Income Taxes

As of December 31, 2015, the statutory income tax rates of the countries where the Company does business are 35% in the United States and 0.0% in Bermuda. The statutory income tax rate of each country is applied against the taxable income from each country to calculate the income tax expense (benefit).

Income tax expense (benefit) consists of the following components for the years ended December 31:



(In thousands)	2015		2014		2013
Current	$	18,910	$	2,816	$	881
Deferred	52,157		44,614		(8,267		)
Total income tax expense (benefit)	$	71,067	$	47,430	$	(7,386	)

For the year ended December 31, 2015 pre-tax income attributable to Bermuda, and U.S. operations was $21.4 million and $207.0 million, respectively. For each of the years ended December 31, 2014 and 2013 pre-tax income (loss) attributable to Bermuda operations was not significant in comparison to total pre-tax income.

Income tax expense (benefit) is different from that which would be obtained by applying the applicable statutory income tax rates to income before taxes by jurisdiction (i.e. U.S. 35%; Bermuda 0.0%). The reconciliation of the difference between income tax expense (benefit) and the expected tax provision at the weighted average tax rate was as follows for the years ended December 31:



($ in thousands)	2015			% of pretax income		2014			% of pretax income		2013			% of pretax income
Tax provision (benefit) at weighted average statutory rates	$	72,461		31.7	%	$	47,930		35.3	%	$	21,405		36.9	%
Non-deductible expenses	381			0.2		398			0.3		276			0.5
Tax exempt interest, net of proration	(1,741		)	(0.8	)	(961		)	(0.7	)	(159		)	(0.3	)
Change in valuation allowance	—			—		—			—		(28,886		)	(49.8	)
Other	(34		)	0.0		63			0.0		(22		)	0.0
Total income tax provision (benefit)	$	71,067		31.1	%	$	47,430		34.9	%	$	(7,386	)	(12.7	)%

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 was comprised of the following at December 31:



(In thousands)	2015			2014
Deferred tax assets	$	36,908		$	31,729
Deferred tax liabilities	(124,872		)	(68,821		)
Net deferred tax liability	$	(87,964	)	$	(37,092	)

The components of the net deferred tax liability were as follows at December 31:



(In thousands)	2015			2014
Contingency reserves	$	(119,896	)	$	(63,103	)
Unearned premium reserve	17,801			16,099
Fixed assets	5,879			6,274
Nonvested shares	5,842			4,140
Start-up expenditures, net	4,158			4,611
Deferred policy acquisition costs	(4,035		)	(3,359		)
Unearned ceding commissions	2,557			—
Unrealized (gain) loss on investments	(760		)	(2,045		)
Accrued expenses	519			(155		)
Prepaid expenses	(181		)	(159		)
Loss reserves	126			86
Organizational expenditures	26			29
Alternative minimum tax credit carryforward	—			490
Net deferred tax liability	$	(87,964	)	$	(37,092	)

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 years ended December 31, 2015 and 2014, we had net purchases of T&L Bonds in the amount of $59.7 million and $51.7 million, respectively, and held $119.4 million of T&L Bonds as of December 31, 2015.

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. As of December 31, 2012, Essent had generated a cumulative net operating loss from inception through each annual reporting period. ASC No. 740 states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Accordingly, we concluded that a valuation allowance was required in each reporting period from inception through December 31, 2012. As of December 31, 2012, the valuation allowance was $28.9 million. In the second quarter of 2013, based on actual results through June 30, 2013 as well as forecasted full year 2013 results, management anticipated that Essent would be in a cumulative GAAP net income position for the most recent three year period and expected that Essent would utilize our net operating loss carryforwards and would be in a cumulative net taxable income position since inception. In 2013, we released the valuation allowance on our deferred tax assets, and recognized a net deferred tax benefit of $8.3 million in the year ended December 31, 2013. At December 31, 2015 and December 31, 2014, after weighing all the evidence, management concluded that it was more likely than not that our deferred tax assets would be realized.

Under current Bermuda law, the parent company, Essent Group, and its Bermuda subsidiary, Essent Re, are not required to pay any taxes on income and capital gains. In the event that there is a change such that these taxes are imposed, these companies would be exempted from any such tax until March of 2035 pursuant to the Bermuda Exempt Undertakings Tax Protection Act of 1966, and the Exempt Undertakings Tax Protection Amendment Act of 2011.

Essent Holdings and its subsidiaries are subject to income taxes imposed by U.S. law and file a U.S. Consolidated Income Tax Return. 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. Should Essent Holdings pay a dividend to its parent company, Essent Irish Intermediate Holdings Limited, withholding taxes at a rate of 5% under the U.S./Ireland tax treaty would likely apply assuming the Company avails itself of Treaty benefits under the U.S./Ireland tax treaty. Absent treaty benefits, the withholding rate on outbound dividends would be 30%. Currently, however, no withholding taxes are accrued with respect to such un-remitted earnings as management has no intention of remitting these earnings. Similarly, no foreign income taxes have been provided on the un-remitted earnings of the Company's U.S. subsidiaries as management has neither the intention of remitting these earnings, nor would any Ireland tax be due, as any Irish tax would be expected to be fully offset by credit for taxes paid to the U.S. An estimate of the cumulative amount of U.S. earnings that would be subject to withholding tax, if distributed outside of the U.S., is approximately $298 million. The associated withholding tax liability under the U.S./Ireland tax treaty would be approximately $15 million.

Essent is not subject to income taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations, or treaties which might require Essent to change the way it operates or becomes subject to taxation.

At December 31, 2015 and 2014, the Company had no unrecognized tax benefits. As of December 31, 2015, the U.S. federal income tax returns for the tax years 2009 through 2014 remain subject to examination. The Company has not recorded any uncertain tax positions as of December 31, 2015 or December 31, 2014.