We do not own any real property. We lease office facilities totaling approximately 77,000 square feet, including 27,000 square feet for our U.S. operations headquarters in Radnor, Pennsylvania. We lease additional office space in Winston-Salem, North Carolina, Irvine, California and Bermuda. We believe our current facilities are adequate for our current needs and that suitable additional space will be available as and when needed.
(2)The weighted average Common Shares outstanding as presented in the table above includes: (a) the weighted average Common Shares outstanding for the period from November 5, 2013 until December 31, 2013, and (b) the weighted average Class B-2 common shares outstanding (adjusted for the 2 for 3 share split) for the period from January 1, 2013 until the date of the conversion to Common Shares at the IPO. For purposes of determining EPS in 2013, the net income allocated to the Class B-2 common shares and all net income of the Company for the period following the IPO are allocated to the Common Shares.
In 2010, Essent became the first private mortgage insurer to be approved by the GSEs since 1995, and is licensed to write coverage in all 50 states and the District of Columbia. We completed our initial public offering in November 2013. The financial strength of Essent Guaranty, Inc., our wholly-owned insurance subsidiary, is rated Baa2 with a stable outlook by Moody's Investors Service and BBB+ with a stable outlook by Standard & Poor's Rating Services.
operations. The FHFA has directed, and is likely to continue to direct, changes to the business operations of the GSEs in ways that affect the mortgage insurance industry. In addition, it is likely that Federal legislation will be necessary to resolve the conservatorship of the GSEs, and such legislation could materially affect the role and charter of the GSEs and the operation of the housing finance system. In 2011, the U.S. Department of the Treasury recommended options for winding down the GSEs and using a combination of Federal housing policy changes to contract the government's footprint in housing finance and restore a larger role for private capital. Since 2011, members of Congress have introduced several bills intended to reform the secondary market and the role of the GSEs, although no comprehensive housing finance or GSE reform legislation has been enacted to date. See "Business-Regulation-Federal Laws and Regulations-Housing Finance Reform", "Risk Factors-Risks Relating to Our Business-Legislative or regulatory actions or decisions to change the role of the GSEs in the U.S. housing market generally, or changes to the charters of the GSEs with regard to the use of credit enhancements generally and private mortgage insurance specifically, could reduce our revenues or adversely affect our profitability and returns", and "-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."
The Dodd-Frank Act provides for an originator or issuer risk-retention requirement on securitized mortgage loans that do not meet the definition of a QRM. Federal regulators issued the proposed risk-retention rule in March 2011, and in response to public comment on such proposed rule, issued a revised proposed-risk retention rule on August 28, 2013, including a definition of QRM that generally defines QRM as a mortgage meeting the requirements of QM (see "Business-Regulation-Federal Laws and Regulations-Dodd-Frank Act-Qualified Mortgage Regulations-Ability to Repay Requirements"). In addition, the regulators also requested public comments on an alternative definition that, among other things, incorporates a maximum LTV standard of 70% and certain other restrictions selected to reduce the risk of default. Neither of the revised proposed definitions of QRM incorporate the use of private mortgage insurance. Under the proposed rule, the GSEs satisfy the risk retention requirements of the Dodd-Frank Act while they are in conservatorship. The public comment period for the proposed rule ended on October 30, 2013 and final rules have yet to be issued. The final timing of the adoption of any risk retention regulation and the definition of QRM remains uncertain.
In July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation approved publication of the Basel III Rules governing almost all U.S. banking organizations regardless of size or business model. The Basel III Rules revise and enhance the Federal banking agencies' general risk-based capital, advanced approaches and leverage rules. The Basel III Rules became effective on January 1, 2014, with a mandatory compliance date of
The Federal banking agencies previously issued proposed rules that would have made extensive changes to the capital requirements for residential mortgages, including eliminating capital recognition for certain low down payment mortgages covered by mortgage insurance. After consideration of extensive comments with regard to the proposed capital rules for residential mortgages, the Federal banking agencies decided to retain in the Basel III Rules the treatment for residential mortgage exposures that is currently set forth in the general risk-based capital rules and the treatment of mortgage insurance.
The FHA is our primary competitor outside of the private mortgage insurance industry and the FHA's role in the mortgage insurance industry is also significantly dependent upon regulatory developments. The U.S. Congress is considering reforms of the housing finance market, which includes consideration of the future mission, size and structure of the FHA, which is part of HUD. In HUD's annual report to Congress on the financial status of the FHA Mutual Mortgage Insurance Fund, or MMIF, dated November 16, 2012, the capital reserve ratio of the MMIF turned to a negative 1.44%, below the congressionally mandated required minimum level of 2%. In part as a result of this capital shortfall, Congress is considering legislation to reform the FHA. If FHA reform were to raise FHA premiums, tighten FHA credit guidelines, make other changes which make lender use of FHA less attractive, or implement credit risk sharing between FHA and private mortgage insurers, these changes may be beneficial to our business. However, there can be no assurance that any FHA reform legislation will be enacted into law, and what provisions may be contained in any final legislation, if any. Therefore, the future impact on our business is uncertain. See "Business-Regulation-Federal Laws and Regulation-FHA Reform" and "Risk Factors-Risks Relating to Our Business-The amount of insurance we may be able to write could be adversely affected if lenders and investors select alternatives to private mortgage insurance."
•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 and the competition to provide credit enhancement on those mortgages;
•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 rescissions and claim payments;
•Premium rates, which represent the amount of the premium due as a percentage of IIF. Premium rates are based on the risk characteristics of the loans insured, the percentage of coverage on the loans, competition from other mortgage insurers and general industry conditions; and
•Premiums ceded or assumed under reinsurance arrangements. To date, we have not entered into any reinsurance contracts.
are repaid earlier than anticipated, our premium earned with respect to those loans and therefore our profitability declines. Currently, the expected return on single premium policies is less than the expected return on monthly policies.
In connection with the acquisition of our mortgage insurance platform, we entered into a services agreement with Triad to provide certain information technology maintenance and development and customer support-related services. In return for these services, we receive a fee which is recorded in other income. From the period from December 1, 2009 to November 30, 2010, this fee was based on a fixed amount. Effective December 1, 2010, the fee is adjusted monthly based on the number of Triad's mortgage insurance policies in force and, accordingly, will decrease over time as Triad's existing policies are cancelled. The services agreement provides for a minimum monthly fee of $150,000 for the duration of the services agreement. The services agreement expires on November 30, 2014 and provides for two subsequent five year renewals at Triad's option. See Note 6 to our consolidated financial statements.
Other income also includes revenues associated with contract underwriting services. The level of contract underwriting revenue is dependent upon the number of customers who have engaged us for this service and the number of loans underwritten for these customers.
•the size of loans insured, with higher average loan amounts tending to increase losses incurred;
Depreciation and amortization expense represented 3%, 25% and 28% of other underwriting and operating expenses for the years ended December 31, 2013, 2012 and 2011, respectively. A significant portion of the depreciation expense recorded during 2011 and 2012 related to the assets acquired from Triad for $30 million in cash and the assumption of certain contractual obligations under that certain asset purchase agreement, dated October 7, 2009, among Essent Guaranty, Inc. and Triad (the "Asset Purchase Agreement"). The purchase price of the assets acquired from Triad was allocated primarily to acquired technology (94%) and workforce-in-place (4%) and was amortized to expense on a straight-line basis over 36 months and 48 months, respectively, from the date of acquisition. The acquired technology component of the purchase price was fully depreciated as of November 30, 2012 and the workforce-in-place component of the purchase price was fully amortized as of November 30, 2013 and, accordingly, depreciation and amortization expense declined in 2013 compared to prior periods.
Underwriting and other expenses also include legal, consulting, other professional fees, premium taxes, travel, entertainment, marketing, licensing, supplies, hardware, software, rent, utilities and other expenses.
We anticipate that as we continue to add customers and increase our IIF, our expenses will also continue to increase. In addition, as a result of the increase in our IIF, we expect that our net premiums earned will grow faster than our underwriting and other expenses resulting in a decline in our expense ratio. Further, we expect to incur incremental costs related to being a public company, including certain operating and compensation expenses.
In general, the majority of any underwriting profit (premium revenue minus losses) that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year. Subsequent years of a book generally result in modest underwriting profit or underwriting losses. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and increasing losses.
The following table outlines our average premium rate, which reflects net premiums earned as a percentage of average IIF, for the periods presented:
The risk to capital ratio is frequently used as a measure of capital adequacy in the mortgage insurance industry and is calculated as a ratio of net risk in force to statutory capital. Net risk in force represents total risk in force net of reinsurance ceded and net of exposures on policies for which loss reserves have been established. Statutory capital is computed based on accounting practices prescribed or permitted by the Pennsylvania Insurance Department. See additional discussion in "-Liquidity and Capital Resources-Risk to Capital."
Our net investment income was derived from the following sources for the period indicated:
The increase in net investment income to $4.1 million for the year ended December 31, 2013 as compared to $2.3 million for the year ended December 31, 2012 is primarily due to an increase in the weighted average balance of our investment portfolio as a result of capital contributions from our initial investors in June and March 2013, and cash flows generated from operations. The average cash and investment portfolio balance was $442.8 million and $214.0 million during the years ended December 31, 2013 and 2012, respectively. The pre-tax investment income yield was 1.1% and 1.2% in the years ended December 31, 2013 and 2012, respectively. The pre-tax investment income yields are calculated based on amortized cost. See "-Liquidity and Capital Resources" for further details of our investment portfolio.
The following table presents a rollforward of insured loans in default for the periods indicated:
The decrease in the average reserve per default is primarily due to changes in the composition (such as mark-to-market loan to value ratios, risk in force, and number of months past due) of the underlying loans in default. In addition, historical cure ratios showed continued improvement in 2013.
The following tables provide a reconciliation of the beginning and ending reserve balances for losses and LAE and a detail of reserves and defaulted RIF by the number of missed payments and pending claims.
•Compensation and benefits increased primarily due to the increase in our work force to 289 at December 31, 2013 from 209 at December 31, 2012. 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 also increased as a result of an increase in annual incentive compensation and incremental cash and stock-based compensation. The increase in stock-based compensation is primarily due to the restricted shares and restricted stock units issued to all of employees in connection with our initial public offering.
•Other expenses, including premium taxes, travel, marketing, hardware, software, rent and other facilities expenses, increased as a result of the expansion of our business. In addition, effective with the completion of our initial public offering, we began to incur certain incremental public company expenses, including insurance and board of director costs.
•the substantial growth in our IIF which has driven the increase in net premiums earned experienced in 2012 and through June 30, 2013;
•our increasing level of profitability in the fourth quarter of 2012 and the first two quarters of 2013 and our expectations regarding the sustainability of these profits;
•our expectation that we would be in a three-year cumulative income position in 2013;
•the size of our IIF and our contractual rights for future premiums from this book of business;
Our determination of the amount of deferred tax asset valuation allowance to reverse as of June 30, 2013 was based on the guidance in ASC No. 740-270 regarding accounting for income taxes in interim periods. This guidance distinguishes between amounts that are recognized through the use of an estimated annual effective tax rate applied to year-to-date operating results and specific events that are discretely recognized as they occur. Under ASC No. 740-270, the tax benefit of an operating loss carryforward from prior years shall be included in the effective tax rate computation if the tax benefit is expected to be realized as a result of ordinary income in the current year. Otherwise, the tax benefit shall be recognized in each interim period to the extent that income in the period and for the year to date is available to offset the operating loss carryforward or, in the case of a change in judgment about realizability of the related deferred tax asset in future years, the effect shall be recognized in the interim period in which the change occurs. We estimated our pretax income for the year to determine the amount of tax benefit that was expected to be realized from ordinary income in 2013 and that amount was used to reduce tax expense from continuing operations to zero. The remainder of the tax benefit resulted from a change in estimate of future years' income and was recognized as a discrete benefit in the year ended December 31, 2013. At December 31, 2013, the valuation allowance was zero. Starting in 2014, we expect that our effective tax rate will approach the statutory tax rate.
During the year ended December 31, 2012, unearned premiums increased by $30.9 million as a result of net premiums written on single premium policies of $35.7 million partially offset by $4.8 million of unearned premium that was recognized in earnings during the year. During the year ended December 31, 2011, unearned premiums increased by $9.7 million as a result of net premiums written on single premium policies of $10.3 million partially offset by $0.6 million of unearned premium that was recognized during the year.
The provision for losses and LAE increased from $0.1 million in 2011 to $1.5 million in 2012 because of an increase in the number of new insured loans in default partially offset by previously identified defaults that cured.
During the year ended December 31, 2012, the provision for losses and LAE was $1.5 million, comprised of $1.6 million of current year loss development partially offset by $0.1 million of favorable prior years' loss development, as a result of a re-estimation of amounts to be paid on prior year defaults in the default inventory. During the year ended December 31, 2011, net losses incurred were $0.1 million, comprised solely of current year loss development. Given the small number of defaults in 2011, management established case reserves based upon a specific review of each loan in default and considering factors such as subsequent performance and policy deductibles.
During the year ended December 31, 2012, we paid one claim for approximately $18,000. We paid no claims during 2011.
•Depreciation and amortization expense increased in 2012 compared to 2011 primarily due to an increase in the depreciation on the assets acquired from Triad as well as depreciation and amortization for additional property and equipment acquired.
Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax benefit was $0.3 million and $0.9 million for the years ended December 31, 2012 and 2011, respectively. Our effective tax rate was 2.4% and 2.6% for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, and the years then ended, we had a full valuation allowance recorded against deferred tax assets.
Our insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which it is authorized to operate and the GSEs. Under the insurance laws of the Commonwealth of Pennsylvania, the insurance subsidiaries may pay dividends during any twelve-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 requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. At December 31, 2013, Essent Guaranty, Inc. had negative unassigned surplus and therefore would require prior approval by the Pennsylvania Insurance Commissioner to make any dividend payment or other distributions in 2014. At December 31, 2013, Essent PA, Inc. had unassigned surplus of less than $1 million. In December 2013, Essent Guaranty of PA, Inc. paid a $5,000 dividend to Essent US Holdings, Inc. Essent Guaranty, Inc. has paid no dividends since its inception. At December 31, 2013, our insurance subsidiaries were in compliance with these rules and regulations.
Cash flow provided by operations totaled $119.0 million for the year ended December 31, 2013 as compared to cash provided by operating activities of $36.6 million for the year ended December 31, 2012 and cash flow used in operations of $8.2 million for the year ended December 31, 2011. The increase in cash flow from operations of $82.4 million in 2013 and $44.8 million in 2012 was a result of increases in premium collected and net investment income partially offset by an increase in expenses paid and a decrease in other income in both periods.
Cash flow provided by financing activities totaled $46.9 million for the year ended December 31, 2012 as compared to cash flow provided by financing activities of $20.4 million for the year ended December 31, 2011. The increase in cash flow provided by financing activities of $26.5 million was primarily related to issuance of equity to our initial investors for net proceeds of $54.5 million in 2012 versus $24.8 million in 2011.
The financial strength of Essent Guaranty, our principal mortgage insurance subsidiary, is rated Baa2 by Moody's Investors Service ("Moody's") with a stable outlook. Standard & Poor's Rating Services' ("S&P") insurer financial strength rating of Essent Guaranty is BBB+ with a stable outlook.
As of December 31, 2013, the total fair value of our investment portfolio was $332.6 million, compared to $247.4 million as of December 31, 2012. In addition, our total cash was $477.7 million as of December 31, 2013, compared to $22.3 million as of December 31, 2012. This increase was primarily
(1)Based on ratings issued by Moody's, if available. S&P rating utilized if Moody's not available.
(1)As of December 31, 2013, for securities in unrealized loss positions, management believes decline in fair values is principally associated with the changes in the interest rate environment subsequent to their purchase and there are no other than temporary impairments. Also, see Note 4 to our consolidated financial statements, which summarizes the aggregate amount of gross unrealized losses by asset class in which the fair value of investments has been less than cost for more than 12 months and less than 12 months.
(2)Based on ratings issued by Moody's if available. S&P utilized if Moody's is not available.
As of December 31, 2013, the approximate future payments under our contractual obligations of the type described in the table below are as follows:
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. 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. 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.
•current credit spreads, downgrade trends, industry and asset sector trends, and issuer disclosures and financial reports to determine if credit ratings from third party credit agencies are reasonable; and
•adverse conditions specifically related to the security, an industry, or a geographic area.
Essent Guaranty was formed in November 2008 and received its certificate of authority from the Pennsylvania Insurance Department on July 6, 2009. It commenced operations in 2010, issuing its first mortgage insurance policy in May 2010. Essent Guaranty is headquartered in Radnor, Pennsylvania and maintains operations centers in Winston-Salem, North Carolina and Irvine, California. Essent Guaranty is approved as a qualified mortgage insurer by the GSEs and is licensed to write mortgage insurance in all 50 states and the District of Columbia.
Cash includes a $200 restricted deposit associated with a letter of credit obtained in connection with the rental of office space.
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are charged to expense as incurred. Estimated useful lives are 5 years for furniture and fixtures and 2 to 3 years for equipment, computer hardware and purchased software. Certain costs associated with the acquisition or development of internal-use software are capitalized. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software's expected useful life, which is generally 3 years. We amortize leasehold improvements over the shorter of the lives of the leases or estimated service lives of the leasehold improvements. The balances by type were as follows at December 31:
In connection with the acquisition of the proprietary mortgage insurance information technology and operating platform of Triad Guaranty, Inc. and Triad Guaranty Insurance Corporation (collectively referred to as "Triad"), we recorded identifiable intangible assets associated with acquired technology and workforce-in-place. Amortization of these assets began on December 1, 2009 and was increased in April 2011 in connection with the additional purchase price recorded effective March 31, 2011. See additional discussion as to the terms of the Triad transaction and the related purchase accounting in Note 6. The amount of purchase price allocated to the acquired technology was amortized to expense on a straight-line basis over 36 months and was fully amortized as of November 30, 2012. The amount of purchase price allocated to workforce-in-place was amortized to expense on a straight-line basis over 48 months and was fully amortized as of November 30, 2013. We recognized amortization associated with the acquired technology of $12,011 and $11,040 for the years ended December 31, 2012 and 2011, respectively. We recognized amortization associated with the workforce-in-place of $371, $405 and $346 for the years ended December 31, 2013, 2012 and 2011 respectively.
We defer certain personnel costs and premium tax expense directly related to the successful acquisition of new insurance policies and amortize these costs over the period the related estimated gross profits are recognized in order to match costs and revenues. We do not defer any underwriting costs associated with our contract underwriting services. Costs related to the acquisition of mortgage insurance business are initially deferred and reported as deferred policy acquisition costs. Consistent with industry accounting practice, amortization of these costs for each underwriting year book of business is recognized in 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 $5,673, $2,240 and $482 for the years ended December 31, 2013, 2012 and 2011, respectively. Amortization of deferred policy acquisition costs totaled $1,703, $456, and $64 for the years ended December 31, 2013, 2012 and 2011, respectively, and is included in other underwriting and operating expenses on the consolidated statements of comprehensive income (loss).
We establish reserves for losses based on our best estimate of ultimate claim costs for defaulted loans. Although Accounting Standards Codification ("ASC") No. 944, regarding accounting and
We are required to establish a premium deficiency reserve if the net present value of the expected future losses and expenses for a particular group of policies exceeds the net present value of expected future premium, anticipated investment income and existing reserves for that specified group of policies. We reassess our expectations for premium, losses and expenses of our mortgage insurance business periodically and update our premium deficiency analysis accordingly. As of December 31, 2013 and 2012, we concluded that no premium deficiency reserve was required to be recorded in the accompanying consolidated financial statements.
Deferred income tax assets and liabilities are determined using the asset and liability (or 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 (loss).
It is our policy to classify interest and penalties related to unrecognized tax benefits as income tax expense.
Basic earnings (loss) per common share amounts are calculated based on income available to common stockholders and the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per common share amounts are calculated based on income available to common stockholders and the weighted average number of common and potential common shares outstanding during the reporting period. Potential common shares, composed of the incremental common shares issuable upon vesting of unvested common shares, are included in the earnings per share calculation to the extent that they are dilutive. Prior to the completion of our initial public offering as more fully discussed in Note 3, basic and diluted earnings (loss) per common share were calculated using the "two-class" method since the cash dividends on our Class B-2 common shares could differ from the dividends on the Class A common shares. The two-class method is an earnings allocation formula that determines earnings (loss) per share for each class of common shares according to dividends declared and participation rights in undistributed earnings or losses.
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"). This ASU largely retains the fair value measurement principles of Topic 820, but potentially expands current disclosures and changes how fair value measurement guidance is applied in
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which expands the disclosure requirements in ASC 220 for the presentation of changes in accumulated other comprehensive income ("AOCI"). This ASU requires an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety from AOCI to net income in the same reporting period, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. Essent Group adopted this ASU prospectively for the year ending December 31, 2013 and presented the additional disclosures in Note 15.
As of January 1, 2012, $258,343 had been contributed by the investors to Essent Group in return for approximately 25,475 Class A common shares. In 2012, investors made additional capital contributions to Essent Group totaling $55,000 in return for approximately 5,424 Class A shares and in 2013, investors made additional capital contributions to Essent Group totaling $124,995 in return for approximately 12,325 Class A shares. In total, $438,338 of capital contributions were made by investors from inception through Essent Group's initial public offering.
the selling shareholders. The total net proceeds from the IPO were $313.7 million after deducting underwriting discounts and commissions of $21.5 million and other offering expenses of approximately $4 million.
Upon the closing of our IPO, all shares of our then-outstanding Class A common shares and Class B-2 common shares, issued under the Company's 2009 Restricted Share Plan as more fully discussed in Note 10, automatically converted into an aggregate of 64,688 Common Shares. Under the terms of the Amended Subscription Agreement, the equity funding commitment terminated upon the completion of the initial public offering.
The amortized cost and fair value of available for sale securities at December 31, 2013, 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 mortgage-backed securities and asset-backed securities provide for periodic payments throughout their lives, they are listed below in separate categories.
Premiums receivable consist of premiums due on our mortgage insurance policies. If mortgage insurance premiums are unpaid for more than 90 days, the receivable is written off against earned premium and the related insurance policy is cancelled. For all periods presented, Essent Group did not record a provision or an allowance for doubtful accounts.
On December 1, 2009, under the terms of an asset purchase agreement dated October 7, 2009 between Essent Guaranty and Triad (the "Asset Purchase Agreement"), we acquired all of Triad's proprietary mortgage insurance information technology and operating platform, certain software and substantially all of the supporting hardware, as well as furniture and fixtures, in exchange for payments of up to $30,000 in cash, subject to certain conditions outlined in the Asset Purchase Agreement, and the assumption of certain contractual obligations. In addition, pursuant to this transaction, 39 employees of Triad's information technology, operations and compliance departments were offered, and accepted, employment with Essent Guaranty. Effective with the completion of the transaction, Essent Guaranty began providing information systems maintenance and development services, customer service and policy administration support to Triad under the terms of a services agreement dated
As the assets acquired and liabilities assumed did not constitute a business, the transaction was accounted for as an acquisition of assets. Under the Asset Purchase Agreement, fixed payments of $15,000 were due and paid as follows: $10,000 on the Closing Date of December 1, 2009, and $2,500 each on the first and second anniversaries of the Closing Date. Contingent payments totaling $15,000 are due commencing 30 months after the closing date, or June 1, 2012, in six equal semi-annual installments if Essent Guaranty or any affiliate US domestic insurance company have written mortgage insurance policies (other than mortgage reinsurance or other types of credit enhancement) on mortgage loans having an aggregate unpaid principal balance of not less than $500,000 in the six months preceding such contingent payment. On December 1, 2009, $15,479 was recorded as purchase price for these acquired assets, which included the net present value of the fixed payments. The depreciation for the fixed assets was recorded over three years from December 1, 2009 to November 30, 2012. In March 2011, based on Essent Guaranty's level of written mortgage insurance policies, management concluded that it was probable that the $15,000 of contingent payments would be made. Accordingly, a liability was accrued effective March 31, 2011 for the net present value of the additional contingent payments due Triad, with an offsetting increase in the purchase price of the acquired assets allocated pro rata based on their relative fair value at the acquisition date. The depreciation of the fixed assets associated with the purchase for the contingent payments was recorded over the period from April 1, 2011 to November 30, 2012. Contingent payments totaling $5,000 were made in each of the years ended December 31, 2013 and 2012.
Under the terms of the Services Agreement, we provide the following services to Triad in exchange for fees: (i) maintain and support the licensed technology and equipment and provide to Triad certain information and technology services; (ii) access to the Triad technology platform in order to support Triad's business pursuant to the license grant outlined in the Services Agreement; (iii) customer support-related services; and (iv) technology development services. The fee earned by Essent Group during the first contract year from December 1, 2009 to November 30, 2010 was a fixed amount. Effective December 1, 2010, the fee is based principally on the number of Triad's insurance policies in force on a monthly basis. Accordingly, this fee is reduced as Triad's policies in force decline. We earned fees under the Services Agreement of $2,988, $3,800 and $4,676 for the years ended December 31, 2013, 2012 and 2011, respectively, which are included in other income in the accompanying consolidated statements of comprehensive income (loss).
For the year ended December 31, 2013, $511 was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $665 favorable prior-year
Under the terms of CUW Solutions' contract underwriting agreements with lenders and subject to contractual limitations on liability, we agreed to indemnify the lender against losses incurred in the event that we make an error in determining whether loans processed meet specified underwriting criteria, to the extent that such error materially restricts or impairs the salability of such loan, results in a material reduction in the value of such loan or results in the lender repurchasing the loan. The indemnification may be in the form of monetary or other remedies. For the year ended December 31, 2013 and 2012, we have paid $5 and $0, respectively, related to remedies. As of December 31, 2013, management believes any potential claims for indemnifications related to contract underwriting services through December 31, 2013 are not material to our consolidated financial position or results of operations.
We lease office space in Pennsylvania, North Carolina, California and Bermuda under leases accounted for as operating leases. In 2012, we amended our lease agreement in Pennsylvania for additional office space and extended the lease term to 2023. In 2012, we also entered into a new two year lease agreement for our office space in North Carolina commencing on December 1, 2012, and we entered into a sublease agreement with Triad Guaranty Insurance Corporation for a portion of the space leased under the new lease agreement. In August 2012, we entered into a new five year lease agreement for office space in Irvine, California commencing on October 1, 2012.
The Class A common shares ranked senior to the Class B-1 common shares and the Class B-2 common shares in all respects as to rights of payment and distribution. The Class B-1 common shares and the Class B-2 common shares ranked junior to the Class A common shares and pari passu with one another in all respects as to rights of payment and distribution.
receive an annual fee for each calendar year (or portion thereof) equal to the lesser of three-quarters of one percent of the total amount invested in Essent Group or a total of $2,300. The annual fee earned by these investors was $1,677 for the year ended December 31, 2011. The annual fee was waived by the investors for the years ended December 31, 2012 and thereafter.
Vested Class B-2 common shares were automatically convertible into Class B-1 common shares upon the consummation of an initial public offering of Essent Group's Shares at an IPO Valuation in excess of the aggregate Class A Preference Amounts (as defined in the Bye-Laws) of all Class A common shares then outstanding. Class B-2 common shares had no voting rights.
Shares, which will be increased on the first day of each of the Company's fiscal years beginning with fiscal year 2014, in an amount equal to the lesser of (i) 1,500 Common Shares, (ii) 2% of the Company's outstanding Common Shares on the last day of the immediately preceding fiscal year, or (iii) such number of Common Shares as determined by the Company's Board of Directors. As of December 31, 2013, there were 12,322 Common Shares available for future grant under the 2013 Plan.
Under the 2009 Restricted Share Plan, certain members of management were granted nonvested Class B-2 common shares upon their employment. The shares vest based on a formula that considers the amount of capital funded under the Amended Subscription Agreement and the period of employment of the respective employee. One-third of Class B-2 shares vest on the third, fourth and fifth anniversary of the employee's date of hire multiplied by the "Investment Percentage." The Investment Percentage is defined as the percentage equal to (i) the aggregate amount of equity capital actually invested in Essent Group pursuant to the Amended Subscription Agreement as of any applicable vesting date, divided by (ii) $750. The vesting period starts upon the respective employee's date of hire.
commencing January 1, 2014. The following table summarizes nonvested Common Share and nonvested Common Share unit activity for the year ended December 31:
In addition to the nonvested share activity above, the Compensation Committee of the Board of Directors approved the issuance of Class A common shares which vested upon issuance of 57, 48 and 46 in 2013, 2012 and 2011, respectively. The estimated fair market value for each of the Class A common shares issued at the date of grant was $10.92 in 2013, $10.11 in 2012 and $10.00 per share in 2011.
Prior to our initial public offering, independent appraisals were obtained in connection with the valuation of Class A and Class B-2 common shares. For nonvested Common Shares granted in September 2013, the valuation estimate was based on analysis provided by the underwriters regarding the estimated fair value of Essent and the estimated IPO price range. Factors considered in determining the IPO price range and Common Share valuation included prevailing market conditions, estimates of the Company's business potential and earnings prospects, the Company's historical operating results, market valuations of companies deemed comparable to the Company and an assessment of risks and opportunities. For nonvested Common Share units granted in October 2013, the initial public offering price of Common Shares was used. Subsequent to our initial public offering, quoted market prices were used for the valuation of Common Shares.
In 2013, Essent Group exercised its right to purchase 1.1 vested Class A common shares at fair value of $10.92 per share and 5 vested Class B-2 common shares at fair value of $1.80 per share from former employees. In 2012, Essent Group exercised its right to purchase 0.7 vested Class A common shares from a former employee at fair value of $10.11 per share. The repurchased shares were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of December 31, 2013.
As of December 31, 2013, the statutory income tax rates of the countries where the Company does business are 35% in the United States and 0.0% in Bermuda. The statutory income tax rate of each country is applied against the taxable income from each country to calculate the income tax expense (benefit).
Income tax expense (benefit) 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. 35%; Bermuda 0.0%). The reconciliation of the difference between income tax expense (benefit) and the expected tax provision at the weighted average tax rate is as follows for the years ended December 31:
We provide deferred taxes to reflect the estimated future tax effects of the differences between the financial statement and tax bases of assets and liabilities using currently enacted tax laws. The net deferred tax asset is comprised of the following at December 31:
realized. As a result, we released the valuation allowance on our deferred tax assets, and recognized a net deferred tax benefit of $8,267 in the year ended December 31, 2013.
Prior to the conversion to Common Shares upon completion of the IPO, all of the Class A shares were contingently issuable potential Common Shares, but they were antidilutive to the diluted earnings per Common Share calculation in 2013. There were no other antidilutive shares for 2013. For the year ended December 31, 2012, 343 nonvested Class A shares were antidilutive and 5,663 nonvested Class B-2 shares were antidilutive. For the year ended December 31, 2011, 251 nonvested Class A shares were antidilutive and 5,659 nonvested Class B-2 shares were antidilutive.
allocated pro rata to the Class A and Class B-2 shares in proportion to their percentage of vested equity capital. During the fourth quarter of 2013, the Company corrected the allocation of undistributed earnings to the Class A and Class B-2 shares from amounts previously presented. As a result, undistributed earnings for the six months ended June 30, 2013 and nine months ended September 30, 2013 allocated to the Class B-2 shares was increased by $540 and $669, respectively, and the undistributed earnings allocated to the Class A shares was reduced by the same amounts. The Company has evaluated this correction and concluded that the impact on the previously reported amounts is not material to the consolidated financial statements for these periods.
The following table shows the rollforward of accumulated other comprehensive income (loss) for the year ended December 31, 2013:
The estimated fair values and related carrying amounts of our financial instruments were as follows:
At December 31, 2013, 2012 and 2011, the statutory capital of our insurance subsidiaries, which is defined as the total of statutory surplus and contingency reserves, was well in excess of the statutory capital necessary to satisfy the insurance subsidiaries' regulatory requirements.
Essent Guaranty has a capital maintenance agreement with Essent PA under which Essent Guaranty agreed to contribute funds, under specified conditions, to maintain Essent PA's risk to capital ratio at or below 25.0 to 1 in return for a surplus note. As of December 31, 2013, Essent PA's risk to capital ratio was 17.1 to 1 and there were no amounts outstanding related to this agreement.
The accompanying Parent Company financial statements should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements. These financial statements have been prepared on the same basis and using the same accounting policies as described in the consolidated financial statements included herein, except that the Parent Company uses the equity-method of accounting for its majority owned subsidiaries.