(1)New insurance written ("NIW") includes NIW on a flow basis (in which loans are insured in individual, loan-by-loan transactions) and bulk insurance that we write (in which each loan in a portfolio of loans is insured in a single transaction).
(2)Loss ratio is calculated by dividing the provision for losses and loss adjustment expenses ("LAE") by net premiums earned.
(4)Combined statutory capital equals the sum of statutory capital of Essent Guaranty, Inc. plus Essent Guaranty of PA, Inc., after eliminating the impact of intercompany transactions. Statutory capital is computed based on accounting practices prescribed or permitted by the Pennsylvania Insurance Department and the National Association of Insurance Commissioners Accounting Practices and Procedures Manual.
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 381 employees as of December 31, 2020. For the years ended December 31, 2020, 2019 and 2018, we generated new insurance written, or NIW, of approximately $107.9 billion, $63.6 billion and $47.5 billion, respectively. As of December 31, 2020, we had approximately $198.9 billion of insurance in force. Our top ten customers represented approximately 35.8%, 42.8% and 43.5% of our NIW on a flow basis for the years ended December 31, 2020, 2019 and 2018, respectively.
The novel coronavirus disease 2019 ("COVID-19") was first identified in December 2019 in Wuhan, China. On March 11, 2020 the outbreak had spread such that it was declared to be a pandemic by the World Health Organization (“WHO”). Within a week of the WHO's declaration, most major economies had announced significant and increasing restrictions on the movement and interaction of people. By the end of March 2020, it was estimated that a quarter of the world’s population was under some form of lockdown or stay-at-home order. Most state governments in the United States implemented some form of travel and/or business restrictions to slow the spread of COVID-19. Due to business restrictions, stay-at-home orders and travel restrictions initially implemented in March 2020, unemployment in the United States increased significantly in the second quarter of 2020 and remained elevated at December 31, 2020. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment has increased the number of delinquencies and has the potential to increase claim frequencies on the mortgages we insure.
Essent has had a Pandemic Plan in place as part of its comprehensive Business Continuity Program for a number of years and invoked the Pandemic Plan in light of the COVID-19 event. A majority of our workforce has been working remotely since March 16, 2020. Through the use of technology, our national and regional account managers and customer service team have been in contact with our policyholders and their servicers, and we have made several COVID-19-related announcements which have been posted on our mortgage insurance website.
As of March 31, 2020, COVID-19 had not had a significant impact on our financial position or results of operations. Beginning in April 2020 through December 2020, we experienced an increase in the number and percentage of mortgage loans we insure that were reported to have missed at least two consecutive payments of principal and interest as a result of COVID-19, which has resulted in an increase in our provision for losses in the year ended December 31, 2020. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers and our expectations for the amount of ultimate losses on these delinquencies. As noted in “- Liquidity and Capital Resources,” Essent had substantial liquidity and had Available Assets in excess of Minimum Required Assets under PMIERs 2.0 as of December 31, 2020. In order to maintain continuous MI coverage, mortgage servicers are required to advance MI premiums to us even if borrowers are in a forbearance plan. Future increases in defaults may result in an increase in our provisions for loss and loss adjustment expenses compared to prior periods, reduced profit commission under our quota share reinsurance agreement with a panel of third-party reinsurers (the "QSR Agreement") and an increase in our Minimum Required Assets.
The QM Rule provides a "safe harbor" for QM loans with annual percentage rates, or APRs, below the threshold of 150 basis points over the Average Prime Offer Rate, or APOR, and a "rebuttable presumption" for QM loans with an APR above that threshold. In October 2020, the CFPB announced a final rule that would implement a previously temporary second category under the QM Rule providing for more flexible underwriting requirements (the "GSE Patch"). To qualify under this category, a mortgage must meet the general product feature requirements and be eligible to be purchased or guaranteed by either of the GSEs (while they remain under FHFA conservatorship), the FHA, the VA, and the U.S. Department of Agriculture Rural Development program. On February 23, 2021, the CFPB announced that, in light of the economic dislocations resulting from the COVID-19 pandemic, it intends to issue a proposed rule to delay the implementation of the final QM Rule and the GSE Patch.
We expect that most lenders will be reluctant to make non-QM loans because they will not be entitled to the presumption against civil liability under the Dodd-Frank Act, and mortgage investors may be reluctant to purchase mortgages or mortgage-backed securities that are not QMs due to potential assignee liability for such loans. As a result, we believe that the QM regulations have a direct impact on establishing a subset of borrowers who can meet the regulatory standards and directly affect the willingness of lenders and mortgage investors to extend mortgage credit and therefore the size of the residential mortgage market. To the extent the use of private mortgage insurance causes a loan not to meet the definition of a QM, the volume of loans originated with mortgage insurance may decline. In addition, the impact of the mortgage insurance premiums on the calculation of points and fees for purposes of QM may influence the use of mortgage insurance, as well as our mix of premium plans and therefore our profitability. See "-Factors Affecting Our Results of Operations-Persistency and Business Mix" and "Risk Factors-Risks Relating to Regulation and Litigation-Our business prospects and operating results could be adversely impacted if, and to the extent that, the Consumer Financial Protection Bureau's ("CFPB") final rule defining a qualified mortgage ("QM") reduces the size of the origination market or creates incentives to use government mortgage insurance programs."
-The amount of insurance we may be able to write could be adversely affected if lenders and investors select alternatives to private mortgage insurance."
The U.S. Internal Revenue Service and Department of the Treasury published both final and newly proposed regulations in January 2021 relating to the tax treatment of passive foreign investment companies ("PFICs"). The final regulations provide guidance on various PFIC rules, including changes resulting from the 2017 Tax Cuts and Jobs Act. In addition, the Company is evaluating the potential impact of the newly proposed PFIC regulations to its shareholders and business operations. The newly proposed regulations, among other provisions, set a limit on the amount of assets that may be deemed “good assets” within the PFIC asset test of a foreign holding company. See "Risk Factors-Risks Relating to Taxes and our Corporate Structure-U.S. Persons who hold our shares will be subject to adverse tax consequences if we are considered to be a passive foreign investment company ("PFIC") for U.S. Federal income tax purposes."
•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, the competition to provide credit enhancement on those mortgages, the number of customers who have approved us to provide mortgage insurance and changes in our NIW from certain customers;
•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;
•Premiums ceded or assumed under reinsurance arrangements. Prior to March 2018, we had not ceded any premiums under third-party reinsurance contracts. In 2018, 2019 and 2020, Essent Guaranty entered into third-party reinsurance agreements. See Note 5 to our consolidated financial statements.
•the percentage of coverage on insured loans, with deeper average coverage tending to increase losses incurred;
•the level and amount of reinsurance coverage maintained with third parties;
•the distribution of claims over the life of a book. As of December 31, 2020, 80% of our IIF relates to business written since January 1, 2018 and was less than three years old. 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 ("LAE"), to increase as our portfolio seasons. See "-Mortgage Insurance Earnings and Cash Flow Cycle" below.
Based upon our experience and industry data, claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. Claims incidence for defaults associated with COVID-19 may not follow this pattern. As of December 31, 2020, 80% of our IIF relates to business written since January 1, 2018 and was 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.
We use third-party reinsurance to provide protection against adverse loss experience and to expand our capital sources. When we enter into a reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements have the impact of reducing our earned premiums, but also reduce our risk in force ("RIF"), which provides capital relief, and may include capital relief under the PMIERs financial strength requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement. For additional information regarding reinsurance, see Note 5 to our consolidated financial statements.
Our most significant expense is compensation and benefits for our employees, which represented 60%, 57% and 60% of other underwriting and operating expenses for the years ended December 31, 2020, 2019 and 2018, respectively. Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes.
Essent Group Ltd. ("Essent Group") and its wholly-owned subsidiary, Essent Re, are domiciled in Bermuda, which does not have a corporate income tax. Essent Re reinsures 25% of Essent Guaranty's NIW under a quota share reinsurance agreement. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae.
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 years ended December 31, 2020, 2019 and 2018 for our U.S. mortgage insurance portfolio. In addition, this table includes our RIF at the end of each period.
The following is a summary of our IIF at December 31, 2020 by vintage:
For the year ended December 31, 2020, we reported net income of $413.0 million, compared to net income of $555.7 million for the year ended December 31, 2019. The decrease in our operating results in 2020 over 2019 was primarily due to the increase in the provision for losses and LAE, partially offset by the increase in net premiums earned and other income and decreases in other underwriting and operating expenses and income taxes.
December 31, 2020. The decrease in the average net premium rate during the year ended December 31, 2020 was a result of an increase in ceded premiums, changes in the mix of the mortgages we insure, in part due to lower persistency, and changes in our pricing which were partially offset by an increase in premiums earned on the cancellation of non-refundable single premium policies. In the year ended December 31, 2020, ceded premiums increased to $88.7 million from $35.5 million in the year ended December 31, 2019 primarily due to an increase in amounts ceded under our QSR Agreement associated with additional risk ceded in 2020 and reduced profit commission as a result of higher ceded losses, new third-party reinsurance agreements entered in 2020 and a full year of premiums ceded under third-party reinsurance agreements entered in 2019. In the year ended December 31, 2020, premiums earned on the cancellation of non-refundable single premium policies increased to $88.9 million from $42.5 million in the year ended December 31, 2019 as a result of an increase in existing borrowers refinancing their mortgages due to favorable mortgage interest rates.
Other income for the year ended December 31, 2020 was $9.8 million compared to $3.4 million for the year ended December 31, 2019. The increase in other income for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to an increase in Triad service fees partially offset by a net unfavorable decrease in the fair value of the embedded derivatives. In the year ended December 31, 2020 we earned Triad service fees of $6.3 million compared to $1.2 million for the year ended December 31, 2019. Effective December 1, 2019, the Triad services agreement was amended providing for a flat monthly fee through November 30, 2021. In the year ended December 31, 2020 we recorded a net unfavorable decrease in the fair value of the embedded derivatives of $2.6 million compared to a net unfavorable decrease of $1.8 million in the year ended December 31, 2019. Other income also includes contract underwriting revenues and underwriting consulting services to third-party reinsurers.
The increase in the provision for losses and LAE in 2020 as compared to 2019 was primarily due to the increase in defaults related to COVID-19.
The following table presents a rollforward of insured loans in default for our U.S. mortgage insurance portfolio for the periods indicated:
The following table includes additional information about our loans in default as of the dates indicated for our U.S. mortgage insurance portfolio:
(1)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $1,073 and $179 as of December 31, 2020 and 2019, respectively.
(1)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $1,073 as of December 31, 2020.
The following table includes additional information about our claims paid and claim severity as of the dates indicated:
•Compensation and benefits decreased primarily due to a decrease in incentive compensation, partially offset by increased salaries and overtime associated with our increased NIW and increased stock compensation expense associated with shares granted in 2019 and 2020. Compensation and benefits includes salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.
•Premium taxes increased primarily due to an increase in premiums written.
•Other expenses decreased as a result of ceding commission earned under the QSR Agreement and lower travel expenses. Other expenses include professional fees, travel, marketing, hardware, software, rent, depreciation and amortization and other facilities expenses.
At December 31, 2020 and 2019, we concluded that it was more likely than not that our deferred tax assets would be realized.
•net premiums that we will receive from our existing IIF as well as policies that we write in the future;
As of December 31, 2020, we had substantial liquidity with cash of $102.8 million, short-term investments of $726.9 million and fixed maturity investments of $3.8 billion. We also had $300 million available capacity under the revolving credit component of our Credit Facility, with $325 million of term borrowings outstanding under our Credit Facility. Borrowings under the Credit Facility contractually mature on October 16, 2023. In June 2020, we completed a public offering of 13.8 million common shares to strengthen our capital resources and provide financial flexibility. Net proceeds from this offering were approximately $440 million. At December 31, 2020, net cash and investments at the holding company were $562.7 million. In addition, Essent Guaranty is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLBank”) and has access to secured borrowing capacity with the FHLBank to provide Essent Guaranty with supplemental liquidity. Essent Guaranty had no outstanding borrowings with the FHLBank at December 31, 2020.
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, to respond to changes in the business or economic environment related to COVID-19, 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. We continually evaluate opportunities based upon market conditions to further increase our
financial flexibility through the issuance of equity or debt, or other options including reinsurance or credit risk transfer transactions. There can be no guarantee that any such opportunities will be available on acceptable terms or at all.
For additional information regarding regulatory capital see Note 16 to our consolidated financial statements. Our combined statutory capital equals the sum of statutory capital of Essent Guaranty plus Essent Guaranty of PA, Inc., 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 Guaranty of PA, Inc. 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 and the National Association of Insurance Commissioners Accounting Practices and Procedures Manual. Such practices vary from accounting principles generally accepted in the United States.
Essent Re has entered into GSE and other risk share transactions, including insurance and reinsurance transactions with Freddie Mac and Fannie Mae. Essent Re also reinsures 25% of Essent Guaranty’s NIW under a quota share reinsurance agreement. During the year ended December 31, 2020, Essent Re paid no dividends to Essent Group. During the year ended December 31, 2019, Essent Re paid dividends to Essent Group of $55 million to increase holding company liquidity. Essent Group made no capital contributions to Essent Re during the years ended December 31, 2020 and 2019. As of December 31, 2020, Essent Re had total stockholders’ equity of $1.1 billion and net risk in force of $12.9 billion.
The financial strength ratings of Essent Guaranty, our principal mortgage insurance subsidiary, are A3 with a stable outlook by Moody's, BBB+ with a negative outlook by S&P and A (Excellent) with a stable outlook by A.M. Best. The financial strength ratings of Essent Re are BBB+ with a negative outlook by S&P and A (Excellent) with a stable outlook by A.M. Best.
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. This risk-based framework provides that an insurer must hold a substantially higher level of required assets for insured loans that are in default compared to a performing loan. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0") which became effective on March 31, 2019. As of December 31, 2020, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs 2.0. As of December 31, 2020, Essent Guaranty's Available Assets were $2.86 billion and its Minimum Required Assets were $1.65 billion based on our interpretation of the PMIERs 2.0.
Under PMIERs guidance issued by the GSEs effective June 30, 2020, Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property located in a Federal Emergency Management Agency (“FEMA”) Declared Major Disaster Area eligible for Individual Assistance and that either 1) is subject to a forbearance plan granted in response to a FEMA Declared Major Disaster, the terms of which are materially consistent with terms of forbearance plans, repayment plans or loan modification trial period offered by Fannie Mae or Freddie Mac, or 2) has an initial missed payment occurring up to either (i) 30 days prior to the first day of the incident period specified in the FEMA Major Disaster Declaration or (ii) 90 days following the last day of the incident period specified in the FEMA Major Disaster Declaration, not to exceed 180 days from the first day of the incident period specified in the FEMA Major Disaster Declaration. In the case of the foregoing, the 0.30 multiplier shall be applied to the risk-based required asset amount factor for a non-performing primary mortgage guaranty insurance loan for no longer than three calendar months beginning with the month the loan becomes a non-performing primary mortgage guaranty insurance loan by reaching two missed monthly payments absent a forbearance plan described in 1) above. Further, under temporary provisions provided by the PMIERs guidance, Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property that has an initial missed payment occurring on or after March 1, 2020 and prior to April 1, 2021 (COVID-19 Crisis Period). The 0.30 multiplier will be applicable for insured loans in default 1) subject to a forbearance plan granted in response to a financial hardship related to COVID-19 (which shall be assumed to be the case for any loan that has an initial missed payment occurring during the COVID-19 Crisis Period and is subject to a forbearance plan, repayment plan or loan modification trial period), the terms of which are materially consistent with terms offered by Fannie Mae or Freddie Mac or 2) for no longer than three calendar months beginning with the month the loan becomes a non-performing primary mortgage guaranty insurance loan by reaching two missed monthly payments. The 28,922 COVID-19 defaults included in our December 31, 2020 default inventory fall into categories 1) and 2) above and received the 0.30 multiplier in calculating the PMIERs required assets.
of common shares and the increase in net borrowings under the Credit Facility during the year ended December 31, 2020.
The following tables includes municipal securities for states that represent more than 10% of the total municipal bond position as of December 31, 2020:
(1)Certain of the above securities may include financial guaranty insurance or state enhancements. The above ratings include the effect of these credit enhancements, if applicable.
(2)Based on ratings issued by Moody’s, if available. S&P or Fitch rating utilized if Moody’s not available.
As of December 31, 2020, the approximate future payments under our contractual obligations of the type described in the table below are as follows:
Schedule I-Summary of Investments-Other Than Investments in Related Parties as of December 31, 2020 116
Schedule II-Condensed Financial Information of Registrant at December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 117
Schedule IV-Reinsurance for the years ended December 31, 2020, 2019 and 2018 121
The principal considerations for our determination that performing procedures relating to the valuation of the reserve for losses and loss adjustment expenses is a critical audit matter are (i) the significant judgment by management when developing their estimate, which in turn led to a high degree of auditor subjectivity and judgment in performing procedures relating to the estimate; (ii) the significant auditor effort and judgment in evaluating the audit evidence related to management's estimates of claim rates and claim size, including management's assumptions related to the macroeconomic factors and their assessment of the relevance of internal and third-party historical default data; and (iii) the audit effort included the involvement of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company's valuation of reserve for losses and loss adjustment expenses, including controls over the development of significant assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the reserve for losses and loss adjustment expenses using Company and historical mortgage insurance industry data and comparing this independent estimate to management's recorded reserve. Developing the independent estimate involved independently estimating claim rates and claim sizes, testing the completeness and accuracy of data provided by management and evaluating the reasonableness of management's assumptions related to macroeconomic factors and management's assessment of internal and third-party default data.
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. CUW Solutions is headquartered in Radnor, Pennsylvania and it maintains operations centers in Winston-Salem, North Carolina and Irvine, California that are subleased from Essent Guaranty.
Our fixed maturity and short-term investments are classified as available for sale as we may sell securities from time to time to provide liquidity and in response to changes in the market. Debt securities classified as available for sale are reported at fair value with unrealized gains and losses on these securities reported in other comprehensive income, net of deferred income taxes. See Note 15 for a description of the valuation methods for investments available for sale.
We recognize purchase premiums and discounts in interest income using the interest method over the securities' estimated holding periods, until maturity, or call date, if applicable. Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method.
proportion to estimated gross profits. Estimated gross profits are composed of earned premium, interest income, losses and loss adjustment expenses. The deferred costs are adjusted as appropriate for policy cancellations to be consistent with our revenue recognition policy. We estimate the rate of amortization to reflect actual experience and any changes to persistency or loss development. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income. Policy acquisition costs deferred were $10.1 million, $7.8 million and $7.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization of deferred policy acquisition costs totaled $8.8 million, $8.1 million and $6.7 million for the years ended December 31, 2020, 2019 and 2018, respectively, and was included in other underwriting and operating expenses on the consolidated statements of comprehensive income.
Mortgage guaranty insurance policies are contracts that are generally non-cancelable by the insurer, are renewable at a fixed price, and provide for payment of premium on a monthly, annual or single basis. Upon renewal, we are not able to re-underwrite or re-price our policies. Consistent with industry accounting practices, premiums written on a monthly basis are earned as coverage is provided. Monthly policies accounted for 84% of earned premium in 2020. Premiums written on an annual basis are amortized on a pro rata basis over the year of coverage. Primary mortgage insurance written on policies covering more than one year are referred to as single premium policies. A portion of the revenue from single premium policies is recognized in earned premium in the current period, and the remaining portion is deferred as unearned premium and earned over the expected life of the policy. If single premium policies related to insured loans are cancelled due to repayment by the borrower, and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized as earned premium upon notification of the cancellation. The Company recorded $88.9 million and $42.5 million of earned premium related to policy cancellations for the years ended December 31, 2020 and 2019, respectively. Unearned premium represents the portion of premium written that is applicable to the estimated unexpired risk of insured loans. Rates used to determine the earning of single premium policies are estimates based on an analysis of the expiration of risk.
Derivative instruments, including embedded derivative instruments, are recognized at fair value in the consolidated balance sheets. The amount of monthly reinsurance premiums ceded under our reinsurance contracts will fluctuate due to changes in one-month LIBOR and changes in money market rates. As the reinsurance premium will vary based on changes in these rates, we concluded that these reinsurance agreements contain embedded derivatives that are accounted for separately like freestanding derivatives.
Deferred income tax assets and liabilities are determined using the asset and liability (balance sheet) method. Under this method, we determine the net deferred tax asset or liability based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and give current recognition to changes in tax rates and laws. Changes in tax laws, rates, regulations and policies, or the final determination of tax audits or examinations, could materially affect our tax estimates. We evaluate the realizability of the deferred tax asset and recognize a valuation allowance if, based on the weight of all available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. When evaluating the realizability of the deferred tax asset, we consider estimates of expected future taxable income, existing and projected book/tax differences, carryback and carryforward periods, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast changes in the mortgage market, as well as the related impact on mortgage insurance, and the competitive and general economic environment in future periods. Changes in the estimate of deferred tax asset realizability, if applicable, are included in income tax expense on the consolidated statements of comprehensive income.
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 new guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected through the use of an allowance for credit losses. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance rather than as a write-down of the amortized cost of the securities. The accounting for insurance losses and loss adjustment expenses ("LAE") are not within the scope of this ASU. The provisions of this update were effective for annual and interim periods beginning after December 15, 2019 and we adopted this standard on January 1, 2020 using the modified retrospective approach. The adoption of this ASU did not have a material effect on the Company's consolidated operating results or financial position.
The amortized cost and fair value of investments available for sale at December 31, 2020, 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 U.S. agency mortgage-backed securities, residential and commercial mortgage securities and asset-backed securities provide for periodic payments throughout their lives, they are listed below in separate categories.
The fair value of investments available for sale in an unrealized loss position and the related unrealized losses for which no allowance for credit loss has been recorded were as follows:
At December 31, 2020 and 2019, we held 363 and 365 individual investment securities, respectively, that were in an unrealized loss position. 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 to record an impairment on the securities in an unrealized loss position. In assessing whether the decline in the fair value at December 31, 2020 of any of these securities resulted from a credit loss or other factors, we made inquiries of our investment managers to determine that each issuer was current on its scheduled interest and principal payments. We reviewed the credit rating of these securities noting that over 98% of the securities at December 31, 2020 had investment-grade ratings. We concluded that gross unrealized losses noted above are principally associated with the changes in credit spreads subsequent to purchase rather than due to credit impairment. We recorded impairments of $0.4 million in the year ended December 31, 2020 and other-than-temporary impairments of $0.3 million in the year ended December 31, 2019 on securities in an unrealized loss position. The impairments resulted from our intent to sell these securities subsequent to the reporting dates. There were no other-than-temporary impairments in the year ended December 31, 2018.
The Company's other invested assets at December 31, 2020 and December 31, 2019 totaled $88.9 million and $78.9 million, respectively. Other invested assets are comprised of limited partnership interests which are accounted for under the equity method of accounting with changes in value reported in other income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.
The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $9.7 million at December 31, 2020 and $9.4 million at December 31, 2019. 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 on deposit in these trusts was $1.1 billion at December 31, 2020 and $805.5 million at December 31, 2019. Essent Guaranty is required to maintain assets on deposit in connection with its fully collateralized reinsurance agreements (see Note
In the ordinary course of business, our insurance subsidiaries may use reinsurance to provide protection against adverse loss experience and to expand our capital sources. Reinsurance recoverables are recorded as assets and included in other assets on our consolidated balance sheets, predicated on a reinsurer's ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, our insurance subsidiaries would be liable for such defaulted amounts.
Effective September 1, 2019, Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers (the "QSR Agreement"). Each of the third-party reinsurers has an insurer financial strength rating of A or better by S&P Global Ratings, A.M. Best or both. Under the QSR Agreement, Essent Guaranty will cede premiums earned related to 40% of risk on eligible single premium policies and 20% of risk on all other eligible policies written September 1, 2019 through December 31, 2020, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims. The QSR Agreement is scheduled to terminate on December 31, 2030. Essent Guaranty has certain termination rights under the QSR Agreement, including the option to terminate the QSR Agreement with no termination fee on December 31, 2021, and the option, subject to a termination fee, to terminate the QSR Agreement on December 31, 2022, or annually thereafter. Should Essent Guaranty not exercise its option to terminate the QSR Agreement on December 31, 2021, the maximum profit commission that Essent Guaranty could earn would increase to 63% in 2022 and thereafter. RIF ceded under the QSR Agreement was $6.3 billion as of December 31, 2020.
The following tables summarizes Essent Guaranty's excess of loss reinsurance agreements as of December 31, 2020:
(3)Reinsurance coverage on new insurance written from January 1, 2019 through August 31, 2019.
(5)Coverage provided immediately above the coverage provided by Radnor Re 2018-1 Ltd.
The following table presents total assets of each Radnor Re special purpose insurer as well as our maximum exposure to loss associated with each Radnor Re entity, representing the fair value of the embedded derivatives, using observable inputs in active markets (Level 2), included in other assets (other accrued liabilities) on our consolidated balance sheet and the estimated net present value of investment earnings on the assets in the reinsurance trusts, each as of December 31, 2020:
Due to business restrictions, stay-at-home orders and travel restrictions initially implemented in March 2020 as a result of COVID-19, unemployment in the United States increased significantly in the second quarter of 2020 and remained elevated at December 31, 2020. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment has increased the number of delinquencies on the mortgages that we insure and has the potential to increase claim frequencies on defaults. As of December 31, 2020, insured loans in default totaled 31,469 and included 28,922 defaults classified as COVID-19 defaults. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status. We believe that the forbearance process could have a favorable effect on the frequency of claims that we ultimately pay. Based on the forbearance programs in place and the credit characteristics of the COVID-19 defaulted loans, we expect the ultimate number of COVID-19-related defaults that result in claims will be less than our historical default-to-claim experience. Accordingly, we recorded a reserve equal to approximately 7% of the risk in force for the COVID-19 default notices received in April 2020 through September 2020. The credit characteristics of defaults reported in October 2020 through December 2020 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, we observed a normalization during the fourth quarter of 2020 of the proportion of unemployment claims related to permanent layoffs as compared to a higher proportion of temporary layoffs during the second and third quarters of 2020. We believe that while defaults in October 2020 through December 2020 were impacted by the pandemic’s effect on the economy, the underlying credit performance of these defaults may not be the same as the expected performance for default notices received in April 2020 through September 2020 that occurred following the onset of the pandemic and these defaults are more likely to transition like pre-pandemic defaults. Accordingly, although these defaults are classified as COVID-19 defaults, we established reserves for defaults reported in October 2020 through December 2020 using our normal reserve methodology. The reserve for losses and LAE on COVID-19 defaults was $316.3 million at December 31, 2020. It is reasonably possible that our estimate of the losses for the COVID-19 defaults could change in the near term as a result of the continued impact of the pandemic on the economic environment, the results of existing and future governmental programs designed to assist individuals and businesses impacted by the virus and the performance of the COVID-19 defaults in the forbearance programs. A 100 basis point increase or decrease in the reserve rate applied to COVID-19 default notices received in April 2020 through September 2020 would result in a corresponding increase or decrease in our reserve for loss and LAE of approximately $35 million as of December 31, 2020. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers, the performance of COVID-19 defaults and our expectations for the amount of ultimate losses on these delinquencies.
During the third quarter of 2017, certain regions of the U.S. experienced hurricanes which have impacted our insured portfolio’s performance. Loans in default identified as hurricane-related defaults totaled 2,288 as of December 31, 2017 and in the fourth quarter of 2017, we provided reserves of $11.1 million for losses and LAE on these hurricane-related defaults. In the year ended December 31, 2018, 2,150 of the 2,288 defaults previously identified as hurricane-related cured. In the fourth quarter of 2018, we reduced the reserves on hurricane-related defaults by $9.9 million based on the performance to date and our expectations of the amount of ultimate losses on the remaining delinquencies.
The following table summarizes cumulative paid losses and allocated loss adjustment expenses, net of reinsurance. The information about paid loss development for the years ended December 31, 2011 through 2019 is presented as supplementary information.
For our mortgage insurance portfolio, our average annual payout of losses as of December 31, 2020 is as follows:
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, 2020, 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 consolidated balance sheets related to these indemnifications.
In June 2020, Essent Group completed the sale of 13.8 million common shares in a public offering at a price of $33.25 per share. The total net proceeds from this offering were approximately $440.0 million after deducting underwriting discounts, commissions and other offering expenses.
During the third quarter of 2019, the Board of Directors declared Essent's inaugural quarterly cash dividend of $0.15 per common share which was paid in September 2019. In each subsequent quarter, we declared and paid quarterly cash dividends on our common shares. The following table presents the amounts declared and paid per common share each quarter:
In September 2013, certain members of senior management were granted nonvested common shares under the 2013 Plan that were subject to time-based and performance-based vesting. The time-based share awards granted in September 2013 vested in four equal installments on January 1, 2015, 2016, 2017 and 2018. The performance-based share awards vested based upon our compounded annual book value per share growth percentage during a three-year performance period that commenced on January 1, 2014. The September 2013 performance-based share awards vested on the one-year anniversary of the completion of the performance period.
In February of each year, 2015 through 2020, certain members of senior management were granted nonvested common shares under the 2013 Plan that were subject to time-based and performance-based vesting. The time-based share awards vest in three equal yearly installments commencing on March 1 of the year following the grant year. The performance-based share awards vest based upon our compounded annual book value per share growth percentage during a three-year performance period that commences on January 1 of the grant year and vest on March 1 following the end of the performance period.
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. The compounded annual book value per share growth for each of the 2013, 2014, 2015, 2016 and 2017 performance-based grants exceeded the maximum performance level and have vested or will vest at 100%.
In January 2017, time-based share units were issued to all vice president and staff level employees that vested in three equal installments in January 2018, 2019 and 2020. In January 2020, time-based share units were issued to all vice president and staff level employees that vested in three equal installments in January 2021, 2022 and 2023. In connection with our incentive program covering bonus awards for performance years 2014 through 2019, in February following each performance year, time-based share awards and share units were issued to certain employees that vest in three equal yearly installments commencing on March 1 of the year following the grant year.
The total fair value of nonvested shares, share units or DEUs that vested was $18.5 million, $25.5 million and $75.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, there was $24.2 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at December 31, 2020 and we expect to recognize the expense over a weighted average period of 1.8 years.
Our U.S. insurance subsidiaries are subject to certain capital and dividend rules and regulations as prescribed by jurisdictions in which they are authorized to operate. Under the insurance laws of the Commonwealth of Pennsylvania, Essent Guaranty and Essent PA may pay dividends during any 12-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 specifies that dividends and other distributions can be paid out of positive unassigned surplus without prior approval. At December 31, 2020, Essent Guaranty had unassigned surplus of approximately $343.6 million. Essent Guaranty paid no dividends to Essent Group or any intermediate holding companies in the years ended December 31, 2020 or 2019. During the year ended December 31, 2018, Essent Guaranty paid to its parent, Essent US Holdings, Inc. ("Essent Holdings"), a $40 million dividend which was used to repay the borrowings remaining under the revolving component of the Credit Facility. As a result of PMIERs guidance issued by the GSEs, through June 30, 2021, Essent Guaranty is required to obtain GSE written approval before paying a dividend. Essent PA had unassigned surplus of approximately $15.4 million as of December 31, 2020. Essent PA did not pay a dividend in 2020, 2019 or 2018.
At December 31, 2020, our insurance subsidiaries were in compliance with these rules, regulations and agreements.
Income tax expense which is generated in the U.S. consists of the following components for the years ended December 31:
Income tax expense is different from that which would be obtained by applying the applicable statutory income tax rates to income before taxes by jurisdiction (i.e. U.S. 21%; Bermuda 0.0%). The reconciliation of the difference between income tax expense and the expected tax provision at the weighted average tax rate was as follows for the years ended December 31:
Essent Holdings and its subsidiaries are subject to income taxes imposed by U.S. law and file a U.S. Consolidated Income Tax Return. Should Essent Holdings pay a dividend to its parent company, Essent Irish Intermediate Holdings Limited, withholding taxes at a rate of 5% under the U.S./Ireland tax treaty would likely apply assuming the Company avails itself of Treaty benefits under the U.S./Ireland tax treaty. Absent treaty benefits, the withholding rate on outbound dividends would be 30%. Currently, however, no withholding taxes are accrued with respect to such unremitted earnings as management has no intention of remitting these earnings. Similarly, no foreign income taxes have been provided on the un-remitted earnings of the Company's U.S. subsidiaries as management has neither the intention of remitting these earnings, nor would any Ireland tax be due, as any Irish tax would be expected to be fully offset by credit for taxes paid to the U.S. An estimate of the cumulative amount of U.S. earnings that would be subject to withholding tax, if distributed outside of the U.S., is approximately $2.1 billion. The associated withholding tax liability under the U.S./Ireland tax treaty would be approximately $103.5 million.
There were 324,813, 39,490 and 128,575 antidilutive shares for the years ended December 31, 2020, 2019 and 2018, respectively.
Based on the compounded annual book value per share growth as of December 31, 2019 and 2018, 100% of all performance-based share awards would have been issuable under the terms of the arrangements at each date if December 31 was the end of the contingency period.
The following table shows the rollforward of accumulated other comprehensive income (loss) for the year ended December 31:
(1)Included in net realized investments gains on our consolidated statements of comprehensive income.
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 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.
•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
At December 31, 2020 and 2019, 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.
The following table summarizes the unaudited results of operations for each quarter of 2020 and 2019.
During the years ended December 31, 2020 and 2018, the Parent Company did not receive any dividends from its subsidiaries. During the year ended December 31, 2019, the Parent Company received dividends from Essent Re totaling $55.0 million.