naperville-Evanston, IL | 2.3 | 2.5 | ||||
Minneapolis-St. Paul-Bloomington, MN-WI | 2.3 | 2.4 | ||||
Denver-Aurora-Lakewood, CO | 2.3 | 2.1 | ||||
Dallas-Plano-Irving, TX | 2.0 | 1.8 | ||||
Seattle-Bellevue-Kent, WA | 2.0 | 2.2 | ||||
Los Angeles-Long Beach-Glendale, CA | 2.0 | 1.8 | ||||
All Others | 77.0 | 77.4 | ||||
Total | 100.0 | % | 100.0 | % | ||
Customers
Our customers consist of originators of residential mortgage loans, such as regulated depository institutions, mortgage banks, credit unions and other lenders. We classify our customers into two broad categories and target our marketing efforts based on the customer's operating model and whether decisions to select a mortgage insurance provider are made centrally, or at the field or customer branch level:
• | Centralized—Centralized customers make decisions regarding the placement and allocation of mortgage insurance among their approved private mortgage insurers at the corporate level. Generally, these customers consist of the larger, national mortgage originators which originate loans across multiple states, but there are several regional and mid-size lenders which use this method as well. |
• | Decentralized—Decentralized customers make mortgage insurance purchasing decisions at the field or branch level. These customers generally are more prevalent with regional and mid-size lenders which originate mortgages in a smaller geographic footprint, but are also seen, on a limited basis, among some national lenders. |
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We seek to maintain strong institutional relationships with all our customers. We provide them with ongoing risk, sales, training, service and product development support. We maintain regular and ongoing dialogue with our customers to develop an in-depth understanding of their strategies and needs, to share market perspectives and industry best practices, and to offer tailored solutions and training where necessary on a local level.
Our top ten customers generated 42.8% of our NIW on a flow basis during the year ended December 31, 2019, compared to 43.5% and 45.8% for the years ended December 31, 2018 and 2017, respectively. For the year ended December 31, 2019, one customer, Quicken Loans Inc., exceeded 10% of our consolidated revenue. The loss of any of our larger customers could have a material adverse impact on us and our business. See "Risk Factors—Risks Relating to Our Business—Our revenues, profitability and returns would decline if we lose a significant customer."
Sales and Marketing
Our sales and marketing efforts are designed to help us establish and maintain in-depth, quality customer relationships. We organize our sales and marketing efforts based on our centralized and decentralized customer segmentation, giving additional consideration to a customer's geographic location and whether its lending footprint is national or regional in nature.
We emphasize a collaborative approach with our customers that includes a number of educational offerings and joint product development and marketing initiatives:
• | Regular Portfolio and Risk Management Reviews. We conduct periodic insured mortgage portfolio reviews with customers, including detailed loan performance metrics. |
• | Joint Product Development and Marketing Initiatives. We emphasize the development of specialized products and programs that provide increased opportunities for customers and address targeted segments of the market. We recognize the value in developing new products collaboratively with our customers. We also work closely with customers to understand their strategic priorities and business objectives while identifying opportunities that will enhance and complement the customers' marketing activities. |
• | Customer Service, Support and Trainings. We have an experienced and knowledgeable customer services team that strives to provide premier service to our customers. We dedicate service representatives to our customers so they can establish relationships with their customer peers and become thoroughly familiar with unique customer systems, processes and service needs. We have developed mortgage industry training courses that are offered to our customers as a value added service. We have an experienced team that maintains the course materials so that they are relevant and current and who facilitate training sessions for our customers. |
We have an experienced team of national and regional account managers strategically deployed nationwide that markets our mortgage insurance products and support services.
We assign national account managers to each of the national lenders, providing a point of communication between us and the customer's senior management team. These professionals are responsible for the development and execution of sales and marketing strategies aimed at growing customer volumes and ensuring each customer's needs are understood and helping them to pursue their strategies. The national account managers also coordinate the direct communication of customers with our underwriting and risk management groups to provide a continual flow of information between the organizations.
We also have regional account managers and dedicated support staff operating in defined geographic regions. Our regional account managers play a similar role to our national account managers with respect to customer relationship management, education and customer training, serving as our primary point of contact for small and mid-sized regional lenders operating in a given territory. Regional account managers also support our national account team by assisting with our efforts to directly market and service the branch locations of certain national lenders.
We support our national and regional sales force, and improve their effectiveness in acquiring new customers, by raising our brand awareness through advertising and marketing campaigns, website enhancements, electronic communication strategies and sponsorship of industry and educational events.
We continue to build our sales force by hiring qualified mortgage professionals who generally have well-established relationships with industry-leading lenders and significant experience in both mortgage insurance and mortgage lending. Our approach is reflected in and supported by our compensation structure, pursuant to which we have successfully implemented a
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non-commission-based structure that includes an equity ownership program, which we believe aligns their efforts with our long-term corporate objectives, including providing better customer service and better risk selection.
Information Technology and Cybersecurity
We have a highly automated business that relies on information technology. We accept insurance applications through electronic submission and issue electronic insurance approvals. In order to facilitate this process, we establish direct connections to the origination and servicing systems of our customers and servicers, which may require a significant upfront investment. We also provide our customers secure access to our web-based mortgage insurance ordering and servicing systems to facilitate transactions.
We continue to upgrade and enhance our systems and technology, including:
• | investing in new customer-facing technology that enables our customers to transact business faster and easier, whether over an internet browser or through direct system-to-system interfacing with our customers' loan origination and servicing systems; |
• | integrating our platform with third-party technology providers used by our customers in their loan origination process and for ordering mortgage insurance; |
• | supporting a business rules engine that automatically enforces our eligibility guidelines and pricing rules at the time the mortgage insurance application is submitted; and |
• | implementing advanced business process management software that focuses on improving our underwriting productivity and that may also be used to improve our quality assurance and loss management functions. |
We believe that our technology, together with our information technology team, greatly enhances our operating efficiency and creates competitive advantages. Our team is experienced in large-scale project delivery, including mortgage insurance administration systems and the development of web-enabled servicing capabilities. Technology costs are managed by standardizing our technology infrastructure, consolidating application systems, managing project execution risks and using contract employees as needed.
As for all institutions involved in financial services, information security represents a significant operational risk. To mitigate this risk, Essent has developed and manages comprehensive information security program dedicated to protecting data entrusted to us by our clients as well as our own proprietary corporate information. Essent’s approach is a considered a defense-in-depth strategy, with multiple tiers of security controls and monitoring. Essent has developed our security program using National Institute of Standards and Technology Cybersecurity Framework (the “NIST”) as our benchmark to manage cybersecurity-related risks. Based on NIST, we have designed our security services, including but not limited to, Application Security, Vulnerability Management and Data Protection, Threat Detection and Incident Response. We test our programs effectiveness and readiness through table top exercises, regular external and internal penetration testing, “Red Team” testing and other means to ensure our program is effectively meeting our program goals as designed.
Our commitment to our information security program extends across the organization. We have an information security committee comprised of cross-departmental company executives and IT leaders to ensure that we maintain strong governance mechanisms and to ensure compliance with our security policies and procedures. Additionally, our board of directors, led by the board’s technology, innovation and operations committee, actively oversees our information security program, with Essent's management providing that committee with regular updates and reporting on our IT strategy, including information security strategies and initiatives, event preparedness and incremental improvement efforts. Although our information security program is designed to attempt to prevent, detect and respond to unauthorized use or disclosure of confidential information, including non-public personal information, there can be no assurance that such use or disclosure will not occur. See “Risk Factors—Risks Relating to Our Business—The security of our information technology systems may be compromised and confidential information, including non-public personal information that we maintain, could be improperly disclosed."
Underwriting
We have established underwriting guidelines that we believe protect our balance sheet and result in the insurance of high quality business. Most applications for mortgage insurance are submitted to us electronically, and we rely upon the lender's representations and warranties that the data submitted is true and correct when making our insurance decision. Our underwriting guidelines incorporate credit eligibility requirements that, among other things, restrict our coverage to mortgages
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that meet our requirements with respect to borrower FICO scores, maximum debt-to-income levels, maximum LTV ratios and documentation requirements. Our underwriting guidelines also limit the coverage we provide for mortgages made with certain high risk features, including those for cash-out refinance, second homes or investment properties.
We regularly seek to enhance our underwriting guidelines through extensive data gathering, detailed loan level risk analysis, and assessments of trends in key macroeconomic factors such as housing prices, interest rates and employment. We utilize proprietary models that enable us to assess individual loan risks with a high degree of granularity and set pricing for our policies within a risk-adjusted return framework. See "—Risk Management" below. We have adopted a balanced underwriting approach, which considers our risk analysis, return objectives and market factors.
At present, our underwriting guidelines are broadly consistent with those of the GSEs. Many of our customers use the GSEs' automated loan underwriting systems, Desktop Underwriter® and Loan Prospector®, for making credit determinations. We accept the underwriting decisions made by the GSEs' underwriting systems, subject to certain additional limitations and requirements. We monitor the GSEs for updates to these systems, and may engage in a deeper review for the more substantive releases. Our reviews may result in the maintenance or implementation of additional eligibility requirements. In addition, the performance results of loans scored via automated underwriting systems are monitored within our portfolio management protocols.
Our primary mortgage insurance policies are issued through one of two programs:
• | Delegated Underwriting. We delegate to eligible customers the ability to underwrite the loans based on agreed-upon underwriting guidelines. To perform delegated underwriting, customers must be approved by our risk management group. See "—Risk Management—Loan Life Cycle Risk Management" below. Some customers prefer to assume underwriting responsibilities because it is more efficient within their loan origination process. Because this delegated underwriting is performed by third parties, we regularly perform quality assurance reviews on a sample of delegated loans to assess compliance with our guidelines. As of December 31, 2019, approximately 62% of our insurance in force had been originated on a delegated basis, compared to 62% as of December 31, 2018. See "Risk Factors—Risks Relating to Our Business—Our delegated underwriting program may subject our mortgage insurance business to unanticipated claims." |
• | Non-Delegated Underwriting. Customers who choose not to participate in, or do not qualify for, our delegated underwriting program submit loan files to us so that we may reach a decision as to whether we will insure the loan. In addition, customers participating in our delegated underwriting program may choose not to use their delegated authority, and instead may submit loans for our independent underwriting. Some customers prefer our non-delegated program because we assume underwriting responsibility and will not rescind coverage if we make an underwriting error, subject to the terms of our master policy. We seek to ensure that our employees properly underwrite our loans through quality assurance sampling, loan performance monitoring and training. As of December 31, 2019, approximately 38% of our insurance in force had been originated on a non-delegated basis, compared to 38% as of December 31, 2018. |
We maintain primary underwriting centers in Radnor, Pennsylvania, Winston-Salem, North Carolina and Irvine, California. We believe that the geographical distribution of our underwriting staff allows us to make underwriting determinations across different time zones and to best serve customers across the United States. Although our employees conduct the substantial majority of our non-delegated underwriting, we engage underwriters on an outsourced basis from time to time in order to provide temporary underwriting capacity.
Risk Management
We have established risk management controls throughout our organization and have a risk management framework that we believe reduces the volatility of our financial results and capital position. The risk committee of our board of directors has formal oversight responsibility for the risks associated with our business and is supported by a management risk committee, chaired by our Chief Risk Officer, comprised of senior members of our executive management team.
We believe that our risk management framework encompasses all of the major risks we face, including our mortgage insurance portfolio, investment risk, liquidity risk and regulatory compliance risk, among others. The majority of our risk analysis is directed toward the risks embedded in our mortgage insurance portfolio. As such, we have established a risk management approach that analyzes the risk across the full life cycle of a mortgage, into what we term the "loan life cycle."
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Loan Life Cycle Risk Management
We generally break down the loan life cycle risk management process into three components:
• | Customer qualification—customer review and approval process; |
• | Policy acquisition—loan underwriting, valuation and risk approval; and |
• | Portfolio management—loan performance and lender monitoring with continuous oversight through the settlement of a claim. |
Customer qualification involves a process in which we diligence a potential customer's financial resources, operational practices, management experience and track record of originating quality mortgages prior to formalizing a customer relationship. We leverage the experience of our management team to pre-screen lenders prior to formally engaging and performing a lender qualification review. Once engaged, our counterparty risk management team conducts a lender qualification review with oversight from the management risk committee. Approved lenders are subject to clear parameters regarding underwriting delegation status, credit guideline requirements and variances and collateral thresholds and volume mix expectations for loan diversification.
The policy acquisition process involves the establishment of underwriting guidelines, pricing schedules and aggregate risk limits. See "—Underwriting" above. These guidelines and schedules are coded in our credit risk rule engine which is utilized to screen each loan underwritten, and are constructed to ensure prudent risk acquisition with adequate return on capital. These guidelines and schedules are maintained and periodically reviewed by our risk management team and adjusted to reflect the most current risk assessment based on ongoing experience in the insurance portfolio as well as industry loan quality trends.
The portfolio management process involves two main functions, quality assurance, or QA, reviews, and a comprehensive surveillance protocol, in order to provide customers timely feedback that fosters high quality loan production. Through our QA process, we review a statistically significant sample of individual mortgages from our customers to ensure that the loans accepted through our underwriting process meet our pre-determined eligibility and underwriting criteria. The QA process allows us to identify trends in lender underwriting and origination practices, as well as to back-test underlying reasons for delinquencies, defaults and claims within our portfolio. The information gathered from the QA process is incorporated into our policy acquisition function and is intended to prevent continued aggregation of underperforming risks. Our surveillance protocol maintains oversight over customer and vendor activities, industry dynamics, production trends and portfolio performance. The portfolio management process also involves loss mitigation aimed to reduce both frequency and severity of non-performing risk. See "—Defaults and Claims" below.
Modeling and Analytics
Our risk management professionals are supported by substantial data analysis and sophisticated risk models. We have a dedicated modeling and analytics team which is responsible for delivering actionable models, tools, analysis and reporting to inform our credit underwriting and pricing decisions. The team analyzes mortgage, financial, economic and housing data to develop proprietary behavioral models that help us assess credit, prepayment and loss severity trends and collateral valuation models to help inform business decisions. Performance and profitability are evaluated across customers and products to identify the emergence of potential weaknesses and adverse risks. Geographic housing market analysis also is utilized in establishing market restrictions for certain products and segments. We utilize an economic capital framework to evaluate risk-adjusted returns. We also perform stress tests on our portfolio to analyze how our book of business may perform under adverse scenarios. We believe that our economic capital framework and stress testing analysis helps to inform our optimal capitalization targets, allowing us to prudently manage and protect our balance sheet.
Reinsurance
We proactively manage our risk exposure and capital in part through the use of third-party reinsurance arrangements. Since 2018, we have entered into several types of reinsurance arrangements:
• | fully collateralized excess of loss reinsurance coverage on mortgage insurance policies that we have already issued with special purpose insurers funding such reinsurance obligations through the issuance of mortgage insurance-linked notes; |
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• | excess of loss reinsurance arrangements with third party reinsurers on mortgage insurance policies that we have already issued; and |
• | quota share reinsurance arrangements in which third party reinsurers agree to prospectively reinsure a pro rata portion of the risk on policies that we write. |
We believe that our reinsurance programs offer us a number of benefits, including:
• | hedging against adverse losses in times of stress and mitigation of portfolio risk and volatility through the housing and economic cycle; |
• | providing capital relief under the various state insurance risk to capital framework, rating agency capital requirements and GSE PMIERs available asset requirements; |
• | providing a diversified source of capital to support and grow our business; and |
• | enhancing our counterparty strength and improving the sustainability of our franchise. |
For additional information regarding our third-party reinsurance programs, see Note to our consolidated financial statements entitled "Reinsurance" included elsewhere in this Annual Report.
Defaults and Claims
Defaults
The default and claim cycle for a mortgage insurance policy begins with receipt of a default notice from the servicer. We consider a loan to be in default when we are notified by the servicer that the borrower has missed at least two consecutive monthly payments. Defaults may occur for a variety of reasons including death or illness, divorce or other family problems, unemployment, changes in economic conditions, declines in property values that cause the outstanding mortgage amount to exceed the value of a home or other events.
We expect servicers to make timely collection efforts on borrowers who have defaulted, and to attempt to restore the defaulted mortgage, and our mortgage insurance coverage, to current status. If the servicer cannot restore a borrower to current status, the servicer may be able to offer the borrower a forbearance or loan modification alternatives. Where these alternatives cannot cure the default, the servicer is responsible for pursuing remedies for the default, including foreclosure or acceptable foreclosure alternatives, certain of which, such as short sales and deeds in lieu of foreclosure, require our prior approval under the terms of our master policy. We have delegated certain authority to the GSEs and their servicers to exercise some of these alternatives. Among other requirements, servicers operate under protocols established by the GSEs. See "Risk Factors—Risks Relating to Our Business—If servicers fail to adhere to appropriate servicing standards or experience disruptions to their businesses, our losses could unexpectedly increase."
The following table shows the number of primary insured loans and the percentage of loans insured by us that are in default as of December 31, 2019 and 2018:
Number of Loans in Default and Default Rate
December 31, | ||||||
2019 | 2018 | |||||
Number of policies in force | 702,925 | 608,135 | ||||
Loans in default | 5,947 | 4,024 | ||||
Percentage of loans in default | 0.85 | % | 0.66 | % | ||
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Loan Defaults by Originating Year
December 31, 2019 | December 31, 2018 | |||||||||||||||||||
Originating Year | Loans in Default | Percentage of policies written in period | Defaulted RIF (in thousands) | Loans in Default | Percentage of policies written in period | Defaulted RIF (in thousands) | ||||||||||||||
2010 | 1 | 0.1 | % | $ | 50 | — | — | % | $ | — | ||||||||||
2011 | 18 | 0.1 | 872 | 32 | 0.2 | 1,442 | ||||||||||||||
2012 | 84 | 0.2 | 3,896 | 106 | 0.2 | 5,193 | ||||||||||||||
2013 | 250 | 0.3 | 12,603 | 281 | 0.3 | 14,328 | ||||||||||||||
2014 | 535 | 0.5 | 29,568 | 585 | 0.5 | 32,322 | ||||||||||||||
2015 | 669 | 0.6 | 36,362 | 664 | 0.6 | 35,307 | ||||||||||||||
2016 | 948 | 0.7 | 51,304 | 900 | 0.6 | 49,287 | ||||||||||||||
2017 | 1,623 | 0.9 | ||||||||||||||||||