Essent Group Ltd. Q1 2023 Earnings Call
Hello, and welcome to the Essent Group limited first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session and instructions will be provided at that time.
I'll now turn the conference over to Phil Stefano. Please go ahead.
Thank you Sarah good morning, everyone and welcome to our call. Joining me today are Mark <unk>, Chairman and CEO and David Weinstock, Chief Financial Officer also on hand for the Q&A portion of the call is Chris Curran President of Essent Guaranty.
Our press release, which contains <unk> financial results for the first quarter of 2023 was issued earlier today and is available on our website at Essent group Dot com.
Prior to getting started I would like to remind participants that today's discussions are being recorded and will include the use of forward looking statements. These statements are based on current expectations estimates projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially for a discussion of these risks and uncertainties.
To review the cautionary language regarding forward looking statements in today's press release the risk factors included in our Form 10-K filed with the SEC on February 17th 2023, and any other reports and registration statements filed with the SEC, which are also available on our website now let me turn the call over to Mark Thanks, Phil.
Good morning, everyone earlier today, we released our first quarter 2023 financial results, which continue to demonstrate the earnings power of our business our financial performance for the first quarter benefited from rising interest rates and favorable credit performance higher rates translated to higher investment income along with higher persistency, which supports the growth of our <unk>.
Portfolio, despite lower origination volumes as we continue through 2023, we've remained confident in our buy manage and distribute operating model, while we recognize the uncertainty surrounding the economy in the near term we continue to manage the business considering a range of scenarios, we remain constructive on housing over the longer term as we believe.
That demographic driven demand and low inventory should provide foundational support to home prices and.
And now for our results for the first quarter of 2023, we reported net income of $171 million compared to $274 million a year ago on a diluted per share basis. We earned $1 59 for the first quarter compared to $2 52, a year ago and our annualized return on average equity was 50.
15%.
As of March 31, our insurance in force was $232 billion at.
A 12% increase compared to a year ago, our 12 month persistency on March 31 was 84% and approximately 80% of our enforced portfolio has a note rate below 5% given current rates, we anticipate that persist.
Persistency could remain elevated in the short term.
The credit quality of our insurance in force remained strong with a weighted average FICO of 746, and a weighted average original LTV of 92%, while certain msas could experience price corrections, we believe home prices nationwide will generally be flat in the coming years. We also anticipate that the embedded home equity within the existing book should continue to.
<unk> the risk of near term claims.
On the business front during the quarter, we continued raising rates through our risk based pricing engine <unk> and edge, we believe that the pricing environment remains constructive and is reflective of ensuring long tail mortgage credit risk given the macroeconomic backdrop.
As of March 31, Essent Re's third party annual run rate revenues are approximately $70 million, while our third party risk in force was approximately $2 billion.
During the quarter Essent re continued to capitalize on the current environment to optimize returns and contribute to the profitability of our franchise.
Cash and investments as of March 31, where were $5 billion.
And the annualized investment yield for the first quarter was three 4% up from two 1% a year ago, our new money yield in the first quarter approximated, 5%, providing continued tailwind for our investment portfolio.
As a reminder for every one point increase in the investment yield there is roughly a one point increase in ROE.
We continue to operate from a position of strength with $4 $6 billion in GAAP equity access to $2 1 billion in excess of loss reinsurance and over $1 billion of available holding company liquidity with a trailing 12 month underwriting margin of 87% and operating cash flow of $595 million.
Our franchise remains well positioned from an earnings cash flow and balance sheet perspective.
We continue to take a measured approach to capital and remain committed to managing it for the long term our strong financial performance affords us the ability to take a balanced approach to capital between distribution and deployment, which includes the $100 million for our planned title acquisition announced in February .
We have initiated an integration and transition process for the pending titled transaction. The companies will continue to operate independently until we close the deal later in the year.
As noted in the past, we believe allocating capital for growth is or better value creator for the shareholders over the long term power.
However, we also recognize that returning capital to shareholders generates meaningful returns for investors year to date through April 30, we repurchased approximately 800000 shares for $32 million.
Further I'm pleased to announce that our board has approved a common dividend of 25.
We continue to see our dividend as a meaningful demonstration of the confidence we have in the stability of our cash flows and strengthen our capital position now let me turn the call over to Dave.
Thanks, Mark and good morning, everyone.
Let me review our results for the quarter and a little more detail.
For the first quarter, we earned $1 59 per diluted share compared to $1 37 last quarter and $2 52 in the first quarter a year ago. As a reminder, our first quarter 2022 results benefited from the release of approximately $100 million of reserves associated with Covid related defaults from 2020.
Net premium earned in the first quarter of 2023 was $211 million and included $14 $7 million of premiums earned by Essent re on our third party business.
The average premium rate for the U S mortgage insurance business in the first quarter was 40 basis points and the net average premium rate was 34 basis points, both consistent with the fourth quarter of 2022.
Net investment income increased $5 4 million or 14% in the first quarter of 2023 compared to last quarter due primarily to higher yields on new investments and floating rate securities resetting to higher rates.
Other income in the first quarter was $4 $9 million, which includes a $368000 loss due to a decrease in the fair value of embedded derivatives and certain of our third party reinsurance agreement.
This compares to a $6 $5 million decrease in the fair value of these derivatives in the fourth quarter of 2022.
The provision for loss and loss adjustment expenses was a benefit of $180000 in the first quarter of 2023 compared to a provision of $4 1 million in the fourth quarter of 2022, and a benefit of $106 9 million in the first quarter a year ago.
At March 31, the default rate was 157% down.
Down nine basis points from 166% at December 31.
Largely due to favorable care activity on prior year defaults.
Other underwriting and operating expenses in the first quarter were $48 2 million, an increase of $1 $3 million over the fourth quarter of 2022 and included approximately $3 4 million of transaction costs associated with our announced title business acquisition.
The expense ratio was 23% this quarter.
<unk> with the fourth quarter of 2022.
We continue to estimate that other underwriting and operating expenses will be approximately $175 million for the full year 2023, excluding expenses associated with the announced title business acquisition and related transaction costs.
During the first quarter Essent group paid a cash dividend totaling $26 $8 million to shareholders.
In March we repurchased $16 6 million of shares under the authorization approved by our board in May 2022.
We repurchased an additional $15 $1 million of shares in April 2023.
As a reminder, essent has a credit facility with committed capacity of $825 million borrowings.
Borrowings under the credit facility accrue interest at a floating rate tied to a short term index as of March 31, we had $425 million of term loan outstanding with a weighted average interest rate of 652%.
Up from six 2% at December 31.
Our credit facility also has $400 million of Undrawn revolver capacity that provides an additional source of liquidity for the company.
At March 31, our debt to capital ratio was 8%.
During the first quarter Essent guaranty paid a dividend of $90 million to its U S holding company.
Based on unassigned surplus at March 31, the U S mortgage insurance companies can pay additional ordinary dividends of $292 million in 2023.
As of quarter end, the combined U S mortgage insurance business statutory capital was $3 2 billion.
With a risk to capital ratio of 10 three to one.
Note that statutory capital includes $2 2 billion of contingency reserves at March 31 2023.
Over the last 12 months the U S mortgage insurance business has grown the statutory capital by $148 million, while at the same time pain $310 million of dividends to our U S holding company.
Now, let me turn the call back over to Mark.
Thanks, Dave and closing our balance sheet and liquidity remained strong while higher interest rates continue to benefit the persistency of our in force book and investment income.
The quality of our portfolio continues to drive positive credit performance.
Looking forward our franchise is well positioned and we remain confident in the strength of our operating model our strong financial results continue to generate excess capital, which we will deploy in a balanced manner between investment in growing our business and distribution to our shareholders now lets get to your questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your telephone keypad.
If you wish to remove yourself from the queue simply press star one again.
One moment. Please for your first question.
Your first question comes from the line of Mark Devries with Barclays. Please go ahead.
Thank you.
Mark I know you don't target market share, but it looks like you've clearly gained share this quarter.
Just hoping to get some insight on what you think might have drove that and let me just ask my second question. It's related because you also just talk about what youre seeing.
Across the industry from a pricing dynamic perspective.
Sure Mark.
And I know I'm like a broken record here, but the market share always kind of ebbs and flows quarter to quarter.
I think we looked at I looked at it the other day the last seven years, our market share average of 16%, which is which I would expect it to be by the end of the year right I mean, its a little high in the first quarter, but also keep in mind marks the small market. So the delta between the number one market share and the number six is like 5 billion.
Relatively tight so little movements.
Can change things so.
Nothing in particular as I noted in the script, we continue to raise rates and my guess is we're probably going to raise them a bit more and we have the room, it's not our goal to be.
Number one in market share and we look at this really just an opportunity.
Again too.
To raise pricing potentially across the board certainly in pockets, but again we.
We want to move back to the middle of the pack. If we can and just in terms of unit economics, I think theyre relatively good we said, we kind of target that 12%, 15% range given the spike in investment yields there are probably a little bit towards closer to the 15% I would've said they were much closer to the 12 a year ago.
Been a significant bump up in pricing probably to the point, where we're right around 2019 type levels in terms of new production, which I think given kind of a three to four flattish outlook on HPA.
I think it's warranted I had said before we kind of want to see that pricing with a four handle on it and we're getting there.
Which is good longer term that sets the industry up well.
To be to have a strong balance sheet because remember we're there to pay claims in times of stress. So again, we thought the pricing got pretty compressed 12, 18 months ago, and it's really started to rebound and we would expect it to stay at this level again given.
I think the discipline in the industry is much stronger than people think and I think thats been evidenced and I would expect that to continue.
Through through this year, we don't see anything changing I just listened to some of the commentary.
The other <unk> and again, it's just a much more of a financial lead business. These days, if you look at where the backgrounds of the other leaders in the industry at the top of the house. So again I'm pretty we're pretty encouraged from a pricing environment and again, just when you think about the nominal cost of MRI Mark for the borrower.
Still very efficient and it's still very efficient it's a good value we're putting folks.
First time homeowners in homes, and it's relatively it's relatively safe and efficient process.
Okay, great. Thank you.
Your next question comes from the line of Bose George with <unk>. Please go ahead.
Yes, good morning.
Investment income the increase this quarter was just was pretty strong so just kind of thinking about the cadence of the increasing investment going forward can you can help us out with that.
Yes Bose good question I think there's a couple of things going on here.
<unk> I think in the fourth quarter of that.
We took an opportunity to do a little bit of of repositioning in the portfolio, where we have found that we had an accretive trade that we got out of some positions.
And reinvested at higher rates and if you look at todays rates and Mark commented on this in the script it.
Investing at 5% in the first quarter.
Is there a lot more upside I think over time.
Look at the yield curve.
We're probably.
Going to see nice pickups from year on year, but I don't know that sequentially. It will be as dramatic as what you might have seen.
Okay, Great. That's helpful. And then just actually a regulatory question just with the changes in the GSE LLP.
The FHA premium Seth.
Any thoughts if that's going to do it much in terms of market share.
Now those again I think we've talked about this a couple quarters ago, we kind of see it more as offsetting penalties.
So.
We don't see a big increase in our share.
And neither do we see it on the on the FHA side and again, a little early to tell but right now thats kind of what we're seeing.
Okay, great. Thanks.
Your next question comes from the line of Mihir Bhatia with Bank of America. Please go ahead.
Hi, Thanks for taking my question.
I guess.
On the credit side I did want to ask is there anything that you are being cautious on any areas. Obviously I understand the macro is getting a little weaker it seems like there's a little bit of a DPI inflation, which is also helping price but is there anything else on the credit side that is driving the price increases.
I think it's the normal things right in here. So think of it are clearly just on the collateral side youre going to youre going to price up in certain msas, where we have kind of different forward looking views.
On the HPA.
Kind of where it's going and like I said, it's flattish.
Across the country over the next three to four years, but it's certainly going to be pockets and we kind of know where the pockets are we're going to have to price up in terms of just core credit.
I think again, it's around the layered risk so it's really going to be cautious around the tails, whether thats higher DTI.
Lower FICO higher LTV very normal.
Things that we're looking at and again with our pricing engine I think we can we can pick.
Things, a little bit better than we could under the old model. So I think that plays into some of it too. So not all high DTI is are created equal some are actually relatively good values and others you should really stay away from so it's really kind of getting down to that loan level kind of analysis there.
Got it and then in terms of just the market share shifts and again not really so concerned as you pointed out about one quarter your market share will be higher one will be lower but more just generally where is the growth where was the growth. If you will in your portfolio on a little bit like we obviously you just get the data.
Atlanta ITW level with like maybe from your own internal metrics you have a view of where your outsized growth outsized growth in this quarter was it just across the board with a particular I don't know well remember China.
<unk> was flat quarter over quarter. So we didn't really notice any outsized growth per.
Per se.
Some lenders go up some lenders go down sorry, it's also theres lender specific so we saw we saw one of our larger.
Mortgage banks.
And the country kind of sell sell their wholesale division to another player. So we've seen and you always see turnover.
At the top another another large refinance driven shop last year really lowered originations, so theres movement around lenders, but and then again it might be different different lenders.
Some may have differ.
A different pricing around certain lenders, we really don't for the most part, especially via the engine. It's all borrower specific so we didn't notice any patterns per say and again, we didn't we didn't see any spikes either given the flattish and IW between quarters.
Okay. Thank you.
Your next question comes from the line of Geoffrey Dunn with Dowling and partners. Please go ahead.
Thank you and good morning.
Good morning.
From a rough high level I'm wondering if you could talk about pricing in a different perspective more from a cumulative loss assumptions.
Alex Lowe.
Was pricing getting down towards 1% cumulative.
On average was it that aggressive and where do you think maybe the pricing is today or where does a four plus handle.
Potentially implying a cumulative loss assumptions.
Yes. Good question again, we don't we don't jerk around our cumulative loss assumptions. So again, we're we've always been and obviously now with the engine it's much more of a loan levels specific.
But it's always in that kind of 2% to 3% range and is driven clearly a little bit with our HPA view I would say when pricing kind of trust.
15 months ago.
When.
I look at it more from the returns right. So we kind of in that 12% to 15 ish range. It was it was pretty much at the lower end of the range and you can you can stretch to get it to that level given.
<unk> and leverage and all those sort of things you can hide from the raw.
The raw pricing, so when pricing dips into the twos, which we saw on one on one large lender bid that we clearly didn't win.
You have to have pretty aggressive assumptions I'm not even sure 1% gets you. There. So you have to because just the cost of capital along Jeff and the cost to originate. So again, we felt that's why you saw our share kind of get so low.
In that third and I think it was the fourth quarter and first quarter again, 12 15 months ago. So.
We said it we thought we thought it was too low and again just given the current environment. So maybe just just the uncertainty in the environment last year kind of sparked folks to move pricing up one large <unk> clearly had backed out of the market.
And there are.
We're a bellwether on one side they were a bellwether and the other in there backing out really opened up the room for others to kind of increase so and I think I think it's been positive right again here at the end of the day, we need to have the balance sheet to pay claims.
And make sure we have the flexibility, whether it's <unk> or at the state level and just to chase to chase it down like that it's just not in the best interest longer term of the industry to be to be quite honest. So.
I am very I think we're encouraged to see where the pricing is and again like I said earlier on.
10 basis points.
Pricing in the absolute pricing that we're giving to the borrower today, we think it's pretty it's pretty cost effective.
Especially when you think about a 6% mortgage rates. So we'll see we'll see if it can continue.
But I would say, where we are definitely encouraged of where the pricing levels are in the industry today.
Okay, and then with respect to Essent guaranty on the statutory side, we've taken dividends out the very level of at least last five quarters.
With where you are in your maturity.
Earnings power and understanding things like vault.
Change with the economy, but on average do you expect to maximize ordinary course dividends on an annual basis, just as a rule of thumb or.
Any any kind of parameters around that to give us a better idea.
Cash inflows to the Holdco.
Yes, great great Great question, I would say given the environment and we'll take it or I don't know if we'll take it a quarter at a time I guess as a year at a time in terms of guarantee outflow, we would fully expect to Max it out. So we have I think another 292.
Capacity this year and the reason is it's easy to put it back down to kind of like to see the cash and we like it for investors to see the cash at the Holdco and then whether that gets upstream.
Group and goes outside the company repurchases or dividends, it's used to reinvest along hold within the at the holdings level.
Keep it in the U S. It's I think it's a good picture for investors to see so yes, I think given the environment. This year, we would fully expect to upstream it.
Alright, thank you.
Yes.
Your next question comes from the line of Rick Shane with Jpmorgan. Please go ahead.
Good morning, it's Melissa on for Rick today.
All of our questions have already been asked but I wanted to come back to the issue of dividends and share repurchase and certainly keeping in mind your point about having the balance sheet to meet claim means.
Forward I'm curious.
It would take for you to get more comfortable with taking up the dividend or increasing repurchase activity is it really just a function of sort of getting through a cycle.
That's a good question.
And one that we've been thinking about so I would say just on the dividend we like the dividend. We think it's a good indication to shareholders of how the business has changed right just given the reinsurance the sustainability.
That affords us with reinsurance is pretty important and we think it's a tangible demonstration to investors I mean, the industry has changed.
We significantly over the past 15 years, it doesn't get a lot of credit for it but when you think about <unk>.
<unk>, 95% of our book is GSE backed.
Which is in the Gse's 745, FICO and the Gse's have made significant improvements over the past 15 years with Du and LP their quality control just a level of guardrails. They have in addition to the qualified mortgage Reits that are qualified mortgage has cast a lot of that long tail risk business are layered.
Risk business out of the out of the business.
Then you have just even the introduction of forbearance and how that means to the borrowers. So that goes into that so I think we are in terms of the kind of the cash flows of the business. We like the dividend. We've we kept it at 25, when we announced it last quarter, we are going to kind of look at that every year right. So every year, we will take a step back and say do we want to take it from that we want to keep it at 25 were.
Do we want to take it.
And then in terms of repurchases, it's really a matter of what other opportunities are out there for the business. We generally have I would say a retained cash and investments <unk>. So whether that's in the core business we clearly.
Entered into the title business, we like that longer term, we think it's better for shareholders in terms of diversified revenue stream less of a mono line per se.
That's accretive to book value per share right, it's really about maintaining our returns and growing book value per share and we look at it really as the numerator and the denominator investments.
Whether the core business or strategically outside the core business increase the numerator dividends decrease the denominator as do repurchases and I think with repurchases we've changed.
We have altered kind of our view a little bit I mean last two years ago, we did.
$250 million think of it ended last year with $250 million repurchase <unk> five plan kind of almost like a road plan and we chew through it chewed through it.
Relatively quickly I think in less than a year, so that caused us to kind of take a step back.
And I think now we're going to be a little bit more opportunistic about it which will have much more of an overlay. So as we look and it's really going to be quarter by quarter.
What opportunities do we see kind of capital needs within the business what opportunities do we see kind of strategically outside of the business, whether that's title ventures.
Other opportunities should they come up.
And then quite frankly, whereas the stock trading alright. So again, our view is buying the stock below book value is accretive to.
Book value per share growth, which is very important to us and we just saw that we saw the opportunity in the quarter.
We trade within the <unk> index, which is very bank heavy obviously and we felt we got caught up in that and we thought it was a good opportunity to really to get the get the stock at attractive prices normally that hasnt been our that hasnt been our course of business, but again, just given again just that's the strength of the operating cash flow.
So we were afforded that kind of luxury so to speak to kind of to invest across that right. So whether it's dividend repurchases and the new business and I think the.
With the repurchases thats another kind of.
I really I would say another kind of tool in the toolbox that will look more strategically and really within kind of the normal course of business. So just like we analyze pricing and how much business. We know how much you want to invest in the core business. This is going to be another thing that we'll look at special dividends as always is another tool we haven't used that yet.
And again, we're always going to look ways to grow book value per share and obviously, we want to maximize shareholder returns.
Yes.
That's really helpful. Thanks Derek.
Mentioned Zen chairs and Thats something that you talked about in the past as being a source of sort of incremental data.
Im getting some useful information.
And those companies were easy.
Provided some capital.
Obviously, you've got a big a bigger transaction coming up.
Just in terms of the current debentures portfolio, what sort of interesting data points are you guys paying attention to right now anything worth noting that youre seeing trending.
And those companies yes.
In terms of the companies the direct investments remember that's relatively small we get a lot more of our information from the funds.
And they're both on the venture side and some of the a couple of private equity, we're seeing clearly valuations I think kind of that bubble has finally started to diversed around venture so you're starting to see a much more realistic approach.
<unk> to valuations and really more focus we're seeing within the funds and the operating companies on on getting to profitability, which shocking is actually the goal all along but we've got it got to be just a revenue kind of chasing revenue and chasing exits as we like to see say.
Due to that 1922 bubble and it's coming down back to reality, which is good for us. So we're seeing we're seeing much more discipline around kind of whats where the funds are going to invest in in terms of.
In terms of opportunities.
I think there it's a matter of we're starting to look a little bit about investing a little bit outside.
Looking at a few new funds to to kind of look look for some emerging technologies and to see potentially how they can be used within kind of the core business and other uses within financial services.
Thanks Mark.
Your next question comes from the line of Doug Harter with Credit Suisse. Please go ahead.
Thanks.
Mark, hoping you could talk a little bit about the reinsurance market.
<unk> pricing is ferring and kind of how that is relative to where you think Ireland's would execute right now.
Yes, I mean, I think in terms of kind of looking at the market <unk> still probably trade a little bit more efficiently in the aisle and no one's in the market. So it's hard to tell with the Io and pricing is I mean, it's been it may now and I don't believe in MRI has issued an IL and I think from our standpoint, Doug just big picture, we're going to continue.
To diversified capital sources.
For our reinsurance our house view is it's much more important to have the sustainability.
And availability of reinsurance and so much the price of an individual deal and I know thats not necessarily how others do it which is fine, but it's very important to us. If you think longer term that availability of reinsurance and a really important part of our capital structure and it's really our leverage right. That's why we don't have a lot of leverage at the Holdco, we really kind of we think of.
Reinsurance more as kind of leverage and having having dry powder at the Holdco really helps us it really will aid us. If there is some type of dislocation in the reinsurance market there really hasnt been.
To date, which I think is encouraging it's our sixth year now of being in the reinsurance market and it's really been tested twice right who got tested.
And Covid, where it's shut down on the island side.
But then picked up and I know there were so well in quota share deals done that year I thought last year was actually a bigger test you are talking about rates going mortgage rates going from three to six.
Credible volatility amongst rates, which caused spreads to below al just the whole media attraction to high HPA and thats going to cost in the housing market to crash and you know it's going to it's going to it's going to hurt the <unk> all of that kind of old I call. It David kind of views on the industry.
Going back to kind of the GSC and yet <unk> got issued Sol's work, we did in Ireland and we did in <unk>. When we did the quota share, albeit a little bit higher pricing, but in the Grand scheme of things Doug.
Really not that.
The average out all the pricing we've done over the last five or six years.
It wasn't really that meaningful.
So again I think it's more around is the permanence of it and the availability and I think as we get to eight 910 years of reinsurance.
<unk> also been impact impact, how we view cash at.
At the Holdco right when we've talked about I think last quarter doing running different scenarios and we I think we talked about a little bit in the script today, we run kind of mild moderate GSE type scenarios across our portfolio every quarter.
And some of that as you get out to whether it's modern or GSC, you really have to kind of test and see what your capital structure looks like without reinsurance. It's just half two because youre not sure the availability of it again, it's our funding rates are <unk> as our liquidity type test and tenure if its reinsurance is.
Still kind of going strong the way. It has five years from now I think we'll have a little bit more reliability around that.
Capital and stress models, which I think is really positive. So again I don't get too caught up and again <unk> is a little bit more efficient in Ireland, we're not really going to jump between each one of them, we're going to try to utilize all three.
And we have really good partners on the reinsurance side, both in <unk> and on the quota share and we have good partners on the island side, we have four or five top investors that are pretty much in every one of their deals and we want to make sure that they are.
They have kind of product that they can purchase from us.
I guess on the island.
Youre the only one thats.
<unk> committed to kind of keeping that capital source open.
Or does it drive up do you need do you need kind of others to kind of supported as well just how do you think about that from us.
Yes, yes.
Yes, I think it's always better to have more issuers, but remember we have the gse's alright that gse's over they're really they're the ones who paved the way for the Miss.
And I think there is given in terms of the technical aspects of it the islands, probably a little bit better value from an investor standpoint, So again some of the sharper guys realize that so we don't anticipate that.
That being an issue and I don't know.
Just because we're committed to it I'm not sure how the other I am I think about it but everyone's been pretty active in it over time.
But we'll see what happens this year, but again I think will be very much wood.
And anticipate being in the market for an island in a latter half of the year.
Great. Thank you Mark.
Your next question comes from the line of Roland Mayer with RBC capital markets. Please go ahead.
Hi, good morning.
Think on the Essent re commentary to a run rate of about $70 million of revenues for the year is that just a premium number or is there seasonality in that we should consider anything else on that would be great.
Yes.
If you really kind of.
<unk>, it's in the Investor deck, it's really it's really three lines of business.
Affiliate quota share right, which is kind of the gift that keeps giving for essent re but they also have a third party business. Both in terms of mainly taking on risk share from the gse's and their MGA business. So the premium.
Is is really coming from the GSE type business. The third party premium, but they also get investment income that we have to hold cash in the trust. So the absolute if we were going to kind of show you a P&L shelf for Essent re it would be a bit higher than the 70 for sure.
Okay. That's helpful and then anything on the market dynamics and just taking a step back with it I mean, it's relatively the math is actually relatively simple.
It's $2 billion of risk in force as of third party assume we.
Earned three points on it.
And the rest of that's coming from a lot of the fee income from MGA. So it's really is how can we grow.
That $2 billion, it's not really that easy it's dependent on on kind of the Gse's I would.
One comment that's interesting is if you combine our market share between the principle that we take.
Principal risk that we take.
With the Gse's and the MGH, where it's shockingly like 15% 16% share.
So we're a nice part of that market and we're really contingent on that mark market growing longer term. So connect to go to five not likely at all right two going to three more likely.
And then we'd have to go outside of kind of just the GSE business, we do some business in Australia with some of the Ams there it's relatively small.
So I would say, it's a relatively contained.
Kind of growth story, so to speak very profitable.
Not really looking to grow its really when you think about Essent re it's been it's been a nice addition to the franchise. We're fortunate we started and we have a great team there and it gives us really just the tax efficiency.
<unk> of.
The quota share also just with the premiums as another way to get capital to the Holdco very efficiently. So it has been all in when you. When you. When you can combine all of kind of the strengths. It's a real it's a key part of the franchise.
No. That's very helpful. It covered most of the second half of my question, where are the sort of returns on that business right now and where do you expect them to be sort of the long term.
Yes.
I would say on a collateral basis and were held to a little bit higher level than maybe the typical reinsurer there in that 12% to 15% range.
Probably 12 to 15.
Ebbs and flows there I would say on an economic capital basis. So they are probably probably in the 15 to 20 range. So we look at it more because we hold the capital and the trusted us that real capital. If we were able to kind of do economics be higher so it's pretty good and that's we talked about earlier, we've talked about ventures. It's really the same thing we kind of have that 12% to 15%.
Target across all the businesses that we're investing in.
That's great. Thank you so much sir.
Yes.
Your next question comes from the line of Eric Hagen with BTG. Please go ahead.
Hey, Thanks, good morning, maybe pulling on the pricing thread a little bit more you mentioned, we're back at 2019 levels, but when we compare interest rate volatility to that period.
And its impact on pricing, how do you feel like we shake out there and to that point, we would typically see higher rate volatility and wider spreads driving.
Higher mortgage rates in the primary market, but can you really say this is the same.
<unk> connectivity exists for pricing for EMI.
No not really I mean, I think it's a little bit apples and oranges right. I mean, I know you are coming that are given your background you are coming at a much more from an MBS type perspective.
Much more interest rate driven again, we're really credit driven so there is there's an interest rate component to our pricing right because that's how we think about duration.
But it's relatively stable it doesn't really kind of jerk around based on based on interest rates. So again I think it's more of our credit views and if you compare just again I throughout 2019 pricing. The returns today are probably higher though even though the pricing is relatively flat and remember 19 just to remind every.
One the 19 is really kind of coming after the the industry lowered pricing kind of following up to the to the reduction in taxes. So if you look at pricing 19 to today, it's at a lower tax rate today right. The corporate tax rate went down.
Higher investment yields today and clearly the addition of kind of the credit risk transfer. So most of the bulk wasn't even reinsurance. So when you think about we're putting a dollar to work today at similar pricing and 19 the unit economics in terms of the predictability of the unit economics, right and that's where the reinsurer.
<unk> plays such a key part.
I would say are stronger today than it was four or five years ago.
Yes.
Yes.
That's helpful. Maybe I could sneak in one more here I mean, how are you thinking about the timeline to foreclosure or liquidation in this environment do you feel like Thats changed meaningfully and to the extent that it has since does that show up as a driver for pricing in the reinsurance market.
And I'm not sure in the reinsurance market it may right and you'd have to ask the reinsurers for that I think for us it's not so much a driver yet right I mean, clearly forbearance is another one and I mentioned it earlier.
In the call around some of the kind of.
Key.
Macro changes to the business.
In terms of the Gse's QM.
Their QC work strengthening of Du and LP forbearance is really another tool that protects the borrower and its historic if you go back and again look at history Post post crisis, you had HAMP and harp and a lot of those those programs were kind of cleaning up the milk after it already spilled on the floor and I think with Forbes.
Barron's, which has always been a tool around.
Hurricanes and some of those other type of events was really a COVID-19 two.
<unk> very quickly.
I commend them for this because they came out very quickly with forbearance.
During the Covid time period, and it made sense right, Eric Youre not allowed to go to work for three months and then the last thing you need to do is get a foreclosure notice it doesn't do anyone good and this is a higher level. It doesn't do any anyone any good to kick a family out of the house. It just doesn't it's not good economically.
For mortgage insurers or Servicers, where the government or clearly from a social perspective with family, so coming up with new and innovative tools to keep borrowers in their own which is good for everyone and I think we saw that with Covid.
And I think with the new forbearance rule that my guess it will come down with US which is you have to have right party contact when you get a six month forbearance and then potentially another six months really gives borrowers a chance to get on their feet and so yes. The answer to your question that will delay the foreclosure timelines. So I think that changes some other.
Businesses that rely on things like foreclosures I'm not sure it's ever going to go back to the way. It was it's kind of like very similar to post crisis, everyone thought.
On the ABS market around subprime mortgage and all would come back and I mean, there's no way we thought it would come back that ship had kind of sale.
And the Gse's are really the only game in town, which is good because you need that type of standardization.
Around around mortgage origination and I think with forbearance I think it is going to change.
I think youre going to see more.
Again more folks stay in their homes and Eric If you think about it from the Essent standpoint, right, we take first loss risk.
We hedge out most of the mez piece, our biggest risk and accompanies re attaching above that.
Alright, Thats, our ultimate cat risks that we have to hold capital for.
And if you think of a borrower staying in their home longer that lowers our expected loss, maybe not a lot certainly helps our reinsurers right I think if youre in the Mezz protection.
If you are providing that Mezz protection in there is the ability for the first loss to not penetrated that that helps clearly helps to categories right. So I think if you when people we had a comment and I think I brought about once but it just reminds repeating we were at an Investor conference in May of last year, and some larger investor.
Asked is how why we didn't think we were going to go out of business, which again. It just shows you how little some folks noticed because again.
Folks on the phone.
The companies in the industry, we know this business cold, but typical portfolio manager reverts back to.
Reverts back to kind of a recency bias and if youre looking at the <unk> and.
2023, and comparing them to the <unk> of 2007, while sets.
That's not the proper analysis and again Big picture, Eric and you would understand this.
The way you cover that way you cover the industry.
We're a company now and there's issues in the economy right theres issues clearly around the banking system there is issues around commercial.
Commercial finance Youre, starting to hear that come up residential is probably one of the best places to be right and we're sitting here with a portfolio that's 95% GSE backed.
Embedded home equity Mark to market of 75.
80% of our book is below 5%. So it's in that 60% is below four.
It's a good place to be from an investor standpoint, that's why we're encouraged clearly again. There is there is there is uncertainty, but I think from a from a relatively just from our position in the market today, we're feeling pretty good about it.
I appreciate your comments very much. Thank you guys.
Your next question is a follow up from Geoffrey Dunn of Dowling and partners. Please go ahead.
Thanks, I just wanted to ask given the reinsurance compensation last year the island market will out and then we.
Kind of gradually solved the traditional reinsurance market.
Adopt changes and we basically increased pricing.
As things may be improved.
<unk> is up on the primary side returns are all <unk>.
How long does it take for that information to trickle through on your reinsurance negotiations in the reinsurance pricing.
It's better than it used to be given greater education, just curious if you could update us on that.
Youre thinking about the quota share.
I would think about quota share, but I'm also just thinking in terms of ex ol everything at the underwriting is tighter maybe their loss assumptions.
An extra long terms come in a little bit just in general if the primary side is in a better place today, how long does that take to necessarily be reflected in the reinsurance mindful.
Yes, let me start and I'll turn it over to Chris.
He may have some thoughts I think it is very helpful. On the quota share side, right, because where you're literally taking a slice of our book and there was pressure from the reinsurers.
Over the past against 12 plus months ago. They saw the same thing I mean, they see better pricing than any of the markets right and so they were pushing on a lot of the <unk> and maybe that's another reason that pricing has come up so it should be we should be able to negotiate better quota share treaty is going forward given the pricing im not sure. They care so much on the <unk>.
Given that.
Really taking credit risk and don't really get compensated.
For how we charge an even ended up before I turn it over to Chris Jeff the spreads blow out on the island side, but youre talking like one one basis point increase in terms of just kind of it we always boil down the premium rates.
And whether it's four to five accounted probably got the six last year and one of our island deals, but kind of big picture I think thats.
We think that's a small price to pay to keep the sustainability of that open to testing.
Yeah, Hey, Jeff, It's Chris just to add to that certainly from a reinsurer perspective.
Our relationships are extremely strong.
And as far as the interest and the quota share. It continues to be high certainly now with some of the primary business kind of repricing to the upside I think from a reinsurance perspective, certainly they'll see that.
And I think the interest will continue.
Even when you just kind of take a step back and you look at the overall credit environment and certainly were.
The portfolio is with regards to the faults and claims still very very low still relatively benign.
But from a reinsurer perspective, there is a demand there and certainly we value those relationships and certainly they should benefit certainly with some of the <unk> that are going on in the semi business and just just to add to that Jeff just from a valuation standpoint, and if you look at some of the large green insurers there.
Their investment performance has been outstanding over the last six to 12 months a lot of that.
Credit is clearly around the hardening of their core business.
If you if you peer between the lines mortgage insurance, a big part of their premiums.
And so they are awarded a much higher kind of multiple for their insurance premiums and kind of then the originators of the product so to speak so I'm not quite sure. It's to me, it's a little bit upside down but it just gives you a sense that there is clearly a dichotomy in how investors are reviewing.
The valuation of insurance premium cash flows and they are being they are being valued much higher for the reinsurers and they offer the primaries, which I think is again over time those things tend to settle it tend to even out.
Okay. Thanks.
Yes.
There are no further questions at this time I will turn the call back to the management team.
Okay, well thanks, everyone.
Good question, so a good discussion and have a great weekend.
This concludes today's conference call you may now disconnect your lines.
Please wait the conference will begin shortly.
Okay.
Okay.
Yes.
Okay.
Sure.
Yes.
Yes.
Okay.
Thanks.
[music].
No.
<unk>.
Okay.
Yes.
[music].
Yes.
No.
Sure.
Okay.
Thank you.
Okay.
[music].
Yes.
Okay.