Q2 2019 Earnings Call
This time I would like to welcome everyone to <unk> Group Limited second quarter 2019 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.
Like to ask a question during that time simply press Star then the number one on your telephone keypad.
If youd like to withdraw your question. Please press the pound key thank you.
Mr., Chris Curran Senior Vice President of Investor Relations you May begin your conference.
Thank you Rob good morning, everyone and welcome to our call.
Joining me today are Mark Sal, Chairman, and CEO , and Larry Mcalee, Chief Financial Officer.
Our press release, which contains essence financial results for the second quarter of 2019 was issued earlier today and is available on our website at Essent group Dot com in the Investor section.
Our press release also includes non-GAAP financial measures that may be discussed during today's call.
A complete description of these measures and the reconciliation to GAAP may be found in exhibit M of our press release.
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. Please 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 FCC on February 19 2019.
And any other reports and registration statements filed with the FCC, which are also available on our website.
Now, let me turn the call over to Mark.
Thanks, Chris Good morning, everyone and thank you for joining us I am pleased to report that Essent generated another strong quarter of financial results as the operating environment remains favorable and credit continues to perform well.
Also we continue to be pleased with our progress in transitioning essent to abide manage and distribute operating model as we increase utilization of us an edge and successfully obtain reinsurance on our 2015 and 2016 vintages with Radnor rate.
We believe that the combination of risk based pricing on the front end and risks distribution on the backend allows us to mitigate franchise volatility during down cycles make in essence, a stronger and more sustainable franchise.
Our outlook on our business remains positive as affordable interest rates accompanied by positive demographics and strong employment continue to bode well for the housing market.
Key metrics, such as homebuilder sentiment and new and existing home sales have rebounded from the declines experienced in 2018.
In addition, there has been some moderation in home prices, which in conjunction with lower rates contributed to improvements in affordability.
Now, let me touch on our results for the quarter, we earned $136 million or $1.39 cents per diluted share compared to $112 million or one dollar and 14 cents per diluted share for the second quarter a year ago.
Our annualized return on average equity for the second quarter was 21%.
Our financial results continued to be driven by our insurance in force, which ended the quarter at $153 billion, representing a 25% increase from $123 billion at the end of the second quarter a year ago.
Finally, our balance sheet remains strong ending the quarter with $3.5 billion in assets and $2.7 billion of GAAP equity.
On the business front, our industry remains competitive with all participants deploying risk based pricing engines.
During the quarter, we saw increased utilization of Essen edge with approximately 95% of our customers now using it.
We believe that the engine provides value to both aesynt and our customers, especially as semi pricing has integrated into best execution frameworks.
For us as an edge provides flexibility for more granular pricing and for our customers. It provides improved efficiencies and obtaining essence best rate based on borrowers credit and loan profiles.
Also during the quarter, we successfully completed our third insurance like no transaction, covering our 2015 and 2016 and I W.
This transaction initially provides $334 million or protection on top of a $208 million or first loss portion that aesynt retains.
Now after completing five reinsurance transactions on our 2015 through 2018 and I W. We have $1.5 billion of reinsurance protection covering approximately 70% of our portfolio.
Given our strong operating performance and use of reinsurance we continued to generate excess capital as a result, our board of directors has declared a quarterly dividend of 15 cents per share to be paid on September 16th 2019.
We believe that a dividend is a tangible demonstration of one of the benefits of a buy manage and distribute operating model.
Also a dividend of this size affords us the opportunity to maintain adequate levels of capital continue investing in the business and take advantage of other potential growth opportunities.
Since the founding of Essent, we've been very thoughtful and managing capital and we'll continue to do what we believe is in the best long term interest of our franchise policyholders and shareholders.
On the Washington front, given new leadership in Congress and at the FHLB say there has been increased focus on GST reform.
However, given the delay in the administrations housing finance reform proposal. The market is taking a wait and see approach along with Congress, which does not appear to be creating a separate plan for reform.
While the FHLB has been vocal on GRC reform timing remains unclear as to when and if the Gses will be released from conservatorship.
From our standpoint, we remain confident that essent is well positioned to be successful across a broad range of alternatives being discussed now let me turn the call over to Larry.
Thanks, Mark and good morning, everyone I will now discuss our results for the quarter in more detail.
Earned premium for the second quarter was $188 million, an increase of 6% over the first quarter of $178 million.
And an increase of 20% from $157 million in the second quarter of 2018.
The increase in earned premiums over the first quarter was in line with our 6% increase in average insurance in force.
The average net premium rate for the second quarter was 49 basis points.
Which was one basis point higher than the first quarter of 2019.
Due principally to an increase in singles cancellation income of $4.5 million in the quarter to $8.8 million.
The favorable impact of singles cancellation income on the net premium rate for the second quarter was partially offset by an increase in ceded premiums on a reinsurance transactions from $6 million in the first quarter of 2019.
To $8.4 million in the second quarter.
The increase in premium ceded results from the full quarter impact of the reinsurance transactions, which closed in the first quarter.
The execution of the insurance link new transaction on our 2015 and 2016, New insurance written which was consummated in late June had minimal impact on seeded premiums or our average net premium rate in the second quarter.
Looking forward to the third quarter, we do expect that the amount of singles cancellation income will decline from the strong level experienced in the second quarter.
As a result based on the reinsurance we currently have in place and our expectation of pricing for new business. We expect our average net premium rate to be in the range of 46 to 47 basis points for the balance of 2019.
Investment income excluding realized gains was $20.6 million in the second quarter of 2019.
Compared to $19.9 million in the first quarter and $15.1 million in the second quarter a year ago.
The increase in investment income of 4% over the first quarter of 2019 is due to a modest increase in the balance of our investments.
We recorded a gain of $1.2 million in the second quarter compared to a gain of $1.4 million in the first quarter.
For the increase in fair value of embedded derivatives associated with the insurance linked new transactions.
These gains are included in other income in our consolidated statements of comprehensive income.
We remain pleased with the credit performance of our in force book.
Our provision for losses and loss adjustment expenses was $5 million in second quarter compared to a provision of $7 million in the first quarter of 2019.
And a provision of $2 million in the second quarter a year ago.
The default rate on the entire portfolio increased one basis point from March 31, 2019 to 66 basis points as of June Thirtyth.
Historically, the second quarter represents the lowest quarter with respect to our provision for losses and loss adjustment expenses.
Other underwriting and operating expenses were $41.5 million for the second quarter of 2019 compared to $41 million in the first quarter.
And $36.4 million in the second quarter a year ago.
Income tax expense for the first half of the year was calculated using an estimated annual effective tax rate for 2019 of 16.1%.
And it was reduced by $2 million of excess tax benefits associated with divesting of restricted share and share units issued to employees.
The consolidated balance of cash and investments at June Thirtyth 2019 was $3.2 billion.
The cash and investment balance at the holding company was $72 million.
No capital contributions or dividends between the holding company and operating businesses were completed during the most recent quarter.
At the end of the second quarter of 2019, we have $275 million of Undrawn capacity under the revolving component of our credit facility.
And $225 million of term debt outstanding.
As of June Thirtyth 2019, the combined us mortgage insurance business statutory capital was $2.1 billion with a risk to capital ratio of 13.6 to one compared to 13.5 to one at the end of the first quarter 2019.
The risk to capital ratio at June Thirtyth reflects a reduction in risk in force of $1.5 billion for reinsurance coverage.
At the end of the second quarter Essent re had GAAP equity of approximately $900 million supporting $9.3 billion of net risk in force.
In addition, aesynt guarantees available assets exceeded its minimum required assets as computed under pmiers by over $900 million.
Now, let me turn the call back over to Mark.
Thanks, Larry in closing Essent generated another strong quarter of financial performance as the operating and credit environments were favorable.
Also we remain pleased with our progress in transitioning our franchise to abide manage and distribute model and we're excited to announce the dividend, which reflects one of the benefits of such an operating model.
Looking ahead, we believe that as more risk is originated through us an edge and is distributed through the reinsurance market markets. It will strengthen our franchise, making us a stronger company for our customers policyholders and shareholders now, let's get to your questions operator.
Thank you and at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Cost for just one moment.
Your first question comes from the line of Mark Devries from Barclays. Your line is open.
Thanks.
Hi, I was pleased to see the.
Dividend.
You guys are.
Fair amount of capital.
First growth better bring some of that up.
How should we think about.
Growth in excess capital.
Kind of preference for.
And mark you're breaking out pretty pretty badly so I'll I'll take a stab at your question.
Just in terms of of the dividends I think the first message and we said it in the script, but the first message is this really is an indication of our confidence in the sustainability of the cash flows.
It's not I wouldn't tie it as much to the excess capital as people think.
For example, if we had the same amount of excess capital, but didnt have any reinsurance we would not be distributing capital to shareholders.
It would be too big of a risk given that the liability would be uncapped on our balance sheet. This is really.
This isn't the output of the reinsurance strategy and now the 70% of the book is reinsured, we feel confident that we have removed a lot of the volatility around the tail. Its why we went back into the 2015 and 16 book.
In the past quarter.
Now that that tail, we feel overly we've really box that risk that gives us more confidence to be able to distribute.
Dividends and cash at this time from.
From from the from that from the company.
Longer term I would expect the growth in capital distribution relative to reflect the growth in operating cash flow again look at the cash flow thats coming out of the statutes, our statutory capital out of the regulated entities, that's really going to give you the close to how much capital we're going to distribute over time don't look at Pmires pmires as $900 million, but pmires really is not the binding constraint the binding constraint is coming from the operating entities.
Where the cash flows can come out of there and we feel comfortable.
To pay that and like the fact that we are hedging the book again gives us the confidence to pay that dividend.
Okay and Mark after after investing in the business how would you look to deploy that no additional growth and an excess cash flow would you would you look first to continue to grow the dividend or would buybacks on the table.
Again, I would look and say you know the amount of the dividend is reflective of what we think.
As a material amount.
And then also believes us adequate capital to continue to.
And invest in the businesses.
Look at potential new opportunities as you heard me say in the past Mark capital Begets opportunities and you can't judge that on a quarter by quarter basis. So.
We're going to look at it that way and we're not going to be forced into kind of capital distribution and by you guys take it as to as the market are really the annals take a look at P. Myers and equate that access.
For cash to be distributed remarks could change mark its keep keep in mind that it's not the binding constraint and we just think there's plenty of opportunities to insurance in force book grew 25% year over year.
Housing continues to be I believe a tailwind.
And we think theres going to be opportunities both inside the business potential GFC reform.
Deeper cover.
Always on the table that I, we think theres plenty of.
Ways to invest the capital to continue.
To grow the business, we're achieving returns and believe in the second quarter was 21% plenty of opportunity to reinvest kind of around in the core business in the future. If those opportunities don't really exist. We will certainly look at capital distributions via dividends or buybacks, but right now I think the message for the dividend was the sustainability of the cash flows versus a capital distribution story.
Okay understood and then just as far as your composition of capital how are you guys thinking about.
You know potentially levering up the balance sheet, a little more using some of your undrawn capacity.
Again, Mark we're not looking to lever up the balance sheet. These businesses are long and there is a there is a lot of leverage within the insurance in force portfolio.
So again I think Theres planning, we have plenty of capital.
To continue to look to reinvest a business without trying to create leverage there. So theres embedded leverage also.
In the islands.
A typical I'll end deal Mark is four to five years, which is equates.
To a senior kind of a senior senior note, obviously at a lower cost with the added protection of a hedge so I would look at that really is kind of a debt replacement versus going and adding additional leverage at the holdco.
We would only do that if there was an opportunity.
Outsize that we could look to grow the franchise.
Sky patent versus versus again using it too.
Create higher returns the returns are higher enough already at 21%.
Okay. Thanks Mark.
Your next question comes from the line of Phil Stefano from Deutsche Bank. Your line is open.
Yes, thanks, and good morning.
I was hoping to talk through just thoughts around funding the dividend.
I know, there's some some excess capital within Essent re when I do my own unassigned surplus roll forward. It looks like the contingency reserve starts coming back and maybe 2023 2024 that really really starts to ramp up more significantly.
But there is the ability to upstream from Essent guaranty to the Holdco to cover that and maybe you could talk about kind of what you want to hold at the holding company just for kind of normal operating expenses.
Yeah. It's a really good question Phil I think you are focused on the right issue, which is really where the cash is coming from and the sustainability of that cash flow.
Right now I mean, just given the size of the dividend we have the cash at Holdco to pay it.
Going forward, we believe there's there's ample capacity to dividend dividend up cash both from Essent re and from Essent Guaranty, and we'll kind of look at that in terms of Holdco cash.
We don't have a ton of operating expenses at the Holdco, if anything they're minimal right. There most of them are embedded in the operating entities that being said well probably look into that $50 million to $100 million range is kind of is kind of a good number and then we'll leave the cash and the operating entities and bring them up as needed.
And when I think about.
Your ability to do normal dividends out of Essent guaranty versus.
The fungibility of.
Reimburse MUTA is there a difference between the two or is it.
You can kind of pull the trigger when you're ready.
They are pretty equal that probably I mean, there's a lot of flexibility within essent guaranty, there's probably even a little bit more.
Flexibility within Essent re and they don't have any of the friction since it's already in Bermuda. So it's about but we have a lot of flexibility in both though good question.
Okay.
One last one with these idle and coverages that you're putting in place are they giving you any insight into the pricing and so when the quota shares started to happen in the sector. The expectation at least in my mind was that the reinsurers were going to provide a second set of eyes on your primary pricing due to the.
Testers in the island business do they care are they looking at it.
Are they absolutely care and they're looking at a pretty closely in terms of.
Key metrics around FICO geographic concentration Ltvs DT eyes, they definitely care, we haven't seen much yet.
To cause us to change the pricing.
It hasn't been as reflective in terms of kind of where we set.
No the attachment point or certainly hasn't happened in the pricing.
But you touched on a good points I think thats one of the reasons, we like the island market. It is a second set of eyes.
I have a group of investors I know mortgage credit risk really well just as well as we to be honest.
So were looking for as things start to turn.
I think we look at that as maybe a little bit of a leading indicator, which we can then roll into kind of the upfront engine and be able to.
Alter price to meet that higher costs that go to goods sold so to speak.
Got it thanks, and congrats on the quarter.
Thanks.
Your next question comes from the line of Sam Choe from Credit Suisse. Your line is open.
Hi.
Filling in for Doug Harter today.
So I guess I'm just thinking about the.
Credit quality of the post crisis vintages.
I mean, we've talked about the seasoning of that and.
I'm seeing that incurred losses for new defaults have been trending lower so I'm just too tightly tied to together and just wanted your thoughts on how we should think about credit quality going forward, especially in the second half of this year.
Yeah couple of things Sam one the credit quality continues.
To be XR and default rates in the 60 to 65 basis point range incurred loss ratio is low single digits across.
All the vintages I wouldn't expect that to change.
In the second half of the year, given given where the economy is and also remember the strength of the book do you have an average FICO now of the mid seven Fortys average LTV 91, 90, 191 and a half.
A lot of embedded mark to market.
LTV on on the older book.
We continue to think credit will be probably performed better than our expectations.
So again I think so from that standpoint, the expected loss around.
The credit is it's pretty benign.
One would ask then why did you go out and reinsure that previous books. If you felt credit was so good which is a fair question and the real answer is you don't know this is a business thats subject to macroeconomic catastrophic risk.
Our hurricane earthquake as a recession and you just never know when thats going to come. So I think the combination of really understanding the credit on the front end and making sure losses are within that 2% to 3% expected case that helps our reinsurance partners feel comfortable that we're looking at it and feel good about it. So I think the combination short term, we feel pretty good about the credit longer term, we still feel pretty good given where the economy is but we wanted to have that added protection again to remove the volatility around those cash flows. Historically this business really was what do you think credit is going to be in the next three to six months. It's a lot like how the credit card guys are they are still in that in that mode, where people kind of look at the.
To investors tend to back away when they think the market's going to soften and I think with.
Our reinsurance in place and love to go through a cycle for people to realize that you're going to see a lot less volatility and the cash flows.
And I think Thats, a positive very positive for the franchise.
Got it.
And one more from me.
So you guys talked about Hudson Heritage and.
I guess now we've had about two three quarters of.
Coming into that just wanted more color on.
How that has been benefiting the NSW production and.
Your positioning from a competitive standpoint.
Yeah, certainly been in place for two quarters, and a little less than two quarters. When you think it kind of got rolled into.
I didn't really get role to metal January and some of the other guys were a little little further behind but pretty much. They are all in place now as I said in the script.
There is no real learning from it and I know, we're not a this is not really a market share. So we're not using this to to bring on more market share. We're doing it really to help us shape shape the portfolio and be prepared when the market enters into again, a softer softer time periods that these again as you heard me say this a bunch of times credit kills these businesses, so our ability to alter pricing both up and down in the long term is really going to be what's critical.
So what are we doing now to do that we're testing we have a lot of different pricing strategies that are in the market. Some higher some lower really looking at price elasticity across a broad range of geographies.
LTV bands FICO bands and we're really in the learning process. We're not after that next loan. This market is so big.
But there's plenty of market share for everyone. So we're really looking at this.
To learn a lot and then over time, it's really can we introduce additional factors are there other factors.
And a borrower's credit profile that are going to be more indicative of their future performance and we're testing those and we're trying to develop that and as you heard me say before we're in we're probably year to into a five year transition around the business again, the dividend was a statement that we believe that the transition is going very well, but we have plenty to learn we continue to test.
Different reinsurance structures and again, we're testing a lot on the front end I'm very encouraged.
Just in terms of their lenders adopting to it.
And I think that helps because I think that will help us continue to test, but it's really early in terms of looking and saying this is going to be a way too.
The buildout share that's never really been kind of our ammo.
Got it thank you so much.
Youre welcome.
Your next question comes from the line of Mackenzie Aron from Zelman and Associates. Your line is open.
Thanks, Good morning, guys from the quarter.
Just one question from me curious Mark your thoughts about the QM patch and the attention and given.
The last couple of weeks with the CFPB is announcement, how you think it could impact the business.
What youre thinking that the most likely outcome.
Hi, there.
I think the most likely outcome period.
The most likely outcome from the comment period will be a balance Mackenzie.
Between.
Promoting homeownership and protecting the taxpayer I really do I think we'll get to a good answer and I don't really believe there'll be much impact if any on on kind of industry and I W. I, just think we'll get to a good answer.
You probably have a team to anywhere from 18 to 30 months before it gets implemented I think the CFPB has requested the comment period I think USA mine has some pretty good thoughts on it and I believe others will have it. So I think we are going to get to a good place I think has a little bit overblown.
As as is typical sometimes and understandable given given how material it is but I think when.
We get down to it it will wind up in a good place.
Okay. Thanks, and actually just a quick numbers one did you give the dollar amount of the single premium cancellation this quarter.
Yeah, Mckenzie, it's Larry was $8.8 million, which compares to.
About $4.3 million in the prior quarter.
Okay, great. Thank you.
Your next question comes from the line of me here.
From Bank of America. Your line is open.
Hi, Thanks for taking my questions and.
Congrats on the quarter and the dividend.
I guess just to start with just to follow up on the QM.
Discussion you can be at Fitch is definition of QM will change also as a result of.
What to see if you read the CFPB ends up.
I can't answer that Steve I don't know, but I do think there will be a coordinated effort I would say that's the one impression we've gotten in the change of leadership and FHLB and FHLB is it's much better coordinated.
So I would expect a coordinated response versus the Q omics patch expire so the gsseven everything goes FHLB I, just don't see that is happening.
But it's a really good question, just I don't see that as a realistic outcome.
Got it and then just can you help us size just the percent that either you know and I Hope you. All just if you don't want to give that would be that specific what do you. Do you guys think is really dependent on QM right because I think one of the.
Issues is b has been right now because of QM does the feeling out there that sometimes you know loan officers what did when they get to okay. Disqualify is they will stop working the file what is the actual impact given rather than the 20% number as we have seen off this QM.
On the non QM currently that's all that I mean.
Yeah, No I understand I don't it's hard it's hard for me to answer that question I mean, I've heard that and we do see that were lenders will stop.
Calculating income I would I would you know.
I would put my money more on they're going to they're going to come out with a realistic solution I wouldn't get tying into how we calculate income and first of all debt to income is not the most predictive.
Indicator anyway, it's more residual income I mean debt to income as a gross number were after tax is probably a better number Mike.
My feeling is I'd, rather see the industry move towards that anyway.
And maybe that will be part of the solution again 18 to 30 months you have a lot of time.
To work through a real solution and I would bank more on that versus trying to get into trying to quantify youre going to quantify something in where the rules going to end up changing and it's and it's not going to matter. So I wouldn't I wouldn't get too caught up in that.
Got it and then if I could switch topics a little bit just on the competitive environment I think again similarly in the last couple of weeks has been.
Optical ODU about some disk space discounting going on maybe in the both mid business are you seeing there can you just comment on the overall pricing environment in general is that stable has the move to black box pricing.
And how did that affect.
And the returns are stable they continue to be stable.
21% return on equity in the second quarter. The unit economics of the business, which is a business that we write our expected return on the business. We write today are still in that kind of mid teens, and that's kind of that 13% to 16% range given kind of an expected claim rate.
In terms of pricing there hasn't been much change since the rate cards drop last year and whether it's in a read an article or two it's you just don't have the context I would continue to look.
At the earned premium yield coming off our portfolio and clearly that will go down as some of the newer rates.
I will work their way into the portfolio.
But you're relatively I think you've been around for a couple of years, there's numerous LPM might discounting six years ago, and we'd get enhance people would call off and say whats going on with the LPMI bid cards.
And there is always something and I just think it's a competitive industry.
Every player we have we have we have some really smart competitors everyone's looking for a way to continue to build their franchise I just wouldnt.
I would just take a step back and say, let let's look at the Big picture you're on a run rate now of 300 billion dollar anti w. for the for the business.
As default rates of 60 basis points I have clear and transparent standards around capital and you have this new technology around I'll ends and reinsurance that's it's really probably the biggest change in industry has had in 20 years.
And again I would look again I would just try to keep this at a higher level again premium rates continue to be strong don't forget theres in places where people discount. There's other places where there is ability to raise price and I think again the unit economics of the business, which is where we really focus on we continue to be continue to be kind of at our return levels.
Excellent. Thank you that's very helpful and last question for me just on the Opex guidance. I think you were at the start earlier. This year you had said 160 $265 million portfolio is that good though given the strong anti w., maybe a little bit higher.
Just now we're still it's still one that I would still thats, a good range stolen or hold on to value.
Great. Thank you.
Youre welcome.
Your next question comes from the line of Bose George from KBW. Your line is open.
Good morning.
Just wanted to ask about market share and I know you don't.
Like to focus on it that much but just with everyone reporting we have you shared at 18.6% the hybrid the guidance you've kind of talked about just sort of keeps 14% to 16. So any thoughts. There also do you think the shares still bouncing around a bit with the introduction of the pricing engines.
Yes, I think it's still bouncing around I think you have the big cards out there that there is a few big players that do that and that kind of moves to share kind of back and forth.
In addition to the to the engine, which I think is probably creating some volatility on were holden's steadfast Bose I still think kind of that mid teens share is really where we'll end up longer term it ebbs and flows.
But we don't read too much into it I mean electric I was looking at it.
A couple of days ago, when we were probably 14% eight quarters ago. So it kind of ebbs and flows I think some of our we continue to add customers I think thats. The one message with edge that's pretty good we added 20.
In the first quarter, we added 35 in the second quarter. So I think there are certain lenders. There was one m. either have the engine at home and I think there are certain lenders at like the engine. So as new as other guys come out with the engines that that allows us to break in to some accounts. That's obviously the volume from that is very immaterial, but that that contends that grow over time.
We continue to grow the franchise.
Again, we don't disclose a lot of the stuff in terms of users, but it continues to grow which is again as a positive.
As a positive angle to it and again just from a market share in general with the market close to 100 billing for the second quarter.
I think that I think theres enough for everyone to too well.
Okay, Great makes sense. Thanks, and then actually just in terms of other growth growth opportunities.
I know growth opportunities remained strong in the us, but just curious if you're interested in growth opportunities in some other jurisdictions like Canada, Australia.
Yes, I mean, I think in the past, we've we've expressed interest and have looked at both Australia and Canada.
Mostly from a reinsurance perspective.
That's been our angle and we continue to like those markets I think just in terms of the strong.
A strong regulatory environments. Good housing interesting borrower characteristics really really longer term is something were.
We'll continue to look at that Thats, one opportunity and like I said earlier I think there is enough opportunity even around GST reform.
There are certain ways, there that they need to put more capital to work and third and we talked about this in the past call is there's always potential consolidation.
And the Ministry and there is always potential you want to keep dry powder around for that because I think longer term as you look at.
The lenders consolidating.
Moving more towards kind of best execution pricing.
I think the kind of the model of EMI in terms of the business model upfront won't begin to evolve over time too.
And I think there there is theres a case too.
To consolidate and really to leverage costs, which I think will benefit from an investor standpoint, you can never predict these type of things are always needs to be a catalyst and there is long range, but if you put yourself in my shoes, you want to make sure you have the capital to take advantage of those opportunities and there could be other ones that we havent that could come across our desk. So I think we look at a lot of different things.
We don't we haven't acted on any of them yet, but you know thats why you have capital the minute you distribute a ton of capital Theres. Some folks that short term are very happy but it really.
And really handcuffs us longer term and I operate the business.
Operating the business as if I'm going to run it for the next 15 to 20 years, whether I personally do that or not is not the point, but I think you have to have a longer range.
Have you 75% of my compensation is growth in book value per share. So we're going to continue to look for ways to grow book value per share and you have to have a long horizon a good having a long horizon gives you the ability in the patients to make decisions over the long course versus just trying to make them on a short term basis.
Okay makes sense. Thanks.
Your next question comes from the line of Jack Micenko from ESI Gi Your line is open.
Hi, good morning.
Mark wanted to get inside the boards had a little bit on the dividend.
Thinking.
You know I guess on consensus numbers for this year.
You are coming in around a 11% payout.
Notional, it's about call it 60 million a year.
How do you.
What's the what's the thought process.
As we look forward is it.
You thinking more payout ratio or is it more dollars and if its dollars what's the what's the driver if it's not some sort of ratio.
Calculation.
Yes, I think it's more of a payout ratio.
Jack is on year, looking and saying how much is how much cash you producing and what portion of that cash do you feel comfortable remitting.
To the shareholders. So I would focus on that I wouldn't focus necessarily on at 10 or 11, I think we have a number in mind longer term.
That will shoot for.
I think again the key part of the dividend today was and we said we talked about this probably last August when we just had our first deal.
And people asked us about capital distribution and I think the response was was normal right. We said we wanted to make sure we had more of the book Reinsured.
We wanted to make sure we box that volatility link run out and distribute capital before we felt comfortable.
Getting back to my comment earlier, where we hadn't done any I'll ends with the same amount of capital we wouldn't have given back a nickel or would have and wouldn't have been a prudent thing to do but now 70% of the book. We felt this was a message that we feel good around the sustainability of those cash flows and then over time I think I think the answer is it depends Jack I mean, if there's opportunities to invest and I just went through some of the potential opportunities they could pan out or not pan out and if they don't Pan out what are you going to do you're probably going to look for.
I don't think the payout ratio would change much as we get to that we'll probably get to a steady state. But then you would of course, you would look at buyback depending on price.
And where where the stock is trading and all those sort of things it would be it would be it wouldn't be prudent not to do that I just the message today is.
We're off to a good start the models and the transition phase we feel like we have.
A lot of capital continuing to grow that capital and we still believe there's choices to put that capital to work and I think we've done a pretty good job.
Of having a good returns on equity and I think the view is we'll continue to exhaust as those opportunities.
Okay got it.
On the on the juvenile and.
Given that was the seasons.
Book of business.
Was execution was pricing any better.
Relative to some of the.
Prior deals where the where the vintages were more recent.
Yes. It was it was better slightly arena.
This is all all the deals that kind of traded and price pretty close to each other but I would say on the margin. It was it was better.
Okay, and just one more for Larry.
Larry does investment income grow.
If we have.
Let's just say call it 50 bips.
Of cuts between now and the end of 2020, just because I mean, obviously you to begin a W quarter this quarter in insurance in force keeps growing.
You know that portfolio, probably this growth outpace rates in the portfolio for the foreseeable future. Thanks.
Yes, Jack It does we will continue to grow cash flows as Mark mentioned earlier very strong so the growth of the portfolio would outpace those types of cutting rates and we do have a portion of the portfolio. That's been locked in duration of portfolio is about three and a half said we do have.
Cash flows and bonds that have been locked in at this sort of three four and five year maturities. So yes, we would expect to continue to grow the absolute dollars of investment income independent of any further rate cuts.
All right. Thank you.
Your next question comes from the line of Chris again, Tony from Compass Point. Your line is open.
Chris Your line is open.
Can you hear me.
Yeah.
All right, sorry, I don't know what happened.
Larry I wanted to follow up on that last question, what's the current reinvestment yields you're seeing on the <unk> on the investment portfolio.
The reinvestment yield for okay. So the new assets during the quarter, Chris were about 2.7%.
And the yield on the portfolio as a whole was 2.8% in the quarter.
That's helpful.
And now with 70% of the book Reinsured.
Is there any commentary that you can provide us on kind of how you think the portfolio would perform during a significant stress event, yeah, Moody's whatever scenario you want to reference.
Sure, Chris I mean, I kind of look at in terms of kind of columns left or right. So if you think about the base case on the left column.
You know, 2% to 3% claim rate, which is our normal forecast, obviously, the mid teen or we wouldn't be sustainable.
Go to a recession moderate recession, where the claim rate rises to 5% and same thing in the mid teens are always in the reason is you know youre going to attach it to in a quarter and our detachment goes all the way up to seven or eight so all those losses now are absorbed.
By the by the reinsurance so you maintain those mid teen are always go go to a crisis now only a 10% claim rate will use for example, which is.
It is not as quite is right, where they maybe the great recession could be given where I mean claim rates would be given.
Given where we have higher ficos than we had in the <unk> in the past.
There I think we still clock in at low single digits, and again, I think thats, because we would attach it to in the quarter, we detach at seven or eight so we'd have a little we'd have the first loss will be down a little bit above that attachment. So I think we feel pretty good.
In terms of just how the portfolio would performed during a stress scenario another way to look at it Chris is just look at the amount of shareholders equity we have on the balance sheet 2.7 billion.
We have another $1.5 billion of off balance sheet, which I mentioned in the script. So that's 4.2 billion against a roughly $150 billion book, that's close to 3% capital.
So we feel pretty good from a capital standpoint, so again as we think about.
The ways to withstand.
A recession or something really severe I think looking at it both ways is both as to how we look at it we obviously run the model with an I kind of look at it from a real high level and how much capital. We are going to have in times of stress and I think that I feel I think we feel pretty good from from that standpoint.
That's all the questions I have thanks.
Your next question comes from the line of Rick Shane from JP Morgan Your line is open.
Hey, Mark and thanks, everybody for taking my question.
Look just one very high level question do you see one of the big theme that's been outlined for the industry over time is the opportunity as millennials enter all them.
First time homebuyer market I'm curious given what you guys are seeing if that's actually really manifesting at this point or is that.
Still sort of a theoretical development.
No I think it's I think it's more than anything is well on its way Rick.
You can see just in terms of homeownership rates I think the tick down a little bit in the past quarter been have been up.
A big portion of new New homeowners has been first time home owners.
And I think just look at the overall level of originations I mean, and look at where builders are and how they are building I read something on White House put out a press release about a month ago, saying for every 10 households, being formed only seven homes are being built in the country. So there clearly the supply is still lacking.
But I think the demand pieces, which we laid out now I think it was right in our first quarter gone public that we believe demand for housing would be stronger.
Than people think I think thats, playing out well and I think it's I think it's a good point that you bring up again from a secular standpoint.
We have a decent tailwind and I think thats, we do follow the fortunes of housing. So when you think and we've talked a lot about the detail here, which is which is critical but when you take a step back and look from a macro standpoint, we do have housing.
And we see it and I see it just traveling around the country when I visit clients just that I call it that third ring.
The first spring was post World War II the first suburbs.
Obviously got Philadelphia second ring was in the eighties.
And now that third ring is really where you're pushing further out.
From the city limits and you're starting to see that really developed so.
The millennials.
Really they have to live somewhere and I think thats, so you're starting to see these this third ring around the cities really start to develop and I think that will play out I think again I think it's going to play out for a while I think could be over the next three to three to five years till we.
So until the the amount to supply catches up with the demand on the housing side again, thats not a straight line up thats. The caution right I mean rates went up in the fourth quarter last year thats going to cause it's going to cause a pause. So it's been my view that the market will continue to go higher just won't go in a straight line will be Dolby stops and starts and we'll be panics when it happens.
Because you know just like it was in the fourth quarter last year.
But again I think longer term I think thats, a little under appreciated is where we stand.
We know that the mice position.
In kind of the secular growth of housing.
Well, it's interesting that you talk about that third ring as we move to.
A more flexible workforce either gig economy or.
Work from home is bandwidth continues to improve.
That makes the third running a lot more accessible as well.
It really does I mean, I think the second ring, which I was fortunate enough to let live and they you have knocked down a farm scraped off all the grass.
And you were there was 60 homes by yourself there was nothing really around you.
And now you are right that third range, they're bringing kind of these many.
Maybe these towns and you see a lot of.
Amenities, such as Starbucks and you're right the ability of the worker to work remotely saved that long commute into the city. So it's becoming much more livable.
Out there a lot of lot of a lot more walking areas mix of Townhomes and single family. So it's actually.
I think it's very attractive for young families and obviously it will start to build very nice schools to remember families are attracted to schools thats. The number one reason why.
Young couples with kids move out of cities because they want to go into the good schools and all the good schools are in the suburbs, so you're starting to see we'd see it in the Philadelphia area.
That expansion Wes.
First you see the developments and you see the housing and these play out over a long time this isn't like a three year.
These are 510 15 year phenomenon, so we're seeing that and I see it in a lot of other places, but you're right. It's it's I think it bodes well for.
Certainly for the mortgage industry, and certainly and obviously for the EMEA business, because we fall we follow the fortunes.
Terrific. Thank you very much.
Youre welcome.
Your next question comes from the line of Geoffrey Dunn from Dowling and partners.
Your line.
Good morning.
Mark with the with 70% plus of the book now covered and that number likely going up when you do the 19 booked.
I'm curious if you have any update on on thoughts on capital reinsurance is that a market that is developing at all that you are looking at more given weather the EXL l. coverages today.
Yeah, well I do we did it on.
We did it on 17 book, we went out and did a reinsurance cover.
And that was it was it wasn't easy to place it was a little thin out there from a reinsurance perspective, I think a more logical.
Execution for that Jeff is in the capital markets I do think and Thats something we are looking at remember we continue to test these various structures.
I wouldn't be surprised if we look at moving higher up in the structure.
Maybe in our in our next deal or two so again, it's something we'll continue to look at because I think you want to you want to almost take it off the table.
In terms of potential kind of detachment and I think the pricing is there the capital market side that you can do and I believe one of our competitors did go higher and it seemed like a price pretty well.
And that actually feeds into my second question, which is.
What dictates the attachment points and the new business, obviously national deals came in below two on its latest deal.
And then obviously, there's the backend detachment.
So if you could address both sides of the islands.
Please.
Yes, I think the I think.
I think our models obviously, it's hard to raise you have to you are hedging your model risk I think when you get to the higher attachment points and I think thats something that some of it is just a comfort level.
And it really just comes down to what the cost of it is.
I think on the attachment points.
I think it's there's a little bit of price there too and I think our view is I think they're all kind of in the same neighborhood. So kind of in that 2% to 2.5% range that I don't know if there is a lot of science.
Between one or the other in but I think it really is going to come down the cost us and Thats. How we look at it which is we're not we feel comfortable in that 2% to 3% claim rate.
So I think the only reason you go higher.
And where we are now is if the market kind of forced and that could certainly happen right. I mean, you can get into in the next 18 to 24 months, where you know the ion investors start to see a slowdown and they start to think the attachment point is going to get ahead. So the first thing they are going I want to do is reason.
That's what I would do and I think there what we would I think our one of our responses to that would be.
Now that we're holding that additional risk is there or is there a means through the pricing engines to reflect that higher cost so to speak in upfront in upfront pricing again, that's just the industry never had that before the industry had one price increase.
In 2008.
And it was a large one it was really relate to two price increases there was the removal of captives.
And there was a 20% increase just across the board via the rate card. It was like one fell swoop.
It's a little too little too late.
But the industry Didnt have the tools then to raise pricing I think here it will be in a much more incremental basis.
And that's what we're testing today, we're testing lower prices and higher prices, because if you're looking to that blended premium. So I think thats. It again, when I think about the engines.
The biggest.
Message there is the ability now to price at the loan level and just the flexibility to both increase and decrease price over time and I think there is a pretty strong linkage between what we are doing on the reinsurance side and how we're going to price on the front end.
Okay. Thank you.
You're welcome.
There are no further questions at this time I will turn the call back to our presenters.
Okay. Thank you operator before ending our call we'd like to thank you for your participation today and enjoy your weekend.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.