(6)The combined risk to capital ratio equals the sum of the net risk in force of Essent Guaranty, Inc. and Essent Guaranty of PA, Inc. divided by combined statutory capital.
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 86.1% at December 31, 2013. Generally, higher prepayment speeds lead to lower persistency.
•Compensation and benefits increased due to the increase in our work force to 209 at December 31, 2012 from 157 employees at December 31, 2011. Additional employees were hired to support the growth in our business, particularly in our sales organization, as well as our underwriting and customer service teams. Compensation and benefits is composed of cash compensation, including salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.
As of December 31, 2013, we had substantial liquidity in addition to our investment portfolio, with $477.7 million of cash, which includes $244.2 million at the holding company. Our cash position increased during the year ended December 31, 2013 primarily as a result of net proceeds of $313.7 million from our initial public offering of Common Shares which was completed in November 2013, $123.9 million in net capital contributions received from our initial investors plus cash flows from operations, net of amounts invested in our fixed income portfolio. As of December 31, 2013, we have $810.2 million in cash and investments and no debt.
Cash flow provided by financing activities totaled $433.1 million for the year ended December 31, 2013 as compared to cash provided by financing activities of $46.9 million for the year ended December 31, 2012. In November 2013, the Company completed an initial public offering of Common Shares for $313.7 million in net proceeds, net of offering costs. In June and March 2013, the Company issued Class A common shares to its initial investors for net proceeds of $123.9 million. These cash inflows were partially offset by payments made to Triad under the asset purchase agreement. Cash provided by financing activities in the year ended December 31, 2012 were principally due to Class A common shares issued to initial investors partially offset by the payment of the 2011 annual fee to initial investors and payments to Triad under the Asset Purchase Agreement. The annual fee was waived by our initial investors for the year ended December 31, 2012 and thereafter.
•credit ratings from third party rating agencies and changes in these credit ratings below investment grade;
Essent PA provides reinsurance to Essent Guaranty for mortgage insurance coverage in excess of 25% of the balance of any mortgage loan insured by Essent Guaranty. Essent PA received its certificate of authority from the Pennsylvania Insurance Department on March 15, 2010.
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 December 31, 2013, 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
Income tax expense (benefit) consists of the following components for the years ended December 31:
•Level 1-Quoted prices for identical instruments in active markets accessible at the measurement date.
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. No financial instruments were classified as Level 3 at December 31, 2013 or 2012.