New insurance written ("NIW") includes NIW on a flow basis (in which loans are insured in individual, loan-by-loan transactions) and bulk insurance that we write (in which each loan in a portfolio of loans is insured in a single transaction).
Combined risk-to-capital ratio equals the sum of net risk in force of Essent Guaranty, Inc. and Essent Guaranty of PA, Inc. divided by combined 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.
We are an established and growing private mortgage insurance company. Essent Guaranty, Inc., our wholly-owned insurance subsidiary which we refer to as "Essent Guaranty," is licensed to write coverage in all 50 states and the District of Columbia. The financial strength ratings of Essent Guaranty are A3 with a stable outlook by Moody's Investors Service ("Moody's"), BBB+ with a stable outlook by S&P Global Ratings ("S&P") and A (Excellent) with a stable outlook by A.M. Best.
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 387 employees as of December 31, 2019. For the years ended December 31, 2019, 2018 and 2017, we generated new insurance written, or NIW, of approximately $63.6 billion, $47.5 billion and $43.9 billion, respectively. As of December 31, 2019, we had approximately $164.0 billion of insurance in force. Our top ten customers represented approximately 42.8%, 43.5% and 45.8% of our NIW on a flow basis for the years ended December 31, 2019, 2018 and 2017, respectively.
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. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. A revised PMIERs framework, which we refer to as "PMIERs 2.0," became effective on March 31, 2019. As of December 31, 2019, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0.
Under the Dodd-Frank Act, the Consumer Financial Protection Bureau ("CFPB") is authorized to issue regulations governing a loan originator's determination that, at the time a loan is originated, the consumer has a reasonable ability to repay the loan. The Dodd-Frank Act provides a statutory presumption that a borrower will have the ability to repay a loan if the loan has characteristics satisfying the QM definition. Under the CFPB's final rule regarding QMs, which we refer to as the "QM Rule," a loan is deemed to be a QM if it has certain loan features, satisfies extensive documentation requirements and meets limitations on fees and points and APRs. The QM Rule provides a "safe harbor" for QM loans with annual percentage rates, or APRs, below the threshold of 150 basis points over the Average Prime Offer Rate, or APOR, and a "rebuttable presumption" for QM loans with an APR above that threshold.
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. The QRM regulations align the definition of a QRM loan with that of a QM loan. If,
however, the QRM definition is changed (or the QM definition is amended) in a manner that is unfavorable to us, such as to give no consideration to mortgage insurance in computing LTV or to require a large down payment for a loan to qualify as a QRM, the attractiveness of originating and securitizing loans with lower down payments may be reduced, which may adversely affect the future demand for mortgage insurance. See "Business-Regulation-Federal Mortgage-Related Laws and Regulation-Dodd-Frank Act-Qualified Residential Mortgage Regulations-Risk Retention Requirements" and "Risk Factors-Risks Relating to Our Business-The amount of insurance we write could be adversely affected by the Dodd-Frank Act's risk retention requirements and the definition of Qualified Residential Mortgage ("QRM")."
On December 22, 2017, the “Tax Cuts and Jobs Act” (“TCJA”) was enacted. The provisions of TCJA include broad tax reforms that are applicable to the Company, including a reduction in the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. This change in tax rates required us to remeasure our deferred tax assets and liabilities as of the enactment date resulting in a one-time $85.1 million income tax benefit in the accompanying consolidated statement of comprehensive income for the year ended December 31, 2017. In addition, TCJA includes a base erosion and anti-abuse tax (“BEAT”). The BEAT is an alternative tax which must be paid if it is greater than the Company's regular tax liability. This alternative base erosion tax, if applicable, may limit or eliminate the tax benefit associated with certain base erosion payments. Premiums ceded by Essent Guaranty under the quota share reinsurance agreement to Essent Re are considered base erosion payments under TCJA. The Company may be subject to the BEAT tax in future periods depending on the earnings of the Company’s U.S. insurance companies and the level of premiums ceded to Essent Re. See "Risk Factors-Risks Relating to Taxes-Proposed U.S. tax legislation could have an adverse impact on us or holders of our common shares."
Premiums associated with our U.S. mortgage insurance business are based on insurance in force, or IIF, during all or a portion of a period. A change in the average IIF during a period causes premiums to increase or decrease as compared to prior periods. Average net premium rates in effect during a given period will also cause premiums to differ when compared to earlier periods. IIF at the end of a reporting period is a function of the IIF at the beginning of such reporting period plus NIW less policy cancellations (including claims paid) during the period. As a result, premiums are generally influenced by:
Premiums ceded or assumed under reinsurance arrangements. Prior to March 2018, we had not ceded any premiums under third-party reinsurance contracts. In 2018 and 2019, Essent Guaranty entered into third-party reinsurance agreements. See Note 5 to our consolidated financial statements.
As more fully described in Note 5 to our consolidated financial statements, the premiums ceded under certain reinsurance contracts with unaffiliated third parties varies based on changes in market interest rates. Under GAAP, these contracts contain embedded derivatives that are accounted for separately as freestanding derivatives. The change in the fair value of the embedded derivatives is reported in earnings and included in other income.
changes in housing values, which affect our ability to mitigate our losses through the sale of properties with loans in default as well as borrower willingness to continue to make mortgage payments when the value of the home is below or perceived to be below the mortgage balance;
the rate at which we rescind policies. Because of tighter underwriting standards generally in the mortgage lending industry and terms set forth in our master policy, we expect that our level of rescission activity will be lower than rescission activity seen in the mortgage insurance industry for vintages originated prior to the financial crisis; and
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.
Our average net premium rate is dependent on a number of factors, including: (1) the risk characteristics and average coverage on the mortgages we insure; (2) the mix of monthly premiums compared to single premiums in our portfolio; (3) cancellations of non-refundable single premiums during the period; (4) changes to our pricing for NIW; and (5) premiums ceded under third-party reinsurance agreements. For the years ended December 31, 2019, 2018 and 2017, our average net premium rate was 0.49%, 0.50% and 0.53%, respectively. In 2018 and 2019, Essent Guaranty entered into third-party reinsurance agreements, and in 2018, we reduced pricing on our published rates effective for future NIW. We anticipate that the continued use of third-party reinsurance and the 2018 pricing reductions on future NIW will reduce our average net premium rate in future periods.
For the year ended December 31, 2019, we reported net income of $555.7 million, compared to net income of $467.4 million for the year ended December 31, 2018. The increase in our operating results in 2019 over 2018 was primarily due to the increase in net premiums earned associated with the growth of our IIF and the increase in net investment income, partially
Net premiums earned increased in the year ended December 31, 2019 by 20% compared to the year ended December 31, 2018 due to the increase in our average IIF from $123.4 billion in 2018 to $152.0 billion in 2019, partially offset by the decrease in the average net premium rate from 0.50% for the year ended December 31, 2018 to 0.49% for the year ended December 31, 2019. The decrease in the average net premium rate during the year ended December 31, 2019 is primarily due to an increase in premiums ceded under third-party reinsurance agreements along with changes in the mix of the mortgages we insure and changes in our pricing, partially offset by an increase in premiums earned on the cancellation of non-refundable single premium policies. In the year ended December 31, 2019, ceded premiums increased to $35.5 million, from $10.8 million in the year ended December 31, 2018 due to new third-party reinsurance agreements entered in 2019 and a full year of premiums ceded under third-party reinsurance agreements entered in 2018.
Net premiums written increased in the year ended December 31, 2019 by 11% over the prior year. The increase was due primarily to the increase in average IIF for the year ended December 31, 2019 as compared to the year ended December 31, 2018, partially offset by a decrease in new single premium policies written, an increase in premiums ceded under third-party reinsurance agreements, changes in the mix of mortgages we insure and changes in our pricing.
In the year ended December 31, 2019, unearned premiums decreased by $16.6 million as a result of net premiums written on single premium policies of $93.5 million which was offset by $110.1 million of unearned premium that was recognized in earnings during the year. In the year ended December 31, 2018, unearned premiums increased by $35.8 million as a result of net premiums written on single premium policies of $114.9 million which was partially offset by $79.1 million of unearned premium that was recognized in earnings during the year. Included in unearned premium recognized was $42.5 million and $17.7 million related to policy cancellations for the year ended December 31, 2019 and 2018, respectively.
Our net investment income was derived from the following sources for the periods indicated:
The increase in the provision for losses and LAE in 2019 as compared to 2018 was primarily due to increases in the number of insured loans in default in the current period. The provision for losses and LAE in 2018 includes a $9.9 million reduction recorded in the fourth quarter of 2018 associated with the performance of previously identified hurricane-related defaults and our expectations of the amount of ultimate losses on the remaining delinquencies. The provision for losses and LAE in 2019 was also impacted by changes in the age and composition of the insured loans in default.
The decrease in the average case reserve per default was 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 and improvements in economic fundamentals.
The significant factors contributing to the change in other underwriting and operating expenses are:
Premium taxes increased primarily due to an increase in premiums written.
Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax expense was $103.3 million for the year ended December 31, 2019 compared to $79.3 million for the year ended December 31, 2018. Income tax expense for the year ended December 31, 2019 was calculated using an effective tax rate of 16.0%. For the year ended December 31, 2019, income tax expense was reduced by excess tax benefits associated with the vesting of common shares and common share units of $2.2 million. Income tax expense for the year ended December 31, 2018, was calculated using an effective tax rate of 16.0% and includes $1.5 million of expense associated with accrual to return adjustments associated with the completion of the 2017 U.S. federal income tax return. Income tax expense for the year ended December 31, 2018 was reduced by excess tax benefits associated with the vesting of common shares and common share units of $9.6 million. The tax effects associated with the vesting of common shares and common share units and the accrual to return adjustments associated with the completion of 2017 U.S. federal income tax return are treated as discrete items in the reporting period in which they occur and are not considered in determining the annual effective tax rate.
At December 31, 2019 and 2018, we concluded that it was more likely than not that our deferred tax assets would be realized.
Pursuant to the FAST Act Modernization and Simplification of Regulation S-K, discussions related to the changes in results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 have been omitted. Such omitted discussion can be found under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 19, 2019.
Cash flow provided by operating activities totaled $589.8 million for the year ended December 31, 2019, as compared to $625.3 million for the year ended December 31, 2018 and $368.6 million for the year ended December 31, 2017. The decrease in cash flow from operations of $35.5 million in 2019 was primarily due to an increase in United States Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) purchased and an increase in expenses paid, partially offset by increases in premiums collected and net investment income. The increase in cash flow from operations of $256.7 million in 2018 was primarily a result of increases in premium collected and net investment income, and a net decrease in T&L Bonds, partially offset by increases in expenses paid.
We compute a risk-to-capital ratio for our U.S. insurance companies on a separate company statutory basis, as well as for our combined insurance operations. The risk-to-capital ratio is our net risk in force divided by our statutory capital. Our net risk in force represents risk in force net of reinsurance ceded, if any, and net of exposures on policies for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders' surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual contributions to the contingency reserve of 50% of net premiums earned. These contributions must generally be maintained for a period of ten years. However, with regulatory approval, a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year.
During the year ended December 31, 2019, no capital contributions were made to our U.S. insurance subsidiaries. During the year ended December 31, 2018, Essent Holdings made capital contributions to Essent Guaranty of $15 million to support new and existing business and Essent Guaranty paid a dividend to Essent Holdings of $40 million which was used to repay the borrowings remaining under the revolving component of the Credit Facility.
Essent Re has entered into GSE and other risk share transactions, including insurance and reinsurance transactions with Freddie Mac and Fannie Mae. Essent Re also reinsures 25% of Essent Guaranty’s NIW under a quota share reinsurance agreement. During the year ended December 31, 2019, Essent Re paid dividends to Essent Group Ltd. of $55 million to increase holding company liquidity. Essent Group Ltd. made no capital contributions to Essent Re during the years ended December 31, 2019 and 2018. As of December 31, 2019, Essent Re had total stockholders’ equity of $939.4 million and net risk in force of $10.3 billion.
Effective December 31, 2015, Fannie Mae and Freddie Mac, at the direction of the FHFA, implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include financial strength requirements incorporating a risk-based framework that require approved insurers to have a sufficient level of liquid assets from which to pay claims. This risk-based framework provides that an insurer must hold a substantially higher level of required assets for insured loans that are in default compared to a performing loan. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0") which became effective on March 31, 2019. As of December 31, 2019, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with the PMIERs 2.0. As of December 31, 2019, Essent Guaranty's Available Assets were $2.34 billion and its Minimum Required Assets were $1.50 billion based on our interpretation of the PMIERs 2.0.
As of December 31, 2019, investments totaled $3.4 billion compared to $2.8 billion as of December 31, 2018. In addition, our total cash was $71.4 million as of December 31, 2019, compared to $64.9 million as of December 31, 2018. The increase in investments was primarily due to investing net cash flows from operations during the year ended December 31, 2019.
We lease office space in Pennsylvania, North Carolina, California and Bermuda under leases accounted for as operating leases. A portion of the space leased in North Carolina has been subleased to Triad; minimum lease payments shown above have not been reduced by minimum sublease rental income of $0.1 million due in 2020 under the non-cancelable sublease.
Essent Guaranty has entered into fully collateralized reinsurance agreements ("Radnor Re Transactions") with unaffiliated special purpose insurers domiciled in Bermuda. The Radnor Re special purpose insurers are special purpose variable interest entities that are not consolidated in our consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance. As of December 31, 2019, our estimated off-balance sheet maximum exposure to loss from the Radnor Re entities was $21.3 million, representing the estimated net present value of investment earnings on the assets in the reinsurance trusts. See Note 5 to our consolidated financial statements for additional information.
ASC No. 740 provides a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In accordance with ASC No. 740, before a tax benefit can be recognized, a tax position is evaluated using a threshold that it is more likely than not that the tax position will be sustained upon examination. When evaluating the more-likely-than-not recognition threshold, ASC No. 740 provides that a company should presume the tax position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. If the tax position meets the more-likely-than-not recognition threshold, it is initially and subsequently measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. This analysis is inherently subjective, as it requires management to forecast the outcome of future tax examinations and the amount of tax benefits that will ultimately be realized given the facts, circumstances, and information available at the reporting date. New information may become available in future periods that could cause the actual amount of tax benefits to vary from management's estimates.
Our fixed maturity and short-term investments are classified as available for sale and are reported at fair value. The related unrealized gains or losses are, after considering the related tax expense or benefit, recognized as a component of accumulated other comprehensive income (loss) in stockholders' equity. Realized investment gains and losses are reported in income based upon specific identification of securities sold. Each quarter we perform reviews of all of our investments in order to determine whether declines in fair value below amortized cost were considered other-than-temporary in accordance with
credit ratings from third-party rating agencies and changes in these credit ratings below investment-grade;
Under the current guidance a debt security impairment is deemed other-than-temporary if we either intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery or we do not expect to collect cash flows sufficient to recover the amortized cost basis of the security. During the years ended December 31, 2019, 2018 and 2017, the unrealized losses recorded in the investment portfolio principally resulted from fluctuations in market interest rates and credit spreads. Each issuer is current on its scheduled interest and principal payments. We recorded other-than-temporary impairments of $0.3 million and $0.1 million in the years ended December 31, 2019 and 2017, respectively, for securities in an unrealized loss position. The impairments resulted from our intent to sell these securities subsequent to the reporting date. There were no other-than-temporary impairments in the year ended December 31, 2018.
For information on our material holdings in an unrealized loss position, see "-Financial Condition-Investments."
Schedule IV-Reinsurance for the years ended December 31, 2019, 2018 and 2017
As described in Notes 2 and 6 to the consolidated financial statements, the Company's recorded reserve for losses and loss adjustment expenses of $69 million as of December 31, 2019 is based on management's best estimate of ultimate claim costs for defaulted loans. Upon notification that a borrower has defaulted, management considers internal and third-party information and models to determine the likelihood that a default will reach claim status and projects the amount that the Company will pay if a default becomes a claim. Management's estimates of claim rates and claim sizes will be influenced by prevailing economic conditions, such as the overall state of the economy, current rates or trends in unemployment, changes in housing values and/or interest rates, and management's best judgments as to the future values or trends of these macroeconomic factors. Losses incurred are also generally affected by the characteristics of the Company's insured loans, such as the loan amount, loan-to-value ratio, the percentage of coverage on the insured loan and the credit quality of the borrower.
In these notes to consolidated financial statements, “Essent”, “Company”, “we”, “us”, and “our” refer to Essent Group Ltd. and its subsidiaries, unless the context otherwise requires.
Essent Guaranty reinsures 25% of new insurance written to Essent Reinsurance Ltd. (“Essent Re”), an affiliated Bermuda domiciled Class 3A Insurer licensed pursuant to Section 4 of the Bermuda Insurance Act 1978 that provides insurance and reinsurance coverage of mortgage credit risk. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae. In 2016, Essent Re formed Essent Agency (Bermuda) Ltd., a wholly-owned subsidiary, which provides underwriting consulting services to third-party reinsurers. In accordance with certain state law requirements, Essent Guaranty also reinsures that portion of the risk that is in excess of 25% of the mortgage balance with respect to any loan insured prior to April 1, 2019, after consideration of other reinsurance, to Essent Guaranty of PA, Inc. (“Essent PA”), an affiliate domiciled in the state of Pennsylvania.
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 $7.8 million, $7.4 million and $8.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Amortization of deferred policy acquisition costs totaled $8.1 million, $6.7 million and $6.0 million for the years ended December 31, 2019, 2018 and 2017, 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 86% of earned premium in 2019. 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 $42.5 million and $17.7 million of earned premium related to policy cancellations for the years ended December 31, 2019 and 2018, 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.
A significant portion of our premium revenue relates to master policies with certain lending institutions. For the year ended December 31, 2019, one lender represented approximately 12% of our total revenue. The loss of this customer could have a significant impact on our revenues and results of operations.
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, 2019 and 2018, we concluded that no premium deficiency reserve was required to be recorded in the accompanying consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires 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 also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of this update were effective for annual and interim periods beginning after December 15, 2018. We adopted this standard on January 1, 2019 using the modified retrospective adoption approach for our existing operating leases at January 1, 2019. As permitted by this ASU, for leases that commenced before January 1, 2019 we elected the practical expedients of not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification for any expired or existing leases and not reassessing any initial direct costs for existing leases. In addition, we elected the practical expedient to use hindsight in determining the lease term. We also elected to recognize rent expense for short-term leases on a straight line basis over the lease term as permitted under this ASU. The adoption of this ASU did not have a material effect on the Company's consolidated operating results or financial position.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The provisions of this update are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for the removed disclosures. We will adopt this standard on January 1, 2020. The adoption of this ASU is not expected to have a material effect on the Company's consolidated operating results or financial position.
Essent Guaranty is required to maintain assets on deposit in connection with its fully collateralized reinsurance agreements (see Note 5). The fair value of the assets on deposit was $6.4 million at December 31, 2019 and $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 $6.4 million at December 31, 2019 and $6.3 million at December 31, 2018.
Premiums receivable consists 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, no provision or allowance for doubtful accounts was required.
If the reinsurance agreement is not terminated at the optional termination date, the risk margin component of the reinsurance premium increases by 50%.
If the reinsurance agreement is not terminated at the optional termination date, the reinsurance premium increases by 50%.
Coverage provided immediately above the coverage provided by Radnor Re 2018-1 Ltd.
Coverage provided pari-passu to the coverage provided by Radnor Re 2019-1 Ltd.
The following table summarizes incurred loss and allocated loss adjustment expense development, IBNR plus expected development on reported defaults and the cumulative number of reported defaults. The information about incurred loss development for the years ended December 31, 2010 to 2018 is presented as supplementary information.
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 2018 is presented as supplementary information.
For our mortgage insurance portfolio, our average annual payout of losses as of December 31, 2019 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 annual commitment fee rate decreased from 0.35% to 0.25% effective October 17, 2019 as a result of our rating increase to A3 by Moody's. 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 16). The borrowings under the Credit Facility contractually mature on May 17, 2021.
The indemnification may be in the form of monetary or other remedies. For the years ended December 31, 2019 and 2018, we paid less than $0.1 million and $0.1 million, respectively, related to remedies. As of December 31, 2019, management believes any potential claims for indemnification related to contract underwriting services through December 31, 2019 are not material to our consolidated financial position or results of operations.
The following table presents a maturity analysis of our lease liabilities as follows at December 31, 2019:
The maturity analysis of our lease liabilities shown above have not been reduced by minimum sublease rental income of $0.1 million due in 2020 under the non-cancelable sublease.
As described in Note 2, we adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019. The future minimum lease payments of non-cancelable operating leases at December 31, 2018, prior to the adoption of new lease guidance were as follows:
During the third quarter of 2019, the Board of Directors declared Essent's inaugural quarterly cash dividend of $0.15 per common share which was paid in September 2019. In November 2019, the Board of Directors declared a quarterly cash dividend of $0.15 per common share which was paid on December 16, 2019. In February 2020, the Board of Directors declared a quarterly cash dividend of $0.16 per common share payable on March 20, 2020, to shareholders of record on March 10, 2020.
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 vested based upon our compounded annual book value per share growth percentage during a three-year performance period that commenced on January 1, 2014. The September 2013 performance-based share awards vested on the one-year anniversary of the completion of the performance period, and the February 2014 performance-based share awards vested on March 1, 2017.
In February of each year, 2015 through 2019, 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 vested in three equal installments in January 2018, 2019 and 2020. In connection with our incentive program covering bonus awards for performance years 2014 through 2018, 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.
In May of each year, 2016 through 2019, time-based share units were granted to non-employee directors that vest one year from the date of grant.
The total fair value of nonvested shares, share units or DEUs that vested was $25.5 million, $75.9 million and $22.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, there was $17.4 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at December 31, 2019 and we expect to recognize the expense over a weighted average period of 2.0 years.
In January 2020, 209,715 nonvested common share units were issued to all vice president and staff level employees and are subject to time-based vesting. In connection with our incentive program covering bonus awards for performance year 2019, in February 2020, 101,933 nonvested common share units were issued to certain employees and are subject to time-based vesting. In February 2020, 177,243 nonvested common shares were granted to certain members of senior management and are subject to time-based and performance-based vesting.
Our U.S. insurance subsidiaries are subject to certain capital and dividend rules and regulations as prescribed by jurisdictions in which they are authorized to operate. Under the insurance laws of the Commonwealth of Pennsylvania, Essent Guaranty and Essent PA may pay dividends during any 12-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. The Pennsylvania statute also specifies that dividends and other distributions can be paid out of positive unassigned surplus without prior approval. At December 31, 2019, Essent Guaranty had unassigned surplus of approximately $327.1 million. During the year ended December 31, 2018, Essent Guaranty paid to its parent, Essent US Holdings, Inc. ("Essent Holdings"), a $40 million dividend which was used to repay the borrowings remaining under the revolving component of the Credit Facility. Essent Guaranty paid no dividends to Essent Group or any intermediate holding companies in the years ended December 31, 2019 or 2017. Essent PA had unassigned surplus of approximately $13.9 million as of December 31, 2019. Essent PA did not pay a dividend in 2019 or 2018. In the year ended December 31, 2017, Essent PA paid to its parent company, Essent Holdings, a dividend of $5 million.
At December 31, 2019, our insurance subsidiaries were in compliance with these rules, regulations and agreements.
On December 22, 2017, the “Tax Cuts and Jobs Act” (“TCJA”) was enacted. The provisions of TCJA include broad tax reforms that are applicable to the Company, including a reduction in the U.S. statutory corporate income tax rate from 35% to 21% effective January 1, 2018. This change in tax rates required us to remeasure our deferred tax assets and liabilities as of the enactment date resulting in a one-time $85.1 million income tax benefit for the year ended December 31, 2017.
Income tax expense consists of the following components for the years ended December 31:
Income tax expense is different from that which would be obtained by applying the applicable statutory income tax rates to income before taxes by jurisdiction (i.e. for 2019 and 2018, U.S. 21%; Bermuda 0.0%; for 2017 and prior U.S. 35%;
As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, under Section 832(e) of the IRC for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is
allowed only to the extent that we purchase T&L Bonds in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. During the year ended December 31, 2019, we had a net purchases of T&L Bonds in the amount of $59.5 million and had net redemptions of T&L Bonds in the amount of $49.8 million during the year ended December 31, 2018. As of December 31, 2019 and 2018 we held $261.9 million and $202.4 million of T&L Bonds, respectively.
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, 2019 and 2018, after weighing all the evidence, management concluded that it was more likely than not that our deferred tax assets would be realized.
Under current Bermuda law, the parent company, Essent Group, and its Bermuda subsidiary, Essent Re, are not required to pay any taxes on income and capital gains. In the event that there is a change such that these taxes are imposed, these companies would be exempted from any such tax until March of 2035 pursuant to the Bermuda Exempt Undertakings Tax Protection Act of 1966, and the Exempt Undertakings Tax Protection Amendment Act of 2011.
Essent Holdings and its subsidiaries are subject to income taxes imposed by U.S. law and file a U.S. Consolidated Income Tax Return. Should Essent Holdings pay a dividend to its parent company, Essent Irish Intermediate Holdings Limited, withholding taxes at a rate of 5% under the U.S./Ireland tax treaty would likely apply assuming the Company avails itself of Treaty benefits under the U.S./Ireland tax treaty. Absent treaty benefits, the withholding rate on outbound dividends would be 30%. Currently, however, no withholding taxes are accrued with respect to such unremitted earnings as management has no intention of remitting these earnings. Similarly, no foreign income taxes have been provided on the un-remitted earnings of the Company's U.S. subsidiaries as management has neither the intention of remitting these earnings, nor would any Ireland tax be due, as any Irish tax would be expected to be fully offset by credit for taxes paid to the U.S. An estimate of the cumulative amount of U.S. earnings that would be subject to withholding tax, if distributed outside of the U.S., is approximately $1.7 billion. The associated withholding tax liability under the U.S./Ireland tax treaty would be approximately $85.6 million.
At December 31, 2019 and 2018, the Company had no unrecognized tax benefits. As of December 31, 2019, the U.S. federal income tax returns for the tax years 2016 through 2018 remain subject to examination. The Company has not recorded any uncertain tax positions as of December 31, 2019 or December 31, 2018.
There were 39,490, 128,575 and 44,540 antidilutive shares for the years ended December 31, 2019, 2018 and 2017, respectively.
The nonvested performance-based share awards are considered contingently issuable for purposes of the EPS calculation. Based on the compounded annual book value per share growth as of December 31, 2019, 2018 and 2017, 100% of the
performance-based share awards would be issuable under the terms of the arrangements at each date if December 31 was the end of the contingency period.
We carry certain of our financial instruments at fair value. We define fair value as the current amount that would be exchanged to sell an asset or transfer a liability, other than in a forced liquidation.
Level 1-Quoted prices for identical instruments in active markets accessible at the measurement date.
We used the following methods and assumptions in estimating fair values of financial instruments:
All assets measured at fair value are categorized in the table below based upon the lowest level of significant input to the valuations. All fair value measurements at the reporting date were on a recurring basis.
Does not include the fair value of embedded derivatives, which we have accounted for separately as freestanding derivatives and included in other assets or other accrued liabilities in our consolidated balance sheet. See Note 5 for more information.
Statement of Statutory Accounting Principles No. 58, Mortgage Guaranty Insurance, requires mortgage insurers to establish a special contingency reserve for statutory accounting purposes included in total liabilities equal to 50% of earned premium for that year. During 2019, Essent Guaranty increased its contingency reserve by $280.7 million and Essent PA increased its contingency reserve by $4.4 million. This reserve is required to be maintained for a period of 120 months to protect against the effects of adverse economic cycles. After 120 months, the reserve is released to unassigned funds. In the event an insurer’s loss ratio in any calendar year exceeds 35%, however, the insurer may, after regulatory approval, release from its contingency reserves an amount equal to the excess portion of such losses. Essent Guaranty and Essent PA did not release any amounts from their contingency reserves in 2019, 2018 or 2017.
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, 2019 and 2018, all such requirements were met.
Essent Re's statutory capital and surplus was $939.2 million and $798.5 million as of December 31, 2019 and 2018, respectively, and statutory net income was $176.4 million and $140.2 million, respectively. Statutory capital and surplus and net
The following table summarizes the unaudited results of operations for each quarter of 2019 and 2018.
Under the insurance laws of the Commonwealth of Pennsylvania, the insurance subsidiaries may pay dividends during any 12-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. The Pennsylvania statute also requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. As of December 31, 2019, Essent Guaranty had unassigned surplus of approximately $327.1 million. Essent PA had unassigned surplus of approximately $13.9 million as of December 31, 2019.