(1)Prior to the initial public offering (IPO) which was completed on November 5, 2013, the Company had two classes of common shares outstanding: Class A common shares and Class B-2 common shares. The Class A common shares accrued a 10% cumulative dividend and the Class B-2 common shares had no stated dividend rate with any dividends being declared at the discretion of the Company's Board of Directors. Accordingly, earnings (loss) per common share was calculated using the "two-class" method which provides that earnings and losses be allocated to each class of common shares according to dividends declared and their respective participation rights. Substantially all of the net income (loss) for the periods prior to the IPO was allocated to the Class A common shares for purposes of determining earnings per share. Upon the completion of the IPO, all of the Class A common shares and the Class B-2 common shares converted into a single class of common shares (the "Common Shares"), as more fully described in Note 9 to our consolidated financial statements.
(3)Loss ratio is calculated by dividing the provision for loss and loss adjustment expenses by net premiums earned.
(4)Expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned.
(5)Combined statutory capital equals the sum of statutory capital of Essent Guaranty, Inc. plus Essent Guaranty of PA, Inc., after eliminating the impact of intercompany transactions.
We are an established and growing private mortgage insurance company. We were formed to serve the U.S. housing finance industry at a time when the demands of the financial crisis and a rapidly changing business environment created the need for a new, privately funded mortgage insurance company. Since writing our first policy in May 2010, we have grown to an estimated 12.1% market share based on new insurance written, or NIW, excluding NIW under the Home Affordable Refinance Program, for the year ended December 31, 2013, up from 8.6% and 4.5% for the years ended December 31, 2012 and 2011, respectively. We believe that our growth has been driven largely by the unique opportunity we offer lenders to partner with a well-capitalized mortgage insurer, unencumbered by legacy business, that provides fair and transparent claims payment practices, and consistency and speed of service.
The overwhelming majority of our current and expected future business is the provision of mortgage insurance on loans sold to the GSEs. Therefore, changes to the business practices of the GSEs or any regulation relating to the GSEs may impact our business and our results of operations. The FHFA is the regulator and conservator of the GSEs with authority to control and direct their
Under the Dodd-Frank Act, the 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. On January 10, 2014, the CFPB implemented a final rule regarding QMs, which we refer to as the "QM Rule". Under 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 also provides for a second temporary category with more flexible requirements if the loan is eligible to be purchased or guaranteed by the GSEs while they are in conservatorship, which is the overwhelming majority of our business. This second temporary category still requires that loans satisfy certain criteria, including the requirement that the points and fees represent 3% or less of the total loan amount.
Failure to comply with the ability-to-repay requirement exposes a lender to substantial potential liability. As a result, we believe that the QM regulations may cause changes in the lending standards and origination practices of our customers. Such changes may include a further tightening of mortgage origination practices and lending standards, which may further improve the credit quality of new mortgages, but may also result in a reduction of the overall volume of mortgage originations. To the extent the use of private mortgage insurance causes a loan not to meet the definition of a QM, the volume of loans originated with mortgage insurance may decline. In addition, the impact of the mortgage insurance premiums on the calculation of points and fees for purposes of QM may influence the use of mortgage insurance, as well as our mix of premium plans and therefore our profitability. See "-Factors Affecting Our Results of Operations-Persistency and Business Mix." Finally, to the extent that government agencies that offer mortgage insurance adopt their own definitions of a qualified mortgage and those definitions are more favorable to lenders than those applicable in the market we operate in, our business may be adversely affected. See "Business-Regulation-Federal Laws and
Regulation-Dodd-Frank Act-Qualified Residential Mortgage Regulations-Risk Retention Requirements" and "Risk Factors-Risks Relating to Our Business-Our business prospects and operating results could be adversely impacted if, and to the extent that, the Consumer Financial Protection Bureau's ("CFPB") final rule defining a qualified mortgage ("QM") reduces the size of the origination market or creates incentives to use government mortgage insurance programs."
Issuers may prefer not to retain risk and may therefore have a strong incentive to originate loans that meet the definition of a QRM. If the final rule gives consideration to private mortgage insurance in the definition of QRM, issuers may benefit from the use of private mortgage insurance for mortgage securitizations subject to the risk retention requirements. However, if the final QRM rule does not give consideration to mortgage insurance in the definition of 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 and our business. In addition, changes in the final regulations regarding treatment of GSE-guaranteed mortgage loans, could impact our business. The ultimate impact of these rules on the use of mortgage insurance depends on, among other things, (i) the final definition of QRM, (ii) under the proposed definition, the extent to which the presence of private mortgage insurance may adversely affect the ability of a loan to qualify as a QM and therefore as a QRM, (iii) under the QM-plus definition or any other final definition with an LTV requirement, the level of the final LTV requirement and the extent to which credit would be given for the use of mortgage insurance, if any, in satisfying the LTV requirement, (iv) if, in the future, sellers of loans to the GSEs become subject to risk-retention requirements, and (v) the degree to which originators or issuers subject to risk retention requirements would see it as beneficial to utilize mortgage insurance on non-QRM loans to mitigate their retained credit exposure. See "Business-Regulation-Federal 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 implementation of the Dodd-Frank Act's risk retention requirements and the definition of Qualified Residential Mortgage ("QRM")."
January 1, 2015 for banking organizations other than advanced approaches banking organizations that are not savings and loan holding companies.
The Basel III Rules continue to afford FHA-insured loans a lower risk-weighting than low down payment loans insured with private mortgage insurance, and Ginnie Mae mortgage-backed securities are afforded a lower risk weighting than Fannie Mae and Freddie Mac mortgage-backed securities. Therefore, with respect to capital requirements, FHA-insured loans will continue to have a competitive advantage over loans insured by private mortgage insurance and then sold to and securitized by the GSEs.
If implementation of the Basel III Rules increases the capital requirements of banking organizations with respect to the residential mortgages we insure, it could adversely affect the size of the portfolio lending market, which in turn would reduce the demand for our mortgage insurance, but may create incentives for banks to originate and sell loans to the GSEs which could expand demand for mortgage insurance. If the Federal banking agencies revise the Basel III Rules to reduce or eliminate the capital benefit banks receive from insuring low down payment loans with private mortgage insurance, or if our bank customers believe that such adverse changes may occur at some time in the future, our current and future business may be adversely affected. Furthermore, if mortgage insurance companies do not meet the requirements to be an eligible guarantor for purposes of general credit mitigation, our future business prospects may be adversely affected. "Risk Factors-Risks Relating to Our Business-The implementation of the Basel III Capital Accord, or other changes to our customers' capital requirements, may discourage the use of mortgage insurance."
Premiums 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 premiums 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 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. 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 balance is immediately recognized as earned premium revenue. Substantially all of our single premium policies in force as of December 31, 2013 were non-refundable. Premiums collected on annual policies are recognized as net premiums earned on a straight line basis over the year of coverage. For the year ended December 31, 2013, monthly and single premium policies comprised 80% and 20% of our NIW, respectively.
Prepayment speeds and the relative mix of business between single premium policies and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages. Because premiums are paid at origination on single premium policies, assuming all other factors remain constant, if loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans
Our investment portfolio was comprised entirely of investment grade fixed income securities and money market investments as of December 31, 2013. The principal factors that influence investment income are the size of the investment portfolio and the yield. As measured by amortized cost (which excludes changes in fair market value, such as from changes in interest rates), the size of our investment portfolio is mainly a function of increases in capital and cash generated from or used in operations which is impacted by net premiums received, investment earnings, net claim payments and expenses. Realized gains and losses are a function of the difference between the amount received on the sale of a security and the security's amortized cost, as well as any "other than temporary" impairments recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.
•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 loan-to-value ratio, with higher average loan-to-value ratios tending to increase losses incurred;
•the rate at which we rescind policies. Because of tighter underwriting standards generally in the mortgage lending industry and terms set forth in our Clarity of Coverage master policy endorsement, we expect that our level of rescission activity will be lower than recent rescission activity seen in the mortgage insurance industry; and
•the distribution of claims over the life of a book. The average age of our insurance portfolio is young with 94% of our IIF as of December 31, 2013 having been originated since January 1, 2012. 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 establish loss reserves for delinquent loans when we are notified that a borrower has missed at least two consecutive monthly payments ("Case Reserves"), as well as estimated reserves for defaults that may have occurred but not yet been reported to us ("IBNR Reserves"). We also establish reserves for the associated loss adjustment expenses ("LAE"), consisting of the estimated cost of the claims administration process, including legal and other fees. Using both internal and external information, we establish our reserves based on the likelihood that a default will reach claim status and estimated claim severity. See "-Critical Accounting Policies" for further information.
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, 2013, 64% of our IIF relates to business written in 2013 and substantially all of our policies in force are 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.
Our most significant expense is compensation and benefits for our employees, which represented 66%, 52% and 49% of other underwriting and operating expenses for the years ended December 31, 2013, 2012 and 2011, respectively. Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes. Compensation and benefits expense has steadily increased each period as we have increased our staffing from 103 employees at January 1, 2011 to 289 at December 31, 2013, primarily in our business development and operations functions to support the growth of our business. The growth in our sales organization contributed to
the growth of our active customers and NIW. We also expanded our underwriting and customer service teams to support this new business.
Income taxes are incurred based on the amount of earnings or losses generated in the jurisdictions in which we operate and the applicable tax rates and regulations in those jurisdictions. To date, substantially all of our business activity has been conducted in the United States where we are subject to corporate level Federal income taxes. Our U.S. insurance subsidiaries are generally not subject to income taxes in the states in which we operate; however, our non-insurance subsidiaries are subject to state income taxes. In lieu of state income taxes, our insurance subsidiaries pay premium taxes that are recorded in other underwriting and operating expenses. 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.
Essent Group Ltd. and its wholly owned subsidiary, Essent Reinsurance, Ltd. ("Essent Re"), are domiciled in Bermuda, which does not have a corporate income tax. To date, these entities have incurred expenses and generated limited amounts of investment income.
Since inception and prior to June 30, 2013, we recorded a valuation allowance against deferred tax assets, and, as such, we generally did not record a benefit associated with the losses incurred in prior periods or other income tax benefits. The income tax provision or benefit recognized in prior periods related to changes in our valuation allowance associated with changes in deferred tax liabilities resulting from the increase or decrease in the unrealized gain on our investment portfolio. At June 30, 2013, after weighing all the evidence, we concluded that it was more likely than not that our deferred tax assets would be realized. As a result, through December 31, 2013, we have released the valuation allowance on our deferred tax assets. The release of the valuation allowance resulted in the recognition of a net $7.4 million benefit for Federal income taxes in the year ended December 31, 2013. Starting in 2014, we expect that our effective tax rate will approach the statutory tax rate.
As discussed above, premiums we collect and earn are generated based on our IIF, which is a function of our NIW and cancellations. From May 2010, when we first began writing policies, through December 31, 2013, we have increased our NIW. We have also grown the number of customers who have approved us to provide mortgage insurance over this period, as well as increased our share of NIW from certain customers over time. The following table includes a summary of the change in our IIF for the years ended December 31, 2013, 2012 and 2011. In addition, this table includes our RIF at the end of each period and the number of customers that purchased mortgage insurance during each respective period.
Our cancellation activity is relatively low because the average age of our insurance portfolio is young. Following is a summary of our IIF at December 31, 2013 by vintage:
As of December 31, 2013, our combined net risk in force was $7.8 billion and our combined statutory capital was $469.4 million resulting in a risk to capital ratio of 16.5 to 1. The amount of capital required varies in each jurisdiction in which we operate; however, generally, the maximum permitted risk to capital ratio is 25.0 to 1. As a condition to its approval from Freddie Mac, until December 31, 2013 Essent Guaranty, Inc. was required to maintain a risk-to-capital ratio of no greater than 20.0:1. State insurance regulators and the GSEs are currently examining their respective capital rules to determine whether, in light of the recent financial crisis, changes are needed to more accurately assess mortgage insurers' ability to withstand stressful economic conditions. As a result, the capital metrics under which they assess and measure capital adequacy may change in the future. Independent of the state regulator and GSE capital requirements, management continually assesses the risk of our insurance portfolio and current market and economic conditions to determine the appropriate levels of capital to support our business.
For the year ended December 31, 2013, we reported net income of $65.4 million, compared to a net loss of $13.5 million for the year ended December 31, 2012. The increase in our operating results in 2013 over 2012 was primarily due to an increase in net premiums earned associated with the growth of our IIF and an increase in net investment income as well as the income tax benefit recorded due to the reversal of our valuation allowance against deferred tax assets, partially offset by increases in other underwriting and operating expenses and the provision for losses and loss adjustment expenses and a reduction in other income.
In the year ended December 31, 2013, unearned premiums increased by $62.8 million as a result of net premiums written on single premium policies of $78.5 million which was partially offset by $15.7 million of unearned premium that was recognized in earnings during the year. In the year ended December 31, 2012, unearned premiums increased by $30.9 million as a result of net premiums written on single premium policies of $35.7 million partially offset by $4.8 million of unearned premium that was recognized in earnings during the year.
Other income includes fees earned for information technology and customer support services provided to Triad and contract underwriting revenues. The decrease in other income for the year ended December 31, 2013 compared to the same period in 2012 is primarily due to a reduction in the number of Triad's mortgage insurance policies in force, partially offset by an increase in contract underwriting revenue. The fees earned from Triad will continue to decrease over time as Triad's existing policies are cancelled.
The increase in the provision for losses and LAE in 2013 as compared to 2012 was primarily due to an increase in the number of insured loans in default partially offset by previously identified defaults that cured.
During the year ended December 31, 2013, the provision for losses and LAE was $2.3 million, comprised of $3.0 million of current year losses partially offset by $0.7 million of favorable prior years' loss development. During the year ended December 31, 2012, the provision for losses and LAE was $1.5 million, comprised of $1.6 million of current year losses partially offset by $0.1 million of favorable prior years' loss development. In both periods, the favorable prior years' loss development is the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory.
Following are the components of our other underwriting and operating expenses for the periods indicated:
Other underwriting and operating expenses increased to $71.1 million in the year ended December 31, 2013 as compared to $61.1 million in the year ended December 31, 2012. The significant factors contributing to the change in other underwriting and operating expenses are:
Compensation and benefits includes salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.
•Depreciation and amortization expense decreased in 2013 compared to 2012 as the substantial majority of the assets acquired from Triad were fully depreciated as of November 30, 2012 and the remaining acquired assets were fully amortized as of November 30, 2013. Depreciation and amortization expense associated with these assets during the years ended December 31, 2013 and 2012 was $0.4 and $12.4 million, respectively.
We account for stock based compensation issued to employees using a fair value based method under which we measure the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of the award. Certain members of senior management were granted nonvested Common Shares in September 2013. The fair value for those grants of $14.50 per Common Share was based on analysis at the time of the grant, provided by the underwriters associated with the offering, regarding the estimated fair value of Essent and the estimated IPO price range of $13.50 to $15.50 per Common Share. Factors considered in determining the IPO price range and Common Share valuation included prevailing market conditions, estimates of the Company's business potential and earnings prospects, the Company's historical operating results, market valuations of companies deemed comparable to the Company and an assessment of risks and opportunities. Employees that were not granted nonvested Common Shares in September 2013 were granted nonvested Common Share units on October 31, 2013. The fair value for those share unit grants was the initial public offering price of $17.00 per Common Share. The increase in the estimated fair value of Common Shares from September 2013 to October 31, 2013 was due to external factors including an increase in the valuations of publicly-traded mortgage insurers during that period and Company-specific factors including the conclusion of the Company's IPO marketing efforts which resulted in an oversubscription at the IPO pricing range and setting the final IPO price at $17.00.
Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax benefit was $7.4 million and $0.3 million for the years ended December 31, 2013 and 2012, respectively. Our effective tax rate was (12.7)% and 2.4% for the years ended December 31, 2013 and 2012, respectively. Since inception and prior to June 30, 2013, we had evaluated the realizability of our deferred tax assets on a quarterly basis and concluded that it was more likely than not that some portion or all of the deferred tax asset would not be realized and provided a valuation allowance against the deferred tax assets. Accordingly, we did not record a benefit associated with the losses incurred in prior periods or for other income tax benefits. The income tax provision or benefit recognized in prior periods related to changes in our valuation allowance associated with changes in deferred tax liabilities relating to the change in the unrealized gain on our investment portfolio. At June 30, 2013, we concluded that it is more likely than not that our deferred tax assets will be realized. As a result, as of December 31, 2013 we have released the valuation allowance on our deferred tax assets in accordance with Accounting Standard Codification ("ASC") No. 740-270. The release of the valuation allowance resulted in the recognition of a net $7.4 million benefit for income taxes for the year ended December 31, 2013.
•the strong credit profile of the loans we have insured since we began to issue mortgage insurance policies in 2010;
•our taxable income for 2012 and our expectations regarding the likelihood of future taxable income; and
•our current net operating loss carryforwards will be fully utilized in 2013.
For the years ended December 31, 2012 and 2011, we reported net losses of $13.5 million and $33.6 million, respectively. The reduction in our net loss in 2012 compared to 2011 was primarily due to an increase in net premiums earned and net investment income, partially offset by increases in other underwriting and operating expenses and the provision for losses and LAE.
Net premiums earned increased in the year ended December 31, 2012 by 411% compared to the year ended December 31, 2011 primarily due to the increase in our average IIF to $7.6 billion for the year ended December 31, 2012 from $1.4 billion for the year ended December 31, 2011. The favorable impact of the increase in IIF on net premium earned was partially offset by a reduction in the average premium rate from 0.59% in 2011 to 0.55% in 2012. Net premiums written increased in the year ended December 31, 2012 by 307% over the prior year.
The increase in net investment income during the year ended December 31, 2012 as compared to the year ended December 31, 2011 is primarily due to an increase in the size of our investment portfolio as a result of capital contributions from our initial investors and cash flows generated from operations, as well as an increase in the pre-tax investment income yield. The average cash and investment portfolio balance was $214.0 million and $179.2 million in 2012 and 2011, respectively. The pre-tax investment income yield increased from 0.86% in 2011 to 1.2% in 2012. The increase in the pre-tax investment income is primarily due to a decrease in the portion of the portfolio invested in U.S. Treasury and Agency bonds and an increase in the allocation to higher yielding investment grade corporate, municipal and asset backed securities and an extension of the portfolio duration from 2.3 years at December 31, 2011 to 3.1 years at December 31, 2012.
Other income includes fees earned for information technology and customer support services provided to Triad and contract underwriting revenues. The decline in other income is primarily due to the decline in service fee income from Triad of $4.7 million in 2011 to $3.8 million in 2012 as a result of a reduction in Triad's mortgage insurance policies in force. This fee will continue to decline in future periods as Triad's existing policies are cancelled. Offsetting the decrease in service fee income from Triad is an increase in contract underwriting revenue to $0.7 million in the year ended December 31, 2012 from less than $0.1 million in the year ended December 31, 2011 primarily due to an increase in the number of customers using the service.
The increase in the number of defaults at December 31, 2012 compared to December 31, 2011 is primarily due to an increase in our IIF and policies in force and an increase in the average age of the insurance portfolio.
The increase in the average reserve per default is primarily due to changes in the composition (such as mark-to-market loan to value ratios, risk in force, and number of months past due) of the underlying loans in default. The primary factor contributing to the increase in the average reserve per default from December 31, 2011 to December 31, 2012 is an increase in the average RIF of the default inventory.
Other underwriting and operating expenses increased to $61.1 million during the year ended December 31, 2012 as compared to $48.8 million for the year ended December 31, 2011. The significant factors contributing to the change in other underwriting and operating expenses are:
•Other expenses, including premium taxes, travel, marketing, hardware, software, rent and other facilities expenses, increased as a result of the expansion of our business.
•net premiums that we will receive from our existing IIF as well as policies that we write in the future; and
While the Company and all of its subsidiaries are expected to have sufficient liquidity to meet all their expected obligations, additional capital may be required to meet any new capital requirements that are adopted by regulatory authorities or the GSEs, or to provide additional capital related to the growth of our risk in force in our insurance portfolio, or to fund new business initiatives.
Cash flow used in investing activities totaled $96.8 million for the year ended December 31, 2013 as compared to cash used in investing activities of $79.7 million for the year ended December 31, 2012. The increase in cash flow used in investing activities was primarily related to investing a portion of capital contributions from our initial investors and cash flows from the business.
Cash flow used in investing activities totaled $79.7 million for the year ended December 31, 2012 as compared to $9.2 million for the year ended December 31, 2011. The increase in cash flow used in investing activities of $70.5 million was primarily related to the purchase of investments from December 31, 2011 to December 31, 2012.
We compute our risk to capital ratio 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.
Our combined risk to capital calculation as of December 31, 2013 is as follows:
As of December 31, 2013, stockholders' equity was $722.1 million compared to $219.1 million as of December 31, 2012. This increase was primarily due to net proceeds of $313.7 million from our initial public offering, $123.9 million in net capital contributions received from our initial investors as well as net income generated in 2013.
due to $313.7 million in net proceeds from our initial public offering, capital contributions in the form of cash that was received in 2013, and cash flows from operations which had not been fully invested as of December 31, 2013.
(1)All municipal securities are general obligation bonds. For information regarding the amortized cost and fair value of the municipal debt securities, see Note 4 to our consolidated financial statements.
The following table includes municipal securities for states that represent more than 10% of the total municipal bond position as of December 31, 2013:
(1)None of the above securities include financial guaranty insurance. Certain securities include state enhancements. The above ratings exclude the effect of such state enhancements.
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 rentals of $0.3 million in 2014 due in the future under the non-cancelable sublease.
We do not have any off-balance sheet arrangements or financing activities with special-purpose entities.
We establish reserves for losses based on our best estimate of ultimate claim costs for defaulted loans. Although ASC No. 944, regarding accounting and reporting by insurance entities, specifically excludes mortgage insurance from its guidance relating to loss reserves, it is industry practice to apply this standard. Accordingly, we establish loss reserves using the general principles contained in ASC No. 944. However, consistent with industry standards for mortgage insurers, we do not establish loss reserves for future claims on insured loans which are not currently in default. Loans are classified as defaulted when the borrower has missed two consecutive payments. Once we are notified that a borrower has defaulted, we will consider internal and third party information and models, including the status of the loan as reported by its servicer and the type of loan product to determine the likelihood that a default will reach claim status. In addition, we will project the amount that we will pay if a default becomes a claim (referred to as "claim severity"). Based on this information, at each reporting date we determine our best estimate of loss reserves at a given point in time. Included in loss reserves are reserves for incurred but not reported ("IBNR") claims. IBNR reserves represent our estimated unpaid losses on loans that are in default, but have not yet been reported to us as delinquent by our customers. We will also establish reserves for associated loss adjustment expenses, consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process. Establishing reserves is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Deferred income tax assets and liabilities are determined using the asset and liability (or balance sheet) method. Under this method, we determine the net deferred tax asset or liability based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and give current recognition to changes in tax rates and laws. Changes in tax laws, rates, regulations and policies, or the final determination of tax audits or examinations, could materially affect our tax estimates. We evaluate the realizability of the deferred tax asset and recognize a valuation allowance if, based on the weight of all available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. When evaluating the realizability of the deferred tax asset, we consider estimates of expected future taxable income, existing and projected book/tax differences, carryback and carryforward periods, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast changes in the mortgage market, as well as the related impact on mortgage insurance, and the competitive and general economic environment in future periods. Changes in the estimate of deferred tax asset realizability, if applicable, are included in income tax expense on the consolidated statements of comprehensive income (loss). 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. Accordingly, we did not record a benefit associated with the losses incurred in the prior periods or for other income tax benefits. The income tax provision or benefit recognized in prior periods related to changes in our valuation allowance associated with changes in deferred tax liabilities for the increase or decrease in the unrealized gain on our investment portfolio.
Our entire investment portfolio is classified as available-for-sale and is 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 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 applicable guidance. In evaluating whether a decline in fair value is other-than-temporary, we consider several factors including, but not limited to:
•our intent to sell the security or whether it is more likely than not that we will be required to sell the security before recovery;
•failure of the issuer to make scheduled interest or principal payments;
There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows. See Note 2 of our consolidated financial statements included elsewhere in this Annual Report.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Essent Group Ltd. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In these notes to consolidated financial statements, "Essent Group", "Company", "we", "us", and "our" refer to Essent Group Ltd. and its subsidiaries, unless the context otherwise requires.
Essent Group Ltd. is a Bermuda-based holding company, which, through its wholly-owned subsidiaries, offers private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. Mortgage insurance provides credit protection to lenders and investors against financial loss due to defaults on mortgage loans secured by residential property. Mortgage insurance facilitates the sale of low-down payment (generally less than 20%) mortgage loans into the secondary mortgage market, primarily to the government sponsored enterprises ("GSEs"), Fannie Mae and Freddie Mac. Essent Group was incorporated in Bermuda in July 2008. Essent US Holdings, Inc. ("Essent Holdings") is a wholly-owned subsidiary of Essent Group and is incorporated in Delaware. The primary mortgage insurance operations are conducted through Essent Holdings' regulated and licensed wholly-owned subsidiaries, Essent Guaranty, Inc. ("Essent Guaranty") and Essent Guaranty of PA, Inc. ("Essent PA"). Essent also has a wholly-owned Bermuda-domiciled reinsurer, Essent Reinsurance, Ltd. ("Essent Re").
Essent Re provides reinsurance coverage of mortgage credit risk and has a Class 3A insurance license issued from the Bermuda Monetary Authority. Through December 31, 2013, Essent Re had not generated any revenue from insurance activities.
Investments available for sale include securities that we sell from time to time to provide liquidity and in response to changes in the market. Debt and equity securities classified as available for sale are reported at fair value with unrealized gains and losses on these securities reported in other comprehensive income, net of income taxes. See Note 16 for a description of the valuation methods for investments available for sale.
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 (loss), and the portion of the other-than-temporary impairment that is not credit related is included in other comprehensive income (loss). 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 (loss). Any subsequent increase in the security's estimated fair value would be reported as an unrealized gain.
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 87% of earned premium in 2013. 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 $4,116 of earned premium related to policy cancellations for the year ended December 31, 2013. 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, 2013 one lender represented 21% of our total revenue. The loss of this customer could have a significant impact on our revenues and results of operations.
reporting by insurance entities, specifically excludes mortgage insurance from its guidance relating to loss reserves, it is industry practice to apply this standard. Accordingly, we establish loss reserves using the general principles contained in ASC No. 944. However, consistent with industry standards for mortgage insurers, we do not establish loss reserves for future claims on insured loans which are not currently in default. Loans are classified as in default when the borrower has missed two consecutive payments. Once we are notified that a borrower has defaulted, we will consider internal and third party information and models, including the status of the loan as reported by its servicer and the type of loan product to determine the likelihood that a default will reach claim status. In addition, we will project the amount that we will pay if a default becomes a claim (referred to as "claim severity"). Based on this information, at each reporting date we determine our best estimate of loss reserves at a given point in time. Included in loss reserves are reserves for incurred but not reported ("IBNR") claims. IBNR reserves represent our estimated unpaid losses on loans that are in default, but have not yet been reported to us as delinquent by our customers. We will also establish reserves for associated loss adjustment expenses, consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process. Establishing reserves is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
certain circumstances. Essent Group adopted this ASU for the year ending December 31, 2012 and the adoption did not have a material effect on its consolidated operating results or financial position.
On February 6, 2009, Essent Group and certain investors executed a Shareholders Agreement, Class A Common Share Subscription Agreement (the "Subscription Agreement") and certain other related legal documents (collectively, the "Agreements"). Under the terms of the Agreements, certain investors, including affiliates of Pine Brook Road Partners, The Goldman Sachs Group, Inc., Aldermanbury Investments Limited, an affiliate of J.P. Morgan, PartnerRe Principal Finance Inc. and RenaissanceRe Ventures Ltd., committed, subject to certain conditions, to make equity contributions to Essent Group in the amount of approximately $519,114 in return for Class A common shares. At the same time, $10,000 of this commitment was funded in return for 1 million Class A common shares (the "Initial Closing"). As part of the Initial Closing, certain of the investors tendered $3,130 of existing Notes Payable that had been issued as part of their contribution. The remaining Notes Payable of approximately $870 was paid with proceeds from the funding. The Notes Payable had been issued by Essent Group on October 6, 2008 to fund our activities prior to the equity closing. In March 2010 (the "Subsequent Closing"), the existing and new investors executed an Amended and Restated Class A Common Share Subscription Agreement (the "Amended Subscription Agreement") and certain other related legal documents (collectively, the "Amended Agreements"). Under the terms of the Amended Agreements, certain of the existing investors, as well as the new investors, increased their commitment, subject to certain conditions, to make equity contributions in return for Class A common shares to Essent Group by $80,896. In addition, certain members of management had made a commitment to purchase Class A Shares of Essent Group.
In November 2013, Essent Group completed an initial public offering ("IPO") in which we issued and sold 19,957 Common Shares at a public offering price of $17.00 per share and certain selling shareholders sold 2,710 Common Shares. We did not receive any proceeds from the sale of shares by
Macquarie Capital (USA) Inc. ("Macquarie") was due a fee equal to 1% of the gross proceeds from the sale of Class A common shares (not to exceed $5,190) issued to shareholders who were party to the Subscription Agreement at the Initial Closing for services rendered in connection with the equity funding for Essent Group. As of December 31, 2013, a total of $4,010 was earned to date by Macquarie and charged to additional paid-in capital. As a result of the termination of the Amended Subscription Agreement, no additional fees are due Macquarie related to the sale of Class A shares.
The fair value of investments in an unrealized loss position and the related unrealized losses were as follows:
The decline in fair values of these investment securities is principally associated with the changes in the interest rate environment 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 of investments in the years ended December 31, 2013, 2012 or 2011.
The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $8,573 at December 31, 2013 and $8,243 at December 31, 2012.
December 1, 2009 (the "Services Agreement"). Triad retains the obligation for all risks insured under its existing insurance contracts and will continue to directly manage loss mitigation and claim activity on its insured business.
The cost of the assets acquired was allocated based on their relative fair value as of the Closing Date (December 1, 2009) as follows:
In connection with the Asset Purchase Agreement, $5,000 is due in the year ending December 31, 2014.
We recorded interest expense associated with the liability due Triad of $108, $138 and $123 for the years ended December 31, 2013, 2012 and 2011, respectively.
development during the year ended December 31, 2013. Reserves remaining as of December 31, 2013 for prior years are $323 as a result of re-estimation of unpaid losses and loss adjustment expenses. For the year ended December 31, 2012, less than $1 was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $57 favorable prior-year development during the year ended December 31, 2012. Reserves remaining as of December 31, 2012 for prior years are $0 as a result of re-estimation of unpaid losses and loss adjustment expenses. The decreases in both years are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims.
a remote risk of loss or payment. We have not recorded any provisions on the consolidated balance sheets related to indemnifications.
Total rent expense was $1,527, $1,011, and $952 for the years ended December 31, 2013, 2012 and 2011, respectively. The future minimum lease payments of non-cancelable operating leases are as follows at December 31, 2013:
Minimum lease payments shown above have not been reduced by minimum sublease rental income of $333 in 2014 due in the future under the non-cancelable sublease.
The following presents a summary of the rights and obligations attaching to the Class A common shares, Class B-1 common shares and Class B-2 common shares of Essent Group.
The holders of Class A common shares were entitled to receive cumulative compounding dividends prior and in preference to any declaration or payment of any dividend on any other class of shares in the capital of Essent Group, at the rate of ten percent of the Original Class A Issue Price per annum, compounded annually, on each outstanding Class A common share. Any dividend or other distribution declared or paid on any Class B common shares shall have been ratably declared and paid on all of the outstanding Class A common shares (based on "as-if-converted" to Class B-1 common share amounts) at the same time as such dividend is paid on such Class B common shares. Beginning December 15, 2009, under the terms of a fee agreement with Essent Group, certain investors were also entitled to
Upon the closing of our IPO, our authorized share capital consists of 233.3 million shares of a single class of common shares (the "Common Shares"). All of our outstanding Class A common shares and Class B-2 common shares that were eligible for vesting under the 2009 Restricted Share Plan were converted into the Common Shares and the Common Shares were split 2 for 3. All of the remaining Class B-2 common shares that were not eligible for vesting under the 2009 Restricted Share Plan were forfeited. The Common Shares have no pre-emptive rights or other rights to subscribe for additional shares, and no rights of redemption, conversion or exchange. Under certain circumstances and subject to the provisions of Bermuda law and our bye-laws, we may be required to make an offer to repurchase shares held by members. The Common Shares rank pari passu with one another in all respects as to rights of payment and distribution. In general, holders of Common Shares will have one vote for each Common Share held by them and will be entitled to vote, on a non-cumulative basis, at all meetings of shareholders. In the event that a shareholder is considered a 9.5% Shareholder under our bye-laws, such shareholder's votes will be reduced by whatever amount is necessary so that after any such reduction the votes of such shareholder will not result in any other person being treated as a 9.5% Shareholder with respect to the vote on such matter. Under these provisions certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share.
Under the terms of certain employment contracts and other agreements, a portion of certain employees' annual incentive bonus were paid in Class A common shares which vest over periods of up to 3 years.
In connection with the initial public offering, certain members of senior management were granted nonvested Common Shares under the 2013 Plan in September 2013. One-quarter of the nonvested Common Shares granted to Essent's Chief Executive Officer and one-half of the nonvested Common Shares granted to each other member of senior management are subject to time-based vesting, and will vest in equal annual installments during the four-year period commencing January 1, 2014. Three-quarters of the nonvested Common Shares granted to Essent's Chief Executive Officer and one-half of the nonvested Common Shares granted to each other member of senior management will be subject to time-based and performance-based vesting, with any nonvested Common Shares becoming earned based upon our compounded annual book value per share growth percentage during a three-year performance period commencing January 1, 2014, vesting on the one year anniversary of the completion of the performance period. The portion of the nonvested Common Shares that will be earned based upon the achievement of compounded annual book value per share growth is as follows:
In the event that the compounded annual book value per share growth falls between the performance levels shown above, the nonvested Common Shares earned will be determined on a straight line basis between the respective levels shown.
Certain of the Company's employees who were not granted nonvested Common Shares were granted nonvested share units in October 2013 that will be settled with Common Shares, subject to time-based vesting, and will vest and settle in equal annual installments during the three-year period
The total fair value of nonvested shares that vested was $4,015, $3,062 and $560 for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, there was $34,498 of total unrecognized compensation expense related to nonvested shares outstanding at December 31, 2013 and we expect to recognize the expense over a weighted average period of 3.6 years.
In connection with our incentive program covering bonus awards for performance year 2013, in February 2014, the Compensation Committee of the Board of Directors approved the issuance to
employees of 30 nonvested Common Shares, 60 nonvested Common Share units and 17 Common Shares which vested upon issuance. In February 2014, the Board of Directors also approved the issuance of 54 nonvested Common Shares related to long-term incentives.
Employees have the option to tender shares to Essent Group to pay the minimum employee statutory withholding taxes associated with shares upon vesting. Class A common shares tendered by employees to pay employee withholding taxes totaled 18, 86 and 31 in 2013, 2012 and 2011, respectively. Class B-2 shares tendered by employees to pay employee withholding taxes totaled 2 in 2013. There were no Class B-2 common shares tendered in 2012 or 2011. Common Shares tendered by employees to pay employee withholding taxes totaled 4 in 2013. The tendered shares were recorded at cost and included in treasury stock.
Our 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 percent 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. Essent Guaranty currently has negative unassigned surplus and, therefore, would require prior approval by the Pennsylvania Insurance Commissioner to make any dividend payment or other distributions in 2014. Essent PA would be able to pay a dividend of $528 in 2014. At December 31, 2013, the insurance subsidiaries were in compliance with these rules and regulations. Essent Guaranty paid no dividends to Essent Group or any intermediate holding companies in the years ended December 31, 2013, 2012 or 2011. In December 2013, Essent PA paid a dividend of $5 to its parent company, Essent Holdings.
The components of the net deferred tax asset were as follows at December 31:
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 non-interest-bearing United States Mortgage Guaranty Tax and Loss Bonds ("T&L Bonds") issued by the Treasury Department in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. During the year ended December 31, 2013, we purchased T&L Bonds for $8.0 million, which is reflected on our consolidated balance sheets as prepaid federal income tax. Alternative minimum tax carryforwards do not expire.
Under current Bermuda law, the parent company, Essent Group Ltd., and its Bermuda subsidiary 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. authorities and file a U.S. Consolidated Income Tax Return. Each subsidiary has executed a tax sharing agreement with its parent company, which provides that taxes are settled in cash between parent and subsidiary on a quarterly basis based on separate company pro-forma calculations.
At December 31, 2013 and 2012, we had no unrecognized tax benefits. As of December 31, 2013, our U.S. federal income tax returns for the tax years 2009 through 2012 remain subject to examination. The Company has not recorded any uncertain tax positions as of December 31, 2013 or December 31, 2012.
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. Through the date of our initial public offering, Goldman Sachs beneficially owned 11.35% of our outstanding shares. Subsequent to the initial public offering, Goldman Sachs held less than 10% of our outstanding shares, and therefore the Company no longer considered Goldman Sachs to be a related party. Investment expense incurred under the investment advisory agreement totaled $374, $184, and $104 for the years ended December 31, 2013, 2012 and 2011, respectively.
As indicated in Note 9, Class A common shares were entitled to receive cumulative compounding dividends prior and in preference to any declaration or payment of any dividend on the Class B-2 common shares. In periods of income, the undistributed net income was allocated to the Class A common shares to satisfy this requirement. In periods of loss, the undistributed net loss has been
•Investments available for sale-Investments available for sale are valued using quoted market prices in active markets, when available, and those investments are classified as Level 1 of the fair value hierarchy. Level 1 investments available for sale include investments such as U.S. Treasury securities, U.S. agency securities, U.S. agency mortgage-backed securities, mortgage-backed securities and money market funds. Investments available for sale are classified as Level 2 of the fair value hierarchy if quoted market prices are not available and fair values are estimated using quoted prices of similar securities or recently executed transactions for the securities. Municipal securities, corporate debt securities and asset-backed securities are classified as Level 2 investments.
•Amounts due under Asset Purchase Agreement-The fair value of amounts due under Asset Purchase Agreement is estimated using discounted cash flow analyses based on current risk-free interest rates of securities with similar maturities. The fair value estimates of amounts due under Asset Purchase Agreement are classified as Level 2 since quoted market prices are not available, but observable inputs are used in the valuation.
All assets measured at fair value at December 31, 2013 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. We had no liabilities measured at fair value at December 31, 2013.
Our domestic insurance subsidiaries prepare statutory-basis financial statements in accordance with the accounting practices prescribed or permitted by their respective state's department of insurance, which is a comprehensive basis of accounting other than GAAP. We did not use any prescribed or permitted statutory accounting practices (individually or in the aggregate) that resulted in reported statutory surplus or capital that was significantly different from the statutory surplus or capital that would have been reported had National Association of Insurance Commissioners' statutory accounting practices been followed. The following table presents Essent Guaranty's and Essent PA's statutory net income or loss, statutory surplus and contingency reserve liability as of and for the years ended December 31:
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 2013, Essent Guaranty increased its contingency reserve by $56,608 and Essent PA increased its contingency reserve by $5,077. 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 2013, 2012 or 2011.
our audited financial statements and the related notes. The results of interim periods are not necessarily indicative of the results for the full year.
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 percent 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. Essent Guaranty currently has negative unassigned surplus and therefore, would require prior approval by the Pennsylvania Insurance Commissioner to make any dividend payment or other distributions in 2014. Essent PA would be able to pay a dividend of $528 in 2014.
During the three years ending December 31, 2013, the Parent Company did not receive any dividends from its subsidiaries.