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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the period ended June 30, 2014

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 005-87689

 


 

ESSENT GROUP LTD.

(Exact name of registrant as specified in its charter)

 


 

Bermuda

 

Not Applicable

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

Clarendon House
2 Church Street
Hamilton HM11, Bermuda
(Address of principal executive offices and zip code)

 

(441) 297-9901
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of the registrant’s common shares outstanding as of August 7, 2014 was 86,528,025.

 

 

 



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Form 10-Q

 

Index

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II.

OTHER INFORMATION

36

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

Item 6.

Exhibits

37

 

 

 

SIGNATURES

38

 

 

 

EXHIBIT INDEX

39

 

ii



Table of Contents

 

Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “Essent,” and the “Company,” as used in this Quarterly Report on Form 10-Q, refer to Essent Group Ltd. and its directly and indirectly owned subsidiaries, including our primary operating subsidiary, Essent Guaranty, Inc., as a combined entity, except where otherwise stated or where it is clear that the terms mean only Essent Group Ltd. exclusive of its subsidiaries.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, or Quarterly Report, includes forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

 

The forward-looking statements contained in this Quarterly Report reflect our views as of the date of this Quarterly Report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described below, factors described in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, and factors described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission.  These factors include, without limitation, the following:

 

·                  changes in or to Fannie Mae and Freddie Mac, which we refer to collectively as the GSEs, whether through Federal legislation, restructurings or a shift in business practices;

 

·                  failure to continue to meet the mortgage insurer eligibility requirements of the GSEs;

 

·                  competition for our customers;

 

·                  lenders or investors seeking alternatives to private mortgage insurance;

 

·                  increase in the number of loans insured through Federal government mortgage insurance programs, including those offered by the Federal Housing Administration;

 

·                  decline in new insurance written, or NIW, and franchise value due to loss of a significant customer;

 

·                  decline in the volume of low down payment mortgage originations;

 

·                  the definition of “Qualified Mortgage” reducing the size of the mortgage origination market or creating incentives to use government mortgage insurance programs;

 

·                  the definition of “Qualified Residential Mortgage” reducing the number of low down payment loans or lenders and investors seeking alternatives to private mortgage insurance;

 

·                  the implementation of the Basel III Capital Accord, which may discourage the use of private mortgage insurance;

 

·                  decrease in the length of time our insurance policies are in force;

 

·                  uncertainty of loss reserve estimates;

 

·                  deteriorating economic conditions;

 

·                  management of risk in our investment portfolio;

 

·                  fluctuations in interest rates;

 

iii



Table of Contents

 

·                  inadequacy of the premiums we charge to compensate for our losses incurred;

 

·                  dependence on management team and qualified personnel;

 

·                  disturbance to our information technology systems;

 

·                  change in our customers’ capital requirements discouraging the use of mortgage insurance;

 

·                  declines in the value of borrowers’ homes;

 

·                  limited availability of capital;

 

·                  unanticipated claims arise under and risks associated with our contract underwriting program;

 

·                  industry practice that loss reserves are established only upon a loan default;

 

·                  disruption in mortgage loan servicing;

 

·                  risk of future legal proceedings;

 

·                  customers’ technological demands;

 

·                  our non-U.S. operations becoming subject to U.S. Federal income taxation;

 

·                  becoming considered a passive foreign investment company for U.S. Federal income tax purposes;

 

·                  scope of recently enacted legislation is uncertain; and

 

·                  potential inability of our insurance subsidiaries to pay dividends.

 

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Quarterly Report are based on information available to us on the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

 

iv



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements (Unaudited)

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

June 30,

 

December 31,

 

(In thousands, except per share amounts)

 

2014

 

2013

 

Assets

 

 

 

 

 

Investments available for sale, at fair value

 

 

 

 

 

Fixed maturities

 

$

672,699

 

$

318,476

 

Short-term investments

 

173,171

 

14,079

 

Total investments

 

845,870

 

332,555

 

Cash

 

14,180

 

477,655

 

Accrued investment income

 

4,641

 

1,978

 

Accounts receivable

 

12,249

 

10,006

 

Deferred policy acquisition costs

 

7,539

 

6,173

 

Property and equipment (at cost, less accumulated depreciation of $38,013 in 2014 and $36,796 in 2013

 

4,865

 

4,411

 

Prepaid federal income tax

 

34,000

 

8,000

 

Net deferred tax asset

 

 

10,346

 

Other assets

 

2,021

 

2,846

 

Total assets

 

$

925,365

 

$

853,970

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and LAE

 

$

4,506

 

$

3,070

 

Unearned premium reserve

 

124,004

 

103,399

 

Amounts due under Asset Purchase Agreement

 

2,483

 

4,949

 

Accrued payroll and bonuses

 

7,957

 

13,076

 

Net deferred tax liability

 

9,430

 

 

Other accrued liabilities

 

9,026

 

7,335

 

Total liabilities

 

157,406

 

131,829

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common Shares, $0.015 par value:

 

 

 

 

 

Authorized - 233,333; issued - 86,528 shares in 2014 and 86,491 shares in 2013

 

1,298

 

1,297

 

Additional paid-in capital

 

760,252

 

754,390

 

Accumulated other comprehensive income (loss)

 

3,947

 

(1,447

)

Retained earnings (accumulated deficit)

 

2,462

 

(32,099

)

Total stockholders’ equity

 

767,959

 

722,141

 

Total liabilities and stockholders’ equity

 

$

925,365

 

$

853,970

 

 

See accompanying notes to condensed consolidated financial statements.

 

1



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In thousands, except per share amounts)

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

63,505

 

$

44,923

 

$

115,697

 

$

78,296

 

Increase in unearned premiums

 

(13,163

)

(17,442

)

(20,605

)

(29,551

)

Net premiums earned

 

50,342

 

27,481

 

95,092

 

48,745

 

Net investment income

 

3,080

 

1,014

 

4,978

 

1,744

 

Realized investment gains, net

 

68

 

83

 

468

 

93

 

Other income

 

793

 

986

 

1,566

 

2,013

 

Total revenues

 

54,283

 

29,564

 

102,104

 

52,595

 

 

 

 

 

 

 

 

 

 

 

Losses and expenses:

 

 

 

 

 

 

 

 

 

Provision for losses and LAE

 

966

 

580

 

1,868

 

1,310

 

Other underwriting and operating expenses

 

23,648

 

15,557

 

47,107

 

30,519

 

Total losses and expenses

 

24,614

 

16,137

 

48,975

 

31,829

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

29,669

 

13,427

 

53,129

 

20,766

 

Income tax expense (benefit)

 

10,114

 

(10,150

)

18,568

 

(10,011

)

Net income

 

$

19,555

 

$

23,577

 

$

34,561

 

$

30,777

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Common Shares

 

$

0.23

 

N/A

 

$

0.42

 

N/A

 

Class A common shares

 

N/A

 

$

0.63

 

N/A

 

$

0.88

 

Class B-2 common shares

 

N/A

 

0.40

 

N/A

 

0.49

 

Diluted:

 

 

 

 

 

 

 

 

 

Common Shares

 

$

0.23

 

N/A

 

$

0.41

 

N/A

 

Class A common shares

 

N/A

 

$

0.62

 

N/A

 

$

0.88

 

Class B-2 common shares

 

N/A

 

0.09

 

N/A

 

0.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Common Shares

 

83,276

 

N/A

 

83,071

 

N/A

 

Class A common shares

 

N/A

 

36,793

 

N/A

 

34,313

 

Class B-2 common shares

 

N/A

 

1,334

 

N/A

 

1,095

 

Diluted:

 

 

 

 

 

 

 

 

 

Common Shares

 

84,706

 

N/A

 

84,701

 

N/A

 

Class A common shares

 

N/A

 

36,901

 

N/A

 

34,408

 

Class B-2 common shares

 

N/A

 

5,994

 

N/A

 

6,004

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,555

 

$

23,577

 

$

34,561

 

$

30,777

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Change in unrealized appreciation (depreciation) of investments, net of tax expense (benefit) of $2,095 and $(2,043) in the three months ended June 30, 2014 and 2013 and $2,465 and $(2,182) in the six months ended June 30, 2014 and 2013

 

4,915

 

(3,795

)

5,394

 

(4,053

)

Total other comprehensive income (loss)

 

4,915

 

(3,795

)

5,394

 

(4,053

)

Comprehensive income

 

$

24,470

 

$

19,782

 

$

39,955

 

$

26,724

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Retained

 

 

 

 

 

 

 

 

 

Class A

 

Class B-2

 

Additional

 

Other

 

Earnings

 

 

 

Total

 

 

 

Common

 

Common

 

Common

 

Paid-In

 

Comprehensive

 

(Accumulated

 

Treasury

 

Stockholders’

 

(In thousands)

 

Shares

 

Shares

 

Shares

 

Capital

 

Income (Loss)

 

Deficit)

 

Stock

 

Equity

 

Balance at January 1, 2013

 

$

 

$

348

 

$

91

 

$

347,924

 

$

2,414

 

$

(97,512

)

$

(34,142

)

$

219,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

65,413

 

 

 

65,413

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(3,861

)

 

 

 

 

(3,861

)

Issuance of Class A and Class B-2 common shares net of issuance cost of $1,143

 

 

 

123

 

 

 

123,729

 

 

 

 

 

 

 

123,852

 

Conversion of Class A and Class B-2 common shares into Common Shares

 

1,004

 

(474

)

(54

)

(476

)

 

 

 

 

 

 

 

Issuance of Common Shares net of issuance cost of $25,546

 

299

 

 

 

 

 

313,414

 

 

 

 

 

 

 

313,713

 

Issuance of management incentive shares

 

28

 

3

 

2

 

582

 

 

 

 

 

 

 

615

 

Forfeiture of management incentive shares

 

 

 

0

 

(39

)

39

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

3,597

 

 

 

 

 

 

 

3,597

 

Treasury stock acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

(311

)

(311

)

Cancellation of treasury stock

 

(34

)

 

 

 

 

(34,419

)

 

 

 

 

34,453

 

 

Balance at December 31, 2013

 

$

1,297

 

$

 

$

 

$

754,390

 

$

(1,447

)

$

(32,099

)

$

 

$

722,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

34,561

 

 

 

34,561

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

5,394

 

 

 

 

 

5,394

 

Issuance of management incentive shares

 

2

 

 

 

 

 

414

 

 

 

 

 

 

 

416

 

Stock-based compensation expense

 

 

 

 

 

 

 

6,148

 

 

 

 

 

 

 

6,148

 

Treasury stock acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,384

)

(2,384

)

Cancellation of treasury stock

 

(1

)

 

 

 

 

(2,383

)

 

 

 

 

2,384

 

 

Excess tax benefits from stock-based compensation expense

 

 

 

 

 

 

 

1,683

 

 

 

 

 

 

 

1,683

 

Balance at June 30, 2014

 

$

1,298

 

$

 

$

 

$

760,252

 

$

3,947

 

$

2,462

 

$

 

$

767,959

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2014

 

2013

 

Operating Activities

 

 

 

 

 

Net income

 

$

34,561

 

$

30,777

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on the sale of investments, net

 

(468

)

(93

)

Depreciation and amortization

 

1,217

 

1,105

 

Amortization of discount on payments due under Asset Purchase Agreement

 

34

 

59

 

Stock-based compensation expense

 

6,148

 

1,115

 

Amortization of premium on investment securities

 

2,835

 

1,388

 

Deferred income tax provision (benefit)

 

17,312

 

(10,011

)

Excess tax benefits from stock-based compensation

 

(1,683

)

 

Change in:

 

 

 

 

 

Accrued investment income

 

(2,663

)

(547

)

Accounts receivable

 

(1,743

)

(5,599

)

Deferred policy acquisition costs

 

(1,366

)

(1,877

)

Prepaid federal income tax

 

(26,000

)

 

Other assets

 

825

 

2,660

 

Reserve for losses and LAE

 

1,436

 

1,049

 

Unearned premium reserve

 

20,605

 

29,551

 

Accounts payable and accrued expenses

 

(5,803

)

(1,778

)

Net cash provided by operating activities

 

45,247

 

47,799

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Net change in short-term investments

 

(159,089

)

4,999

 

Purchase of investments available for sale

 

(427,964

)

(89,386

)

Proceeds from maturity of investments available for sale

 

16,832

 

4,000

 

Proceeds from sales of investments available for sale

 

67,209

 

19,350

 

Purchase of property and equipment, net

 

(1,671

)

(1,069

)

Net cash used in investing activities

 

(504,683

)

(62,106

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Issuance of common shares net of costs

 

 

123,852

 

Payment of offering costs

 

(837

)

 

Treasury stock acquired

 

(2,385

)

(194

)

Excess tax benefits from stock-based compensation

 

1,683

 

 

Payments under Asset Purchase Agreement

 

(2,500

)

(2,500

)

Net cash (used in) provided by financing activities

 

(4,039

)

121,158

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

(463,475

)

106,851

 

Cash at beginning of year

 

477,655

 

22,315

 

Cash at end of period

 

$

14,180

 

$

129,166

 

 

 

 

 

 

 

Noncash Transactions

 

 

 

 

 

Issuance of management incentive shares (see Note 6)

 

$

416

 

$

614

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

In these notes to condensed consolidated financial statements, “Essent”, “Company”, “we”, “us”, and “our” refer to Essent Group Ltd. and its subsidiaries, unless the context otherwise requires.

 

Note 1. Nature of Operations and Basis of Presentation

 

Essent Group Ltd. (“Essent Group”) 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 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. In March 2014, Essent Group formed Essent Irish Intermediate Holdings Limited (“Essent Irish Intermediate”) as a wholly-owned subsidiary.  In April 2014, Essent Group contributed the stock of Essent US Holdings, Inc. (“Essent Holdings”) to Essent Irish Intermediate.  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 Group also has a wholly-owned Bermuda domiciled Class 3A Insurer pursuant to Section 4 of the Bermuda Insurance Act 1978, Essent Reinsurance, Ltd. (“Essent Re”), which issued its first insurance policy in July 2014. Essent Guaranty is approved as a qualified mortgage insurer by the GSEs and is licensed to write mortgage insurance in all 50 states and the District of Columbia.  Essent Re expects to enter into a quota share reinsurance transaction with Essent Guaranty to reinsure 25% of Essent Guaranty’s GSE-eligible new insurance written effective July 1, 2014.  Completion of this transaction is subject to approval by the Pennsylvania Insurance Department.

 

We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These statements should be read in conjunction with the consolidated financial statements and notes thereto, including Note 1 and Note 2 to the consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2013, which discloses the principles of consolidation and a summary of significant accounting policies. The results of operations for the interim periods are not necessarily indicative of the results for the full year. We evaluated the need to recognize or disclose events that occurred subsequent to June 30, 2014 prior to the issuance of these condensed consolidated financial statements.

 

As described more fully in our Annual Report on Form 10-K for the year ended December 31, 2013, Class B-2 common share and per share data in all periods presented has been restated for the 2 for 3 share split and the 1 for 1 conversion rate to Common Shares that was effective immediately prior to the closing of the Company’s initial public offering in November 2013.  Class A common share and per share data has not been restated because the conversion to Common Shares in connection with the initial public offering was considered a value-for-value exchange of equity interests at the point of the transaction that resulted in a change in shareholder rights and rank before and after the transaction.

 

Certain amounts in prior years have been reclassified to conform to the current year presentation.

 

Note 2. Investments Available for Sale

 

Investments available for sale consist of the following:

 

June 30, 2014

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

U.S. Treasury securities

 

$

66,641

 

$

393

 

$

(315

)

$

66,719

 

U.S. agency securities

 

8,117

 

48

 

 

8,165

 

U.S. agency mortgage-backed securities

 

60,389

 

922

 

(383

)

60,928

 

Municipal debt securities(1)

 

168,480

 

2,509

 

(194

)

170,795

 

Corporate debt securities

 

239,204

 

2,800

 

(130

)

241,874

 

Mortgage-backed securities

 

54,451

 

374

 

(618

)

54,207

 

Asset-backed securities

 

88,484

 

268

 

(42

)

88,710

 

Money market funds

 

154,472

 

 

 

154,472

 

Total investments available for sale

 

$

840,238

 

$

7,314

 

$

(1,682

)

$

845,870

 

 

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Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

December 31, 2013

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

U.S. Treasury securities

 

$

59,100

 

$

977

 

$

(890

)

$

59,187

 

U.S. agency securities

 

14,763

 

76

 

 

14,839

 

U.S. agency mortgage-backed securities

 

23,023

 

53

 

(835

)

22,241

 

Municipal debt securities(1)

 

57,947

 

155

 

(452

)

57,650

 

Corporate debt securities

 

126,311

 

378

 

(1,096

)

125,593

 

Mortgage-backed securities

 

19,219

 

 

(638

)

18,581

 

Asset-backed securities

 

20,340

 

81

 

(36

)

20,385

 

Money market funds

 

14,079

 

 

 

14,079

 

Total investments available for sale

 

$

334,782

 

$

1,720

 

$

(3,947

)

$

332,555

 

 


(1)         At June 30, 2014, approximately 57% of municipal debt securities were special revenue bonds, 40% were general obligation bonds, 2% were tax allocation bonds, and 1% were certification of participation bonds. At December 31, 2013, all municipal debt securities were general obligation bonds.

 

The amortized cost and fair value of available for sale securities at June 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most mortgage-backed securities and asset-backed securities provide for periodic payments throughout their lives, they are listed below in separate categories.

 

 

 

Amortized
Cost

 

Fair
Value

 

U.S. Treasury securities:

 

 

 

 

 

Due in 1 year

 

$

27,033

 

$

27,089

 

Due after 1 but within 5 years

 

9,048

 

9,113

 

Due after 5 but within 10 years

 

30,560

 

30,517

 

Subtotal

 

66,641

 

66,719

 

U.S. agency securities:

 

 

 

 

 

Due in 1 year

 

4,919

 

4,927

 

Due after 1 but within 5 years

 

3,198

 

3,238

 

Subtotal

 

8,117

 

8,165

 

Municipal debt securities:

 

 

 

 

 

Due in 1 year

 

468

 

469

 

Due after 1 but within 5 years

 

67,633

 

67,786

 

Due after 5 but within 10 years

 

54,895

 

56,188

 

Due after 10 years

 

45,484

 

46,352

 

Subtotal

 

168,480

 

170,795

 

Corporate debt securities:

 

 

 

 

 

Due in 1 year

 

9,992

 

10,055

 

Due after 1 but within 5 years

 

159,680

 

160,757

 

Due after 5 but within 10 years

 

67,996

 

69,520

 

Due after 10 years

 

1,536

 

1,542

 

Subtotal

 

239,204

 

241,874

 

U.S. agency mortgage-backed securities

 

60,389

 

60,928

 

Mortgage-backed securities

 

54,451

 

54,207

 

Asset-backed securities

 

88,484

 

88,710

 

Money market funds

 

154,472

 

154,472

 

Total investments available for sale

 

$

840,238

 

$

845,870

 

 

Essent realized gross gains and losses on the sale of investments available for sale as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Realized gross gains

 

$

175

 

$

83

 

$

840

 

$

93

 

Realized gross losses

 

107

 

 

372

 

 

 

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Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

The fair value of investments in an unrealized loss position and the related unrealized losses were as follows:

 

 

 

Less than
12 months

 

12 months or more

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

At June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

5,230

 

$

(9

)

$

7,138

 

$

(306

)

$

12,368

 

$

(315

)

U.S. agency mortgage-backed securities

 

600

 

(1

)

8,690

 

(382

)

9,290

 

(383

)

Municipal debt securities

 

24,562

 

(61

)

9,440

 

(133

)

34,002

 

(194

)

Corporate debt securities

 

15,650

 

(35

)

15,270

 

(95

)

30,920

 

(130

)

Mortgage-backed securities

 

18,158

 

(86

)

12,201

 

(532

)

30,359

 

(618

)

Asset-backed securities

 

23,468

 

(28

)

3,251

 

(14

)

26,719

 

(42

)

Total

 

$

87,668

 

$

(220

)

$

55,990

 

$

(1,462

)

$

143,658

 

$

(1,682

)

 

 

 

Less than
12 months

 

12 months or more

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

16,474

 

$

(890

)

$

 

$

 

$

16,474

 

$

(890

)

U.S. agency mortgage-backed securities

 

13,484

 

(452

)

3,685

 

(383

)

17,169

 

(835

)

Municipal debt securities

 

21,573

 

(267

)

13,074

 

(185

)

34,647

 

(452

)

Corporate debt securities

 

75,364

 

(1,038

)

3,148

 

(58

)

78,512

 

(1,096

)

Mortgage-backed securities

 

13,249

 

(347

)

5,333

 

(291

)

18,582

 

(638

)

Asset-backed securities

 

6,024

 

(36

)

 

 

6,024

 

(36

)

Total

 

$

146,168

 

$

(3,030

)

$

25,240

 

$

(917

)

$

171,408

 

$

(3,947

)

 

The gross unrealized losses on these investment securities are 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 six months ended June 30, 2014 or year ended December 31, 2013.

 

The fair value of investments deposited with insurance regulatory authorities to meet statutory requirements was $8,553 at June 30, 2014 and $8,573 at December 31, 2013.

 

Net investment income consists of:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Fixed maturities

 

$

3,322

 

$

1,144

 

$

5,378

 

$

2,024

 

Short-term investments

 

19

 

2

 

31

 

4

 

Gross investment income

 

3,341

 

1,146

 

5,409

 

2,028

 

Investment expenses

 

(261

)

(132

)

(431

)

(284

)

Net investment income

 

$

3,080

 

$

1,014

 

$

4,978

 

$

1,744

 

 

7



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

Note 3. Accounts Receivable

 

Accounts receivable consist of the following:

 

 

 

June 30,
2014

 

December 31,
2013

 

Premiums receivable

 

$

11,360

 

$

9,488

 

Other receivables

 

889

 

518

 

Total accounts receivable

 

12,249

 

10,006

 

Less: Allowance for doubtful accounts

 

 

 

Accounts receivable, net

 

$

12,249

 

$

10,006

 

 

Premiums receivable consist of premiums due on our mortgage insurance policies. If mortgage insurance premiums are unpaid for more than 90 days, the receivable is written off against earned premium and the related insurance policy is cancelled. For all periods presented, Essent did not record a provision or an allowance for doubtful accounts.

 

Note 4. Reserve for Losses and Loss Adjustment Expenses

 

The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses (“LAE”) for the six months ended June 30:

 

 

 

2014

 

2013

 

Reserve for losses and LAE at beginning of period

 

$

3,070

 

$

1,499

 

Less: Reinsurance recoverables

 

 

 

Net reserve for losses and LAE at beginning of period

 

3,070

 

1,499

 

Add provision for losses and LAE, net of reinsurance, occurring in:

 

 

 

 

 

Current period

 

2,452

 

1,435

 

Prior years

 

(584

)

(125

)

Net incurred losses during the current period

 

1,868

 

1,310

 

Deduct payments for losses and LAE, net of reinsurance, occurring in:

 

 

 

 

 

Current period

 

 

4

 

Prior years

 

432

 

257

 

Net loss and LAE payments during the current period

 

432

 

261

 

Net reserve for losses and LAE at end of period

 

4,506

 

2,548

 

Plus: Reinsurance recoverables

 

 

 

Reserve for losses and LAE at end of period

 

$

4,506

 

$

2,548

 

 

 

 

 

 

 

Loans in default at end of period

 

235

 

90

 

 

For the six months ended June 30, 2014, $432 was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $584 favorable prior-year development during the six months ended June 30, 2014. Reserves remaining as of June 30, 2014 for prior years are $2,054 as a result of re-estimation of unpaid losses and loss adjustment expenses. For the six months ended June 30, 2013, $257 was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $125 favorable prior-year development during the six months ended June 30, 2013. Reserves remaining as of June 30, 2013 for prior years were $1,117 as a result of re-estimation of unpaid losses and loss adjustment expenses. The decreases in both periods 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.

 

Note 5. Commitments and Contingencies

 

Obligations under Guarantees

 

Under the terms of CUW Solutions LLC’s contract underwriting agreements with lenders and subject to contractual limitations on liability, we agreed to indemnify the lender against losses incurred in the event that we make an error in determining whether loans processed meet specified underwriting criteria, to the extent that such error materially restricts or impairs the salability of such loan, results in a material reduction in the value of such loan or results in the lender repurchasing the loan. The indemnification may be in the form of monetary or other remedies. We paid $4 and less than $1 related to remedies for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, management believes any potential claims for indemnification

 

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Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

related to contract underwriting services through June 30, 2014 are not material to our condensed consolidated financial position or results of operations.

 

In addition to the indemnifications discussed above, in the normal course of business, we enter into agreements or other relationships with third parties pursuant to which we may be obligated under specified circumstances to indemnify the counterparties with respect to certain matters. Our contractual indemnification obligations typically arise in the context of agreements entered into by us to, among other things, purchase or sell services, finance our business and business transactions, lease real property and license intellectual property. The agreements we enter into in the normal course of business generally require us to pay certain amounts to the other party associated with claims or losses if they result from our breach of the agreement, including the inaccuracy of representations or warranties. The agreements we enter into may also contain other indemnification provisions that obligate us to pay amounts upon the occurrence of certain events, such as the negligence or willful misconduct of our employees, infringement of third party intellectual property rights or claims that performance of the agreement constitutes a violation of law. Generally, payment by us under an indemnification provision is conditioned upon the other party making a claim, and typically we can challenge the other party’s claims. Further, our indemnification obligations may be limited in time and/or amount, and in some instances, we may have recourse against third parties for certain payments made by us under an indemnification agreement or obligation. As of June 30, 2014, contingencies triggering material indemnification obligations or payments have not occurred historically and are not expected to occur. The nature of the indemnification provisions in the various types of agreements and relationships described above are believed to be low risk and pervasive, and we consider them to have a remote risk of loss or payment. We have not recorded any provisions on the consolidated balance sheets related to indemnifications.

 

Commitments

 

We lease office space for use in our operations under leases accounted for as operating leases.  In May 2014, we amended our existing lease agreement for our office space in North Carolina and extended the lease term to 2025.  The future minimum lease payments of all of our non-cancelable operating leases are as follows at June 30, 2014:

 

Year Ended December 31,

 

 

 

2014

 

$

943

 

2015

 

1,476

 

2016

 

2,114

 

2017

 

2,023

 

2018 and thereafter

 

14,282

 

Total minimum payments required

 

$

20,838

 

 

Minimum lease payments shown above have not been reduced by minimum sublease rental income of $151 due in 2014 under a non-cancelable sublease.

 

Note 6. Stock-Based Compensation

 

On February 6, 2009, Essent Group adopted the 2009 Restricted Share Plan.  In connection with the initial public offering that was completed in November 2013, Essent Group’s Board of Directors amended and restated the 2009 Restricted Share Plan, effective immediately prior to the initial public offering. In addition, Essent Group’s Board of Directors adopted, and Essent Group’s shareholders approved, the Essent Group Ltd. 2013 Long-Term Incentive Plan (the “2013 Plan”), which was effective upon completion of the initial public offering.  The types of awards available under the 2013 Plan include nonvested shares, nonvested share units, non-qualified share options, incentive stock options, share appreciation rights, and other share-based or cash-based awards.  As of June 30, 2014, there were 13,521 Common Shares available for future grant under the 2013 Plan.

 

In September 2013 and February 2014, certain members of senior management were granted nonvested Common Shares under the 2013 Plan that were subject to time-based and performance-based vesting.  The time-based share awards vest in three equal installments on January 1, 2015, 2016 and 2017.  The performance share awards vest based upon our compounded annual book value per share growth percentage during a three-year performance period commencing January 1, 2014.  The September 2013 grants vest on the one-year anniversary of the completion of the performance period, and the 2014 grants vest on March 1, 2017.  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:

 

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Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

Performance level

 

Compounded Annual Book Value
Per Share Growth

 

Nonvested Common
Shares Earned

 

 

 

< 11

%

0

%

Threshold

 

11

%

10

%

 

 

12

%

36

%

 

 

13

%

61

%

 

 

14

%

87

%

Maximum

 

> 15

%

100

%

 

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.

 

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 of time-based share awards and share units to employees that will vest in three equal installments on January 1, 2015, 2016 and 2017.

 

In May 2014, the Compensation Committee of the Board of Directors approved the issuance of time-based share units to non-employee directors.  The portion of the grant that relates to director compensation for the period from our initial public offering through April 2014 vests on November 1, 2014 and the portion of the grant that relates to director compensation from May 2014 through April 2015 vests one year from the date of grant.

 

The following table summarizes nonvested Common Share and nonvested Common Share unit activity for the six months ended June 30, 2014:

 

 

 

Time and Performance-
Based Share Awards

 

Time-Based Share
Awards

 

Share Units

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Number of
Shares

 

Average
Grant
Date Fair
Value

 

Number of
Shares

 

Average
Grant
Date Fair
Value

 

Number
of
Share
Units

 

Average
Grant
Date Fair
Value

 

Outstanding at beginning of year

 

1,238

 

$

14.50

 

2,839

 

$

4.82

 

528

 

$

17.03

 

Granted

 

52

 

22.68

 

82

 

23.47

 

159

 

21.60

 

Vested

 

 

N/A

 

(1,254

)

1.77

 

 

N/A

 

Forfeited

 

 

N/A

 

(13

)

2.65

 

(9

)

18.04

 

Outstanding at June 30, 2014

 

1,290

 

14.83

 

1,654

 

8.08

 

678

 

18.09

 

 

The total fair value of nonvested shares that vested was $28,021 and $2,044 for the six months ended June 30, 2014 and 2013, respectively.  As of June 30, 2014, there was $34,597 of total unrecognized compensation expense related to nonvested shares outstanding at June 30, 2014 and we expect to recognize the expense over a weighted average period of 3.1 years.

 

In addition to the nonvested share activity listed above, in February 2014, the Compensation Committee of the Board of Directors approved the issuance to employees of 17 Common Shares which vested upon issuance.

 

Employees have the option to tender shares to Essent Group to pay the minimum employee statutory withholding taxes associated with shares upon vesting. Common Shares tendered by employees to pay employee withholding taxes totaled 101 in the six months ended June 30, 2014. The tendered shares were recorded at cost, included in treasury stock and have been cancelled as of June 30, 2014.

 

Compensation expense, net of forfeitures, and related tax effects recognized in connection with nonvested shares were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Compensation expense

 

$

3,365

 

$

556

 

$

6,148

 

$

1,115

 

Income tax benefit

 

1,178

 

194

 

2,152

 

390

 

 

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Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

Note 7. Income Taxes

 

As of June 30, 2014, the statutory income tax rates of the countries where the Company does business are 35.0% in the United States and 0.0% in Bermuda.  The statutory income tax rate of each country is applied against the taxable income from each country to calculate the income tax expense.

 

Income tax expense (benefit) consists of the following components:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Current

 

$

(91

)

$

 

$

1,256

 

$

 

Deferred

 

10,205

 

(10,150

)

17,312

 

(10,011

)

Total income tax expense (benefit)

 

$

10,114

 

$

(10,150

)

$

18,568

 

$

(10,011

)

 

Income tax expense (benefit) is different from that which would be obtained by applying the applicable statutory income tax rates to income before taxes by jurisdiction (i.e. U.S. 35.0%; Bermuda 0.0%). The reconciliation of the difference between income tax expense (benefit) and the expected tax provision at the weighted average tax rate is as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

% of pretax
income

 

2013

 

% of pretax
income

 

Tax provision at weighted average statutory rates

 

$

10,788

 

36.4

%

$

4,902

 

36.5

%

Non-deductible expenses

 

75

 

0.3

 

63

 

0.5

 

Tax exempt interest

 

(248

)

(0.9

)

(206

)

(1.5

)

Change in valuation allowance

 

 

 

(14,883

)

(110.9

)

Difference in estimated full-year rate and year-to-date actual rate

 

(501

)

(1.7

)

 

 

Other

 

 

 

(26

)

(0.2

)

Total income tax expense (benefit)

 

$

10,114

 

34.1

%

$

(10,150

)

(75.6

)%

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

% of pretax
income

 

2013

 

% of pretax
income

 

Tax provision at weighted average statutory rates

 

$

19,540

 

36.8

%

$

7,600

 

36.6

%

Non-deductible expenses

 

180

 

0.3

 

110

 

0.5

 

Tax exempt interest

 

(383

)

(0.7

)

(206

)

(1.0

)

Change in valuation allowance

 

 

 

(17,489

)

(84.2

)

Difference in estimated full-year rate and year-to-date actual rate

 

(769

)

(1.5

)

 

 

Other

 

 

 

(26

)

(0.1

)

Total income tax expense (benefit)

 

$

18,568

 

34.9

%

$

(10,011

)

(48.2

)%

 

We provide deferred taxes to reflect the estimated future tax effects of the differences between the financial statement and tax bases of assets and liabilities using currently enacted tax laws. The net deferred tax (liability) asset is comprised of the following:

 

 

 

June 30,
2014

 

December 31,
2013

 

Deferred tax assets

 

$

28,699

 

$

27,043

 

Deferred tax liabilities

 

(38,129

)

(16,697

)

Net deferred tax (liability) asset

 

$

(9,430

)

$

10,346

 

 

11



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

The components of the net deferred tax (liability) asset were as follows:

 

 

 

June 30,
2014

 

December 31,
2013

 

 

 

 

 

 

 

Contingency reserves

 

$

(33,607

)

$

(14,420

)

Unearned premium reserve

 

13,550

 

11,637

 

Fixed assets

 

7,260

 

7,646

 

Start-up expenditures, net

 

4,838

 

5,064

 

Deferred policy acquisition costs

 

(2,639

)

(2,160

)

Nonvested shares

 

2,081

 

965

 

Unrealized (gain) loss on investments

 

(1,685

)

779

 

Alternative minimum tax credit carryforward

 

877

 

877

 

Accrued expenses

 

(145

)

(64

)

Loss reserves

 

63

 

43

 

Prepaid expenses

 

(53

)

(53

)

Organizational expenditures

 

30

 

32

 

Net deferred tax (liability) asset

 

$

(9,430

)

$

10,346

 

 

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 six months ended June 30, 2014 and the year ended December 31, 2013, we purchased T&L Bonds for $26,000 and $8,000, respectively, which are reflected on our condensed consolidated balance sheets as prepaid federal income tax.  As of June 30, 2014, the total amount of T&L Bonds purchased since inception was $34,000.

 

Alternative minimum tax carryforwards do not expire.

 

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 June 30, 2014 and December 31, 2013, 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 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 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 June 30, 2014 and 2013, we had no unrecognized tax benefits. As of June 30, 2014, 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 June 30, 2014 or December 31, 2013.

 

12



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

Note 8. Earnings per Share (EPS)

 

The following table reconciles the net income and the weighted average common shares outstanding used in the computations of basic and diluted earnings per common share:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

19,555

 

$

23,577

 

$

34,561

 

$

30,777

 

Less: Class A common shares dividends declared

 

 

 

 

 

Less: Class B-2 common shares dividends declared

 

 

 

 

 

Undistributed net income

 

$

19,555

 

$

23,577

 

$

34,561

 

$

30,777

 

Net income allocable to Common Shares

 

$

19,555

 

N/A

 

$

34,561

 

N/A

 

Net income allocable to Class A common shares

 

N/A

 

$

23,037

 

N/A

 

$

30,237

 

Net income allocable to Class B-2 common shares

 

N/A

 

540

 

N/A

 

540

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Common Shares

 

$

0.23

 

N/A

 

$

0.42

 

N/A

 

Class A common shares

 

N/A

 

$

0.63

 

N/A

 

$

0.88

 

Class B-2 common shares

 

N/A

 

0.40

 

N/A

 

0.49

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Common Shares

 

$

0.23

 

N/A

 

$

0.41

 

N/A

 

Class A common shares

 

N/A

 

$

0.62

 

N/A

 

$

0.88

 

Class B-2 common shares

 

N/A

 

0.09

 

N/A

 

0.09

 

Basic weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Common Shares

 

83,276

 

N/A

 

83,071

 

N/A

 

Class A common shares

 

N/A

 

36,793

 

N/A

 

34,313

 

Class B-2 common shares

 

N/A

 

1,334

 

N/A

 

1,095

 

Dilutive effect of nonvested shares:

 

 

 

 

 

 

 

 

 

Common Shares

 

1,430

 

N/A

 

1,630

 

N/A

 

Class A common shares

 

N/A

 

108

 

N/A

 

95

 

Class B-2 common shares

 

N/A

 

4,660

 

N/A

 

4,909

 

Diluted weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Common Shares

 

84,706

 

N/A

 

84,701

 

N/A

 

Class A common shares

 

N/A

 

36,901

 

N/A

 

34,408

 

Class B-2 common shares

 

N/A

 

5,994

 

N/A

 

6,004

 

 

There were 152 and 0 antidilutive shares for the three months ended June 30, 2014 and 2013, respectively and 108 and 0 antidilutive shares for the six months ended June 30, 2014 and 2013, respectively.

 

The nonvested performance-based share awards are considered contingently issuable for purposes of the EPS calculation.  There were no performance-based share awards that would be issuable under the terms of the arrangements if June 30, 2014 was the end of the contingency period.  Therefore, no nonvested performance-based share awards were included in diluted shares outstanding for the three and six months ended June 30, 2014. There were 1,290 and 1,271 weighted average nonvested performance-based share awards outstanding for the three and six months ended June 30, 2014, respectively.

 

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.  During the fourth quarter of 2013, the Company corrected the allocation of undistributed earnings to the Class A and Class B-2 shares from amounts previously presented. As a result, undistributed earnings for the three and six months ended June 30, 2013 allocated to the Class B-2 shares was increased by $540 and the undistributed earnings allocated to the Class A shares was reduced by the same amounts. The Company has evaluated this correction and concluded that the impact on the previously reported amounts is not material to the consolidated financial statements for these periods.

 

13



Table of Contents

 

Essent Group Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(In thousands except per share amounts, unless otherwise noted)

 

Note 9. Accumulated Other Comprehensive Income (Loss)

 

The following table presents the rollforward of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013:

 

 

 

Three months ended June 30, 2014

 

 

 

Before Tax

 

Tax Effect

 

Net of Tax

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(1,378

)

$

410

 

$

(968

)

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

7,078

 

(2,118

)

4,960

 

Less: Reclassification adjustment for gains included in net income (1)

 

(68

)

23

 

(45

)

Net unrealized gains on investments

 

7,010

 

(2,095

)

4,915

 

Other comprehensive income

 

7,010

 

(2,095

)

4,915

 

Balance at end of period

 

$

5,632

 

$

(1,685

)

$

3,947

 

 

 

 

Six months ended June 30, 2014

 

 

 

Before Tax

 

Tax Effect

 

Net of Tax

 

Balance at beginning of period

 

$

(2,227

)

$

780

 

$

(1,447

)

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

8,327

 

(2,627

)

5,700

 

Less: Reclassification adjustment for gains included in net income (1)

 

(468

)

162

 

(306

)

Net unrealized gains on investments

 

7,859

 

(2,465

)

5,394