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 385 employees as of December 31, 2018. For the years ended December 31, 2018, 2017 and 2016, we generated new insurance written, or NIW, of approximately $47.5 billion, $43.9 billion and $34.9 billion, respectively. As of December 31, 2018, we had approximately $137.7 billion of insurance in force. Our top ten customers represented approximately 43.5%, 45.8% and 35.1% of our NIW on a flow basis for the years ended December 31, 2018, 2017 and 2016, respectively.
Premiums ceded or assumed under reinsurance arrangements. Prior to March 2018, we had not ceded any premiums under third-party reinsurance contracts. In 2018, Essent Guaranty entered into third-party reinsurance agreements. See Note 5 to our consolidated financial statements.
Premiums are paid either on a monthly installment basis ("monthly premiums"), in a single payment at origination ("single premiums"), or in some cases as an annual premium. For monthly premiums, we receive a monthly premium payment which is recorded as net premiums earned in the month the coverage is provided. Monthly premium payments are based on the original mortgage amount rather than the amortized loan balance. Net premiums written may be in excess of net premiums earned due to single premium policies. For single premiums, we receive a single premium payment at origination, which is recorded as "unearned premium" and earned over the estimated life of the policy, which ranges from 36 to 156 months depending on the term of the underlying mortgage and loan-to-value ratio at date of origination. If single premium policies are cancelled due to repayment of the underlying loan and the premium is non-refundable, the remaining unearned premium
In connection with the acquisition of our mortgage insurance platform, we entered into a services agreement with Triad Guaranty Inc. and its wholly-owned subsidiary, Triad Guaranty Insurance Corporation, which we refer to collectively as "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. This 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 was automatically extended until November 30, 2019.
Other income also includes changes in the fair value of derivative instruments. Through June 30, 2016, the insurance and certain of the reinsurance policies issued by Essent Re in connection with Freddie Mac's Agency Credit Insurance Structure (ACIS) program were previously accounted for as derivatives under U.S. generally accepted accounting principles ("GAAP") with the fair value of these policies reported as an asset or liability and changes in the fair value of these policies reported in earnings. Changes in the fair value of these policies were impacted by changes in market observable factors. In the quarter ended September 30, 2016, these policies were amended and are now accounted for as insurance rather than as derivatives.
the percentage of coverage on insured loans, with deeper average coverage tending to increase losses incurred;
the distribution of claims over the life of a book. The average age of our insurance portfolio is young with 79% of our IIF as of December 31, 2018 having been originated since January 1, 2016. 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, to increase as our portfolio seasons. See "-Mortgage Insurance Earnings and Cash Flow Cycle" below.
We believe, based upon our experience and industry data, that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. As of December 31, 2018, 79% of our IIF relates to business written since January 1, 2016 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.
related defaults that result in claims will be less than the default-to-claim experience of non-hurricane-related defaults. In addition, under our master policy, our exposure may be limited on hurricane-related claims. For example, we are permitted to exclude a claim entirely where damage to the property underlying a mortgage was the proximate cause of the default and adjust a claim where the property underlying a mortgage in default is subject to unrestored physical damage.
Our most significant expense is compensation and benefits for our employees, which represented 60%, 63% and 64% of other underwriting and operating expenses for the years ended December 31, 2018, 2017 and 2016, respectively. Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes.
Underwriting and other expenses include legal, consulting, other professional fees, premium taxes, travel, entertainment, marketing, licensing, supplies, hardware, software, rent, utilities, depreciation and amortization and other expenses. We anticipate that as we continue to add new 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 for the full year 2019 as compared to 2018.
The amount of income tax expense or benefit recorded in future periods will be dependent on the jurisdictions in which we operate and the tax laws and regulations in effect.
As discussed above, premiums we collect and earn are generated based on our IIF, which is a function of our NIW and cancellations. From 2010, when we first began writing policies, through December 31, 2018, we have increased our NIW annually. We have also grown the number of customers who have approved us to provide mortgage insurance over this period, as well as increased our NIW from certain customers. The following table includes a summary of the change in our IIF for the years ended December 31, 2018, 2017 and 2016 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, 2018 by vintage:
For the year ended December 31, 2018, we reported net income of $467.4 million, compared to net income of $379.7 million for the year ended December 31, 2017. The increase in our operating results in 2018 over 2017 was primarily due to the increase in net premiums earned associated with the growth of our IIF, the increase in net investment income and the decrease in the provision for losses and loss adjustment expense, partially offset by increases in other underwriting and operating expenses, interest expense and income taxes. The increase in income taxes is due largely to an $85.1 million income tax benefit recognized in 2017 associated with the one-time impact of the reduced U.S. statutory corporate income tax rate from 35% to 21%.
The decrease in the provision for losses and LAE in 2018 as compared to 2017 was primarily due to an increase in the number of previously identified insured loans in defaults that cured. At December 31, 2017, loans in default included 2,288 defaults we identified as hurricane-related defaults 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 increase in the average case reserve per default was primarily due to a decrease in the proportion of hurricane-related defaults in the default inventory at December 31, 2018 as compared to December 31, 2017. Based on our experience to date and prior industry experience, we expect the ultimate number of hurricane-related defaults that result in claims will be less than the default-to-claim experience of non-hurricane-related defaults. Accordingly, we applied a lower estimated claim rate to hurricane-related default notices than the claim rate we apply to other notices in our default inventory. Also contributing to the change in the average case reserve per default were 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 and improvements in economic fundamentals.
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:
During the year ended December 31, 2018, the provision for losses and LAE was $11.6 million, comprised of $36.4 million of current year losses partially offset by $24.9 million of favorable prior years' loss development. During the year ended December 31, 2017, the provision for losses and LAE was $27.2 million, comprised of $38.2 million of current year losses partially offset by $10.9 million of favorable prior years' loss development. In 2018, the favorable prior years' loss development includes a $9.9 million reduction of loss and LAE reserves associated with hurricane-related defaults that cured. In both periods, the favorable prior years' loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified defaults that cured.
Other expenses increased as a result of the continued expansion of our business. Other expenses include premium taxes, travel, marketing, hardware, software, rent, depreciation and amortization and other facilities expenses.
For the year ended December 31, 2018, we incurred interest expense of $10.2 million as compared to $5.2 million for the year ended December 31, 2017. The increase was primarily due to an increase in the average amounts outstanding under the Credit Facility and an increase in the weighted average interest rate on amounts outstanding under the Credit Facility. For the year ended December 31, 2018, the average amount outstanding under the Credit Facility was $240.3 million as compared to $154.1 million for the year ended December 31, 2017. As of December 31, 2018 and 2017, the borrowings under the Credit Facility had a weighted average interest rate of 4.43% and 3.49%, respectively.
At December 31, 2018 and 2017, we concluded that it was more likely than not that our deferred tax assets would be realized.
In the year ended December 31, 2017, unearned premiums increased by $40.1 million as a result of net premiums written on single premium policies of $114.3 million which was partially offset by $74.2 million of unearned premium that was recognized in earnings during the year. In the year ended December 31, 2016, unearned premiums increased by $18.6 million as a result of net premiums written on single premium policies of $99.4 million which was partially offset by $80.8 million of unearned premium that was recognized in earnings during the year. Included in unearned premium recognized was $23.2 million and $36.9 million related to policy cancellations for the year ended December 31, 2017 and 2016, respectively.
Other income includes fees earned for information technology and customer support services provided to Triad and contract underwriting revenues. In 2016, other income also included changes in the fair value of the insurance and certain reinsurance policies issued by Essent Re under the ACIS program. These policies were amended in the three months ended September 30, 2016 and are accounted for as insurance rather than as derivatives subsequent to their amendment. The decrease in other income for the year ended December 31, 2017 as compared to the same period in 2016, was primarily due to the favorable net valuation adjustments recorded in 2016 associated with ACIS contracts formerly accounted for as insurance
The increase in the provision for losses and LAE in 2017 as compared to 2016 was primarily due to the increase in the number of insured loans in default, partially offset by previously identified defaults that cured.
Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax expense was$18.8 million for the year ended December 31, 2017 compared to $89.3 million for the year ended December 31, 2016. Income tax expense for the year ended December 31, 2017 was calculated using an effective tax rate of 26.9% and was reduced by $85.1 million of income tax benefits associated with the one-time impact of the reduced U.S. statutory corporate income tax rate on the company's net deferred tax liability position and $3.2 million of excess tax benefits associated with the vesting of common shares and common share units during the period as required by ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), adopted on January 1, 2017. Prior to the adoption of ASU 2016-09, excess tax benefits were recognized in additional paid-in-capital. Our effective tax rate was 28.6% for the year ended 2016. During 2017, the proportion of our consolidated earnings generated in Bermuda increased as a result of insurance and reinsurance contracts executed with Freddie Mac and Fannie Mae and the quota share reinsurance agreement between Essent Guaranty and Essent Re. Bermuda does not have a corporate income tax.
interest payments and repayment of borrowings under our Credit Facility; and
In December 2014, Essent Guaranty became a member of the Federal Home Loan Bank of Pittsburgh (the “FHLBank”). In November 2018, Essent Guaranty entered into additional agreements with the FHLBank providing Essent Guaranty with secured borrowing capacity with the FHLBank. Such borrowings may be used by Essent Guaranty to provide supplemental liquidity. As of December 31, 2018, Essent Guaranty had no borrowings outstanding with the FHLBank.
inability to sell investment assets to provide cash to fund operating needs;
Our combined risk-to-capital calculation for our U.S. insurance subsidiaries as of December 31, 2018 was as follows:
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. As of December 31, 2018, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs. As of December 31, 2018, Essent Guaranty's Available Assets were $1.91 billion and its Minimum Required Assets were $1.55 billion based on our interpretation of the PMIERs.
The GSEs released PMIERs 2.0 on September 27, 2018 and have indicated that the PMIERs 2.0 framework will take effect on March 31, 2019. If PMIERs 2.0 had been in effect as of December 31, 2018, Essent Guaranty’s excess of Available Assets over Minimum Required Assets would be substantially unchanged from the amount computed under original PMIERs. Essent expects to remain in full compliance with the existing and revised PMIERs, as applicable, prior to and after March 31, 2019.
As of December 31, 2018, 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. Also, see Note 3 to our consolidated financial statements, which summarizes the aggregate amount of gross unrealized losses by asset class in which the fair value of investments available for sale has been less than cost for less than 12 months and for 12 months or more.
As of December 31, 2018, the approximate future payments under our contractual obligations of the type described in the table below are as follows:
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
Schedule I-Summary of Investments-Other Than Investments in Related Parties as of December 31, 2018
Schedule II-Condensed Financial Information of Registrant at December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018
Schedule IV-Reinsurance for the years ended December 31, 2018, 2017 and 2016
We have audited the accompanying consolidated balance sheets of Essent Group Ltd. and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company operates as a single segment for reporting purposes as substantially all business operations, assets and liabilities relate to the private mortgage insurance business and management reviews operating results for the Company as a whole to make operating decisions and assess performance.
We monitor our fixed maturities for unrealized losses that appear to be other-than-temporary. A fixed maturity security is considered to be other-than-temporarily impaired when the security's fair value is less than its amortized cost basis and 1) we intend to sell the security, 2) it is more likely than not that we will be required to sell the security before recovery of the security's amortized cost basis, or 3) we believe we will be unable to recover the entire amortized cost basis of the security (i.e., a credit loss has occurred). When we determine that a credit loss has been incurred, but we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of the security's amortized cost basis, the portion of the other-than-temporary impairment that is credit related is recorded as a realized loss in the consolidated statements of comprehensive income, and the portion of the other-than-temporary impairment that is not credit related is included in other comprehensive income. For those fixed maturities for which an other-than-temporary impairment has occurred, we adjust the amortized cost basis of the security and record a realized loss in the consolidated statements of comprehensive income.
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 $7.4 million, $8.0 million and $7.7 million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization of deferred policy acquisition costs totaled $6.7 million, $6.0 million and $5.8 million for the years ended December 31, 2018, 2017 and 2016, 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 88% of earned premium in 2018. 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 $17.7 million and $23.2 million of earned premium related to policy cancellations for the years ended December 31, 2018 and 2017, 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.
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, 2018 and 2017, we concluded that no premium deficiency reserve was required to be recorded in the accompanying consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This update requires certain equity investments (except those accounted for under the equity method of accounting or result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. This update also requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. In addition, an entity is required to evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale investment securities in combination with the entity’s other deferred tax assets. The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not have a material effect on the Company's consolidated operating results or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance will also require additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of this update are effective for annual and interim periods beginning after December 15, 2018. We anticipate adopting this standard on January 1, 2019 using the retrospective adoption approach as of the adoption date and electing certain practical expedients allowed under the standard. The adoption of this ASU is not expected to have a material effect on the Company's consolidated operating results or financial position.
are effective for annual and interim periods beginning after December 15, 2019. While the Company is still evaluating this ASU, we do not expect it to impact our accounting for insurance losses and loss adjustment expenses ("LAE") as these items are not within the scope of this ASU.
The gross unrealized losses on these investment securities are principally associated with the changes in market interest rates and credit spreads subsequent to their purchase. Each issuer is current on its scheduled interest and principal payments. 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 an impairment is other-than-temporary. There were no other-than-temporary impairments in the year ended December 31, 2018. We recorded other-than-temporary impairments of $0.1 million and $0.1 million in the years ended December 31, 2017 and 2016, respectively, on securities in an unrealized loss position. The impairments resulted from our intent to sell these securities subsequent to the reporting dates.
The Company's other invested assets at December 31, 2018 and December 31, 2017 totaled $31.0 million and $0.5 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 $8.9 million at December 31, 2018 and $8.6 million at December 31, 2017. 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 $759.9 million at December 31, 2018 and $615.8 million at December 31, 2017. In connection with an excess-of-loss reinsurance agreement (see Note 5), Essent Guaranty is required to maintain assets on deposit for the benefit of the reinsurer. The fair value of the assets on deposit was $3.4 million at December 31, 2018. Essent Guaranty
is also required to maintain assets on deposit for the benefit of the sponsor of a fixed income investment commitment. The fair value of the assets on deposit was $6.3 million at December 31, 2018.
On March 22, 2018, Essent Guaranty entered into a fully collateralized reinsurance agreement with Radnor Re 2018-1 Ltd. ("Radnor Re"), an unaffiliated special purpose insurer domiciled in Bermuda, that provides for up to $424.4 million of aggregate excess-of-loss reinsurance coverage at inception for new defaults on a portfolio of mortgage insurance policies issued between January 1, 2017 and December 31, 2017. For the reinsurance coverage period, Essent Guaranty and its affiliates will retain the first layer of $224.7 million of aggregate losses, and Radnor Re will then provide second layer coverage up to the outstanding reinsurance coverage amount. Essent Guaranty and its affiliates retain losses in excess of the outstanding reinsurance coverage amount. The reinsurance premium due to Radnor Re is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR plus a risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during that period. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate the reinsurance agreement, which includes an option to terminate after five years from issuance. If the reinsurance agreement is not terminated after five years from issuance, the risk margin component of the reinsurance premium payable to Radnor Re increases by 50%. Radnor Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $424.4 million to unaffiliated investors. The notes have ten-year legal maturities and are non-recourse to any assets of Essent Guaranty or its affiliates. The proceeds of the notes were deposited into a reinsurance trust for the benefit of Essent Guaranty that will be the source of reinsurance claim payments to Essent Guaranty and principal repayments on the mortgage insurance-linked notes.
The amount of monthly reinsurance premium ceded to Radnor Re will fluctuate due to changes in one-month LIBOR and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreement contains an embedded derivative that will be accounted for separately like a freestanding derivative. The fair value of this derivative at December 31, 2018 and the change in its fair value from inception of the reinsurance agreement to December 31, 2018 was not material.
In connection with entering the reinsurance agreement with Radnor Re, we concluded that the risk transfer requirements for reinsurance accounting were met as Radnor Re is assuming significant insurance risk and a reasonable possibility of a significant loss. In addition, we assessed whether Radnor Re was a variable interest entity ("VIE") and the appropriate accounting for Radnor Re if it was a VIE. A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity. A VIE is consolidated by its primary beneficiary. The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of the decision-making ability and ability to influence activities that significantly affect the economic performance of the VIE. We concluded that Radnor Re is a VIE. However, given that Essent Guaranty (1) does not have the unilateral power to direct the activities that most significantly affect Radnor Re’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits that could be potentially significant to Radnor Re, Radnor Re is not consolidated in these financial statements.
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
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, 2010 through 2017 is presented as supplementary information.
For our mortgage insurance portfolio, our average annual payout of losses as of December 31, 2018 is as follows:
Essent Group and its subsidiaries, Essent Irish Intermediate Holdings Limited and Essent US Holdings, Inc. (collectively, the "Borrowers"), are parties to a secured credit facility (the “Credit Facility”) which provides for a revolving credit facility, term loans and an uncommitted line that may be exercised at the Borrowers' option so long as the Borrowers receive commitments from the lenders. Borrowings under the Credit Facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to Essent’s insurance and reinsurance subsidiaries. Borrowings accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. A commitment fee is due quarterly on the average daily amount of the undrawn revolving commitment. The applicable margin and the commitment fee are based on the senior unsecured debt rating or long-term issuer rating of Essent Group to the extent available, or the insurer financial strength rating of Essent Guaranty. The current annual commitment fee rate is 0.35%. The obligations under the Credit Facility are secured by certain assets of the Borrowers, excluding the stock and assets of its insurance and reinsurance subsidiaries. The Credit Facility contains several covenants, including financial covenants relating to minimum net worth, capital and liquidity levels, maximum debt to capitalization level and Essent Guaranty's compliance with the PMIERs (see Note 17). The borrowings under the Credit Facility contractually mature on May 17, 2021. This description is not intended to be complete in all respects and is qualified in its entirety by the terms of the Credit Facility, including its covenants.
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, 2018, 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 connection with the IPO in 2013, Essent Group's Board of Directors adopted, and Essent Group's shareholders approved, the Essent Group Ltd. 2013 Long-Term Incentive Plan (the "2013 Plan"), which was effective upon completion of the initial public offering. The types of awards available under the 2013 Plan include nonvested shares, nonvested share units, non-
qualified share options, incentive stock options, share appreciation rights, and other share-based or cash-based awards. Amendments to our 2013 Plan were approved by shareholders and effective as of May 3, 2017. These amendments included a reduction in the maximum number of shares and share units available for issuance to 7.5 million under the Amended and Restated 2013 Plan (inclusive of approximately 2.6 million nonvested shares and share units outstanding as of May 3, 2017), down from the approximately 14.7 million shares and share units originally available for issuance under the 2013 Plan. As of December 31, 2018, there were 4.6 million common shares available for future grant under the 2013 Plan.
In September 2013 and February 2014, 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 time-based share awards granted in February 2014 vested in three equal installments on March 1, 2015, 2016 and 2017. The performance-based share awards vest 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, and the February 2014 performance-based share awards vested on March 1, 2017.
In February of each year, 2015 through 2018, 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 connection with our incentive program covering bonus awards for performance year 2013, in February 2014, time-based share awards and share units were issued to certain employees that vested in three equal installments on January 1, 2015, 2016 and 2017. In January 2017, time-based share units were issued to all vice president and staff level employees that vest in three equal installments in January 2018, 2019 and 2020. In connection with our incentive program covering bonus awards for performance years 2014 through 2017, 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 or share units that vested was $75.9 million, $22.4 million and $15.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, there was $18.1 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at December 31, 2018 and we expect to recognize the expense over a weighted average period of 1.9 years.
In connection with our incentive program covering bonus awards for performance year 2018, in February 2019, 113,631 nonvested common share units were issued to certain employees and are subject to time-based vesting. In February 2019, 90,292 nonvested common shares were granted to certain members of senior management and are subject to time-based vesting.
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. for 2018, U.S. 21%; Bermuda 0.0%; for 2017 and prior U.S. 35%; 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:
In evaluating our ability to realize the benefit of our deferred tax assets, we consider the relevant impact of all available positive and negative evidence including our past operating results and our forecasts of future taxable income. At December 31, 2018 and 2017, after weighing all the evidence, management concluded that it was more likely than not that our deferred tax assets would be realized.
At December 31, 2018 and 2017, the Company had no unrecognized tax benefits. As of December 31, 2018, the U.S. federal income tax returns for the tax years 2015 through 2017 remain subject to examination. The Company has not recorded any uncertain tax positions as of December 31, 2018 or December 31, 2017.
The Company is a party to an investment advisory agreement with Goldman Sachs Asset Management, L.P., a subsidiary of The Goldman Sachs Group, Inc. ("Goldman Sachs"), one of Essent Group's investors prior to 2017. Through the date of our IPO, Goldman Sachs beneficially owned 11.35% of our outstanding shares. Subsequent to the IPO and prior to 2017, Goldman Sachs directly held less than 10% of our outstanding shares. Investment expense incurred under the investment advisory agreement totaled $0.8 million for the year ended December 31, 2016. Goldman Sachs is also one of several lenders under our Credit Facility discussed in Note 7 and was paid an upfront fee of $0.1 million in 2016. Commitment fees and interest expense incurred under the Credit Facility allocable to Goldman Sachs totaled $0.1 million in 2016.
Level 3-Valuations derived from one or more significant inputs that are unobservable.
At December 31, 2018 and 2017, 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.
Under The Insurance Act 1978, as amended, and related regulations of Bermuda (the "Insurance Act"), Essent Re is required to annually prepare statutory financial statements and a statutory financial return in accordance with the financial reporting provisions of the Insurance Act, which is a basis other than GAAP. The Insurance Act also requires that Essent Re
maintain minimum share capital of $1 million and must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margins and enhanced capital requirement pertaining to its general business. At December 31, 2018 and 2017, all such requirements were met.
During the three years ending December 31, 2018, the Parent Company did not receive any dividends from its subsidiaries.