Essent Group Ltd. Common Shares

Good morning, ladies and gentlemen. Welcome to the Essent Group third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. And if you would like to withdraw your question, press star 1 again. And now I'd like to turn the call over to Phil Stefano, Vice President, Investor Relations. Please go ahead.

Thank you, Beau. Good morning, everyone, and welcome to our call. Joining me today are Mark Gasau, Chairman and CEO, and David Weinstock, Interim Chief Financial Officer. Also on hand for the Q&A portion of the call is Chris Caron, President of Essent Guarantee. Our press release, which contains Essent's financial results for the third quarter of 2022, was issued earlier today and is available on our website at EssentGroup.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 the risks and uncertainties, which may cause actual results . For discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in state's press release, the risk factors included in our Form 10-K filed with the SEC on February 16, 2022, 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, and good morning, everyone. Today we released our quarterly financial results, which continue to reflect the strong operating performance of our business. For the third quarter of 2022, we reported a net income of $178 million as compared to $205 million a year ago. On a diluted per share basis, we earned $1.66 for the third quarter, compared to $1.84 a year ago, and our annualized return on average equity was 17%. Our long-term outlook for housing remains constructive, despite near-term headwinds. Sharply higher rates and elevated home price appreciation have pressured affordability, resulting in a slowdown of housing activity. However, housing inventory remains low at approximately three months, partially due to reductions in supply from the lock-in effect of existing homeowners and low-rate mortgages. Also, favorable demographic trends should continue to provide foundational support to housing demand. As of September 30th, our insurance in force was $223 billion, a 7% increase compared to a year ago. Our three-month annualized persistency on September 30th was 84%, while the weighted average note rate of our book is approximately 3.7%. As a result, The rise in rates should continue to translate to higher persistency for our in-force portfolio, which remains well positioned from both an expected duration and embedded home equity perspective. The credit quality of our insurance in-force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 92%. While the strong labor market has bolstered credit performance, forward results remain levered to unemployment trends. In the third quarter, we closed our eighth Radnor Re-ILN transaction, obtaining $238 million of fully collateralized excess of loss reinsurance coverage on our NIW from October 2021 through July 2022. This follows our quota share and excess of loss transactions placed earlier in the year, covering 40% of our current year business with forward reinsurance protection. As of September 30th, approximately 98% of our portfolio is reinsured. Our reinsurance entity, SNRE, continues to write profitable GSE business and support our MGA clients. In response to the current environment, SNRE is benefiting from increased reinsurance pricing while moving up the structure to optimize returns. As of September 30th, third-party annual run rate revenues are approximately $60 million, while our risk in force was $2 billion. We remain pleased with S&RE's performance and its contribution to the profitability of our franchise. Cash-in investments as of September 30th were nearly $5 billion, and the investment yield for the third quarter of 2022 was 2.7%, up from 2% in 2021. The recent rise in rates is providing clear tailwinds for our investment portfolio, as yields in the third quarter on new money approximated 4%. We continue to operate from a position of strength with $4.3 billion in gap equity, access to $2.6 billion in excess of loss reinsurance, and approximately $1 billion of available liquidity. With a trailing 12-month operating cash flow of $608 million, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. On September 21st, AMBEST affirmed the A financial strength rating of our insurance subsidiaries. S&Garantee also has a financial strength ratings of A3 by Moody's and BBB Plus by S&P. We continue to take a measured approach to capital and remain committed to managing for the long term. Given our strong financial performance during the third quarter, I am pleased to announce that our board has approved a one cent per share increase in our dividend to 23 cents. We continue to believe that dividends are a meaningful demonstration of the confidence we have in the stability of our cash flow and the strength of our operating model. Now, let me turn the call over to Dave.

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the third quarter, we earned $1.66 per diluted share compared to $2.16 last quarter and $1.84 in the third quarter a year ago. Net premium earned for the third quarter was $208 million and included $13.7 million of premiums earned by Essent Re on our third-party business. The net average premium rate for the U.S. mortgage insurance business in the third quarter was 35 basis points, a decrease of three basis points from the second quarter, driven primarily by higher reinsurance costs. Net investment income increased $3.3 million, or 11%, in the third quarter of 2022 compared to last quarter, due primarily to higher yields on new investments and floating rate securities resetting the higher rates. Other income in the third quarter was $11.4 million, which includes a $5.2 million gain due to an increase in the fair value of embedded derivatives in certain of our third-party reinsurance agreements. This compares to $1.6 million last quarter, which included a $5.5 million loss due to a decrease in the fair value of these embedded derivatives. The provision for loss and loss adjustment expenses was $4.3 million in the third quarter of 2022, compared to a benefit of $76.2 million in the second quarter and a benefit of $7.5 million in the third quarter a year ago. This quarter's provision reflects an increase in the average reserve per default based on the composition of the default inventory and the current economic environment. Our reserve estimate on late-stage delinquencies increased primarily due to continued low levels of foreclosure and claim activity. As a reminder, the provision for losses in the second quarter included a benefit of $62.9 million related to a change in estimate of the ultimate claim rate on defaults from the second and third quarter of 2020. Our portfolio default rate was 1.6% at September 30th, effectively flat compared to the second quarter. We expect the default rate will increase in the fourth quarter due to the traditional seasonality of defaults and the impact of Hurricane Ian. Other underwriting and operating expenses in the third quarter were $42.1 million, relatively flat to the second quarter. The expense ratio was 20% this quarter, consistent with the second quarter of 2022, and a slight increase from 19% for the full year 2021. We continue to estimate that other underwriting and operating expenses will be approximately $170 million for the full year 2022. During the third quarter, Essendon Group paid a cash dividend totaling $23.5 million to shareholders. As a reminder, Essendon has a credit facility with committed capacity of $825 million. Borrowings under the credit facility grew interest at a floating rate tied to a short-term index. As of September 30th, we had $425 million of term loan outstanding with a weighted average interest rate of 4.39%, up from 2.92% at June 30th. Our credit facility also has $400 million of undrawn revolver capacity that provides an additional source of liquidity for the company. At September 30th, our debt-to-capital ratio is 9%. During the quarter, S&G paid a dividend of $60 million to its U.S. holding company. The U.S. mortgage insurance companies can pay additional ordinary dividends of $243 million in 2022. As of quarter end, the combined U.S. mortgage insurance business statutory capital was $3.1 billion, with a risk to capital ratio of 10.1 to 1. Note that statutory capital includes $2 billion of contingency reserves as of September 30, 2022. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $212 million, while at the same time paying $407 million of dividends to our U.S. holding company. Now let me turn the call back over to Mark.

Thanks, Dave. During the third quarter, our business continued to generate high-quality earnings and robust returns, while our balance sheet and liquidity remained strong. We believe that our measured approach around excess capital is in the best long-term interest of our franchise and stakeholders, providing us both offensive and defensive optionality. As a result, we remain confident in the strength of our buy, manage, and distribute operating model, Mbuesen is well positioned in supporting affordable and sustainable home ownership. Now let's get to your questions. Operator?

Thank you, sir. Again, ladies and gentlemen, any questions simply press star 1, and if you do find that your question has already been addressed, you can remove yourself from the queue by pressing star 1 again. We'll take our first question this morning from Mark DeVries at Barclays.

Yeah, thank you. Mark, could you just discuss kind of what you're doing around pricing here with some of the growing uncertainties in the market and what you're observing from competitors?

Sure. I mean, I think it starts, you know, with the environment, Mark. You know, as we said in the script, we're clearly levered, you know, to unemployment. So it is a slowing economy as far as we're seeing. You're starting to see some weakness here. in the lower end consumer, particularly driven by inflation versus unemployment. Inflation is very difficult for the unsecured borrower down kind of below 680. That's our renter. A lot of that shelter inflation is hitting those guys hard, and obviously not with us. But it's certainly something we have our eye on. FHA delinquencies are up a bit. And you're starting to see some defaults in the single-family rental, or at least delinquencies. And the single-family rental business, some of the larger ones that we follow, their average FICA is kind of in that 660 to 680. So again, the environment's there. You're not really seeing it in unemployment. That's pretty much a lagging indicator. But you're starting to see other signs, particularly even around the technology sector. So Because of that, and also I think just that the capital markets are a bit volatile. We saw that with our ION execution. You're starting to see the property and casualty business harden. The pricing really hardened in that side of the business, which will probably draw capacity from the mortgage insurers. So the cost of reinsurance is going up too. So when you talk about cost of capital going up, slowing economy, you know, elevated HPA, and probably, Mark, more of a normalized credit environment. You know, if we're going to hold to 12% to 15%, you know, longer-term returns, you know, pricing just needs to come up. It's kind of simple math. We are, you know, we do have some support with higher investment yields, but our view, pricing has to come up. You know, we kind of lagged the market in the third. And fourth quarter of last year, even in the first quarter of this year, and we kind of said we're a proxy for the market. We thought the pricing had gotten a bit too low as far as we're concerned. It clearly has come up. I think that was reflected in the second and third quarters. Our share has gone up and we've raised pricing. We raised it in the second quarter. We did a couple additional raises in the third quarter. And given where we are with share, I wouldn't be surprised to see us raise it again in the fourth quarter. So I think when you kind of look at those base average premium rates, I think at some point you're going to want to see a four handle on that longer term. It's going to take a while to get to that because of where the pricing's been. And the rest of the industry is clearly raising pricing, which I think is a good thing. But again, even when you get past this mark, I think you have to look at a normalized credit environment you know, where we historically have said 2% to 3% claim rates, and it's been obviously below 1%. So absent just all the other issues that we talked about, which were probably shorter term in nature in terms of the economy, but, you know, longer term, you know, 2% to 3% claim rates would argue for higher pricing, again, to achieve those type of returns. If we don't have that pricing, again, then it's going to be harder for the industry to maintain that 12% to 15% range.

Okay, that's really helpful. And then just turning to capital deployment, I mean, you did raise the dividend, but you've been pretty conservative. I think that your premier's sufficiency ticked up a decent amount in QRQ. Can you just talk about how you're thinking about deploying excess capital in this environment?

Yeah, I mean, I think, again, we think the dividend, we are deploying it, and we're turning it to shareholders in the form of dividend. But, again, I think when you see just where the environment is, and we don't have a crystal ball mark. We don't really know where unemployment is going to go and what the impact is. I think when you think about the pro-cyclicality nature of PMARS, it probably argues to be a little bit more conservative around unemployment. excess liquidity. I mean, as we run through various stress amounts, you want to make sure you're bolstered there. So I think we'll take a measured approach to it, as you heard me say in the past. And I think the next, I don't know, 12, 18 months, I think it's going to be all about the balance sheet. I really do. I don't think it's about growth or insurance in force. Pricing is clearly one aspect of it, but I would say that's more of a defensive nature I think when, again, when this is all through, I think we're going to be in better shape, and I think our shareholders will be in better shape for us to have this type of balance sheet. And I think that's something we believed in. It's a long game. And the other part to think about it, Mark, is when you get into these environments, sometimes those are the best times to invest. So you have to think of it that way. That's the offensive nature of it. And when we look at investments, It could be as simple as additional data, strengthening additional employees, the foundation of the business in terms of our infrastructure. It could be potentially in new businesses. Essent was born out of dislocation. So we've seen kind of the movie before, and I think sometimes longer term, you've heard me say this, longer term for Essent, I can't speak for others in the business, but for Essent to continue to maintain its growth it's going to have to find other sources of revenue. I mean, the mortgage insurance industry is a fantastic industry, but it's only so big. So you have to keep that in mind. And, again, the toughest times on the balance sheet and where there's stress are also, you know, sometimes the best times to invest. So we just want to make sure that we're well balanced and we're not kind of caught short and not able to take advantage of those opportunities.

Okay, makes sense. Thanks for all the comments.

Thank you. We'll go next now to Rick Shane of JPMorgan.

Thanks, guys, for taking my question. Good morning. I want to follow up a little bit, Mark, on your comments about pricing. And one of the things that we're thinking about is that there are some pretty significant differences this cycle. One is that obviously we're sort of in slow motion watching what everybody perceives to be an economic downturn and very specific views on certain geographies and certain things that are going to manifest. Also, the industry's moved to much more granular dynamic pricing. I'm curious if you are seeing, because of those two dynamics, greater disparity in terms of pricing dynamics than you've seen in the past. And does that make it more difficult because you might see overall trends in terms of pricing moving up, but pockets of risk that you like more increasingly competitive?

We don't see any, you know, really discerning. I mean, I think there's clearly we see differences amongst the industry around MSAs, right? Certain players are picking MSAs that they don't like. and they're kind of heavily emphasizing other MSAs that they do like. I think we're a little bit there in the middle of the pack. I mean, again, we're more of a frequency game. And our view is, just to give you our top-level view, Rick, in terms of HPA, is we probably see it flattish for three to four years. And, again, that's part of the HPA rise really was driven by excess demand, right, from kind of that COVID excess demand on top of low rates, on top of a shortage of supply. So it's kind of simple supply and demand. So we think that flattens out. It doesn't mean there's not going to be pockets or certain areas that have overbuilt that will see declines. That's certainly going to happen. There's no doubt that that's going to happen. And you can price for some of that, but at the end of the day, you're not going to price your way out of that. So I wouldn't get – we don't get – sometimes you can be a little bit, you know, what is the old saying, generally right or precisely wrong. So we have to be careful with the engine. So I think we have a broader perspective, you know, around the portfolio. I think it's more around kind of the base rates versus picking and choosing on MSAs. I really think that that will be the driver longer term.

Got it.

I actually have not heard that expression before, but I like it and I appreciate the answer as well. Thank you, Lincoln. Thank you. We go next now to Doug Harder of Credit Suisse.

Hi, this is John Kieliszowski on for Doug. Just looking at the provision for losses here in this quarter, you know, you can see the prior period reserve is down quarter over quarter and versus peers. I'm just kind of curious, is that conservatism on your part or is that just you've made the adjustment for the COVID advantages that you need to just like some more color around that?

Yeah, I'll start and then, you know, Dave can add. Yeah, I do think, I'm not sure about, again, we don't really are familiar with what the competitors are doing there. But I think in terms of us, you know, to remind everyone, we really highlighted the COVID quarter, second and third quarter and kind of froze them. And then in the fourth quarter of 20 went back to our normalized actuarial model. So a lot of the performance past that kind of ran through the model. So you saw a lot of pluses and minuses. And then in the last two quarters is where we really adjusted, you know, for the COVID to the point where I'm not sure we're quite done with it, but we're pretty much done with it. So I think that's it. And then I think there was some, additional changes to the reserves around some of the later stage buckets that I'll let Dave comment on.

Yeah. And John, as we talked about in the script, we are seeing really not a return to normalcy for foreclosures and for claims. So foreclosure moratoriums kind of ended at the end of the first quarter. And not surprisingly, we hadn't seen a lot of foreclosure activity in the second quarter. But we thought that might start picking up in the third quarter and really did not significantly change much from the second quarter. Same thing really with claims activity. So we are, you know, as we said, we're seeing kind of a buildup of some late stage delinquencies. And so, you know, that along with what's happening in the environment with what you're seeing with interest rates and maybe, you know, how that may affect borrowers and their options, especially severely delinquent borrowers, you know, it just, it was something where we felt that clearly risk is building on these later stage delinquencies, and so that really drove an increase in the average reserve per default in the quarter. We still did have prior period, prior year favorable development. It was probably more muted than we've had in the prior quarters, and some of that's going to be some of the timing things I think that Mark referred to.

Got it. Thank you very much for the color. Thank you. We'll go next now to Boss George at KDW.

Hi, this is actually Alex Vaughn on for Bose. This is more of a modeling question, but I was wondering if you could break out what goes into that other income line item. I know that you mentioned the change in the quarter was due to the change in fair value of the embedded derivatives. But yeah, any color there on what else is included in that line item? And then also, what would be a good run rate for other income going forward?

Yeah, so other income is really a combination of a handful of things. You know, we do have our MGA business. You know, so we're providing consulting services to other reinsurers, and that goes in there. We also are providing some services. We're still providing services to Triad, and our Triad service fee goes in there. Those are probably – and then our contract underwriting business is also in there. So there's a handful of things in there. you know, the thing that's going to move that around a lot is really going to be those embedded derivatives. And so that's why you see it fluctuate, and that's something that is really going to be based on what happens in the market and really hard to predict. So I think, you know, that's one of the reasons we try to give those numbers so that you guys can kind of, you know, get an understanding of why other incomes are moving around and kind of, you know, adjust for those variations.

Yeah, but longer term, I wouldn't expect You know, and there's not like a run rate for it. Again, I think it's relatively, you know, the MGA is probably the most, I would say, sustainable part of that income line. And that actually, that spikes in certain quarters because of some of the, you know, we have some profit commissions in some of the earlier agreements that we structure that are kind of paying off in the next couple of years, but kind of fade away in the outer years. It's gone more from just, you know, to a straight fee-for-service.

Okay, great. That's helpful there. Appreciate the caller. And then also just wondering if you guys could provide any guidance or outlook for operating expenses for next year.

Yeah, probably a little early. You know, we generally give that guidance, you know, on the February call, so stay tuned there.

Okay, great. That makes sense, and thanks for taking questions. Thank you. We'll go next now to Mihir Bhatia of Bank of America. And, Mr. Bhatia, your line is open if you do have a question, sir.

Oh, sorry. Sorry, I was on mute. Good morning. Thank you for taking my questions. I wanted to start by asking about S&P Edge. As we enter, or it looks like we're entering a time of economic volatility here with unemployment rising and consumer finance is becoming more stressed, I was curious about how that model is working and going to your comment about being generally right and precisely wrong. Are you finding yourselves needing to put any kind of qualitative overlays on top of what the pure quantitative model would spit out or anything like that?

No. I mean, I would say there's two components to it. One, it's really the frequency part of the model, and that really is driven from the raw, you know, the soft credit pull and a lot of the variables that go into it. So it is a little bit more real-time, and we believe more effective than FICO, and it should be. It's looking at more variables. It's particularly good as we move down the credit spectrum because there's obviously more of a you know, a discrepancy or diversion amongst, you know, really good credits versus not so good credits. So we like it from that aspect. I think the overlay, we have the technology around the HPA, but that is more of an overlay in terms of how we price the market. So keep in fact that, again, the edge is really a score. So it spits out pretty much an expected claim rate. And then as we always talk about here in economics, you kind of back solve for rate based on, you know, kind of return goals you know, in terms of just pricing in general, the other qualitative aspect could be you just expect a higher, you know, you have a higher discount rate. So you expect a higher return given some of the uncertainty about it. But we do think in this environment, edge should provide, you know, a little bit of an advantage on the margin.

Right. And maybe just to follow up on that, the advantage on the margin, is that going to lead to, you know, a little bit more stress economic time, does that lead to just better credit performance or is that also an opportunity to write more business in some of those bands where you're seeing the differentiated performance and some of your peers maybe just because you have more confidence in your model?

Well, I think it depends, right? I mean, it depends on how the size of the market. So the market, you know, historically below $700,000, hasn't been a very large market, which is both a blessing and a curse. I would say if you don't have the technology, which the industry really didn't with cards, it's probably more of a blessing. Hence the strong high FICO's that we have in our portfolios. It's hard to price that. There's so much volatility around your mean expected losses when you get below 680, hence why you hold more capital. But it's certainly riskier for a reason. And it's not always priced appropriately. I think when we talked about or we have heard in the industry about FHFA's change, that has the potential to significantly open up that market. Our view is at the top of the house is FHA probably changes their premiums also, so we have a bit of offsetting penalties. However, if that were to be an open market, you have to proceed with caution. We do think AIDS can help pick and choose a little bit better than FICO, but it may actually be the opposite. It keeps you away from those businesses. So you're pricing it away because of the risky nature of it that you don't do as much in that market. And I've seen over time, I've been in the business for a while, is when consumer lenders, whether it's mortgage, finance companies, autos, credit cards, when they go below kind of 680, they tend to lead with their chin and they get attracted by the price and don't have a true appreciation for the volatility of the loss over an extended period of time, right? You can go below 680 and make a ton of money for a period of time, but in generally over the course of it, it always catches up with you. So we're pretty cautious around that. I think you pick and choose for your opportunities, but I certainly wouldn't look at it as a way I certainly wouldn't look at it as a growth opportunity. We like kind of where we are in the credit spectrum and the type of borrower we have now.

Thank you. Thank you. We go next now to Roland Mayer of RBC Capital Markets.

Hi, good morning. This first one's a simple question. Is there any sort of interest rate cap on the revolving or the term loans? I'm trying to understand how that might rise or fall going forward.

Yeah, there's no cap on it. It's just tied to a short-term index. So it's based on rally market rates.

So certainly, you know, we're sensitive to the rise in rates there. The mitigate to that, Roland, is twofold. One, it's not relatively, it's not that big of a number. And second is just, you know, the adjustable portion of our investment portfolio. more than is probably triple the size, if not more. So it certainly makes up for that.

Thank you. And then last week, I think the FHFA announced the FICO 10 and 10T would be able to be used in the future. Does that have any effect on how S&Edge actually runs for your credit selection?

Hey, good morning. It's Chris. As far as the announcement on the alternate credit scores, I think from our perspective, certainly the timeline remains outstanding. And as far as what the finality of it will look like, I think generally speaking, we're comfortable. We work with data ongoing. So from our standpoint, as it relates to Edge, I think we're going to be pretty comfortable in transitioning to the alternative credit scores.

Okay, perfect. Thank you for the answers. Thank you. We'll go next now to Eric Hagan of ETIG.

Hey, thanks. Good morning. Thanks for taking my question. I think I just have two. Following up on the conversation around unemployment, is there any sensitivity analysis that you can maybe share around the P-minus cushion or the reserve to incremental changes in unemployment? Or do you feel like it's just too much of a lagging indicator? There's other factors at the loan level that you could really point to as a sensitivity? And then how are we thinking about bringing new ILN transactions with costs at their current level? How much flexibility do you think you have to tweak the structure, like the attachment and detachment points, or is there just not that much flexibility there? Just how we're thinking about that in general. Thank you.

Sure. I'll take the first one. I think you can kind of look at COVID. Eric, I mean, we had 10% unemployment and defaults. you know, were 5% or PMARS excess at the time without the haircut was still in pretty good shape. I don't have the exact number at the top of my head, but I would look at that, you know, I think, and then it's a continuum, so you can kind of do, you know, do the math. And again, it's important to just point out the pro-cyclicality nature of the calculation. So you have, you know, in general, you know, five, six, seven cents of capital for a performing loan. And then it goes up to 55 cents, you know, when you miss two or three payments. So, you know, that gross required asset could jump up. We get a nice deduction for the reinsurance. But again, if there's a potential dislocation in the reinsurance market, which by the way, we saw in COVID and you always expect, you know, we've been again around this business long, long enough to know when the going gets tough, the capital markets gets going. So you have to, You have to think about core capital in that sense. Not that they're going to go away, not that we wouldn't be an active issuer, but you have to be prepared for that. You have to be prepared that delinquencies go up to a certain amount, there's no haircut from the GSEs, and you have adequate capital to support the insurance company. Because again, we look at the next downturn also as an opportunity to pay claims in a very fast and efficient manner which I think longer term will only strengthen the reputation of the industry, both amongst our lenders and down in Washington. And those are the things. So you have to think about those things.

And we have.

And that's probably, again, why we're a little bit more conservative around the balance sheet. In terms of the ION, we issued back in the fourth quarter last year. We saw some tightening or some higher costs to execute. It clearly got you know, worse this year. We were an issuer. Another MI was an issuer. I'm a big believer in diversified capital sources. So again, you know, reinsurance is a form of capital, levered capital, but still a form of capital. And I think you want to play in all areas. So, you know, we're pleased with our quota share programs, the XO all programs with the reinsurers have gone well. And we like ILMs. We think it's still an early kind of early in the life cycle of that part of the market. It's almost nascent. It's only been around really in size the last five plus years. And it needs to be strengthened in terms of number of investors. So our team has done, they did a great job this year, widening the investor base. It didn't really come to fruition given where the market is. And there's a lot of causes for that, right? I mean, you have a two-year treasury rate at 4%. So These type of investors have other alternatives to put their capital in. There's obviously volatility around the credit, which we see. I mean, they see the same things we see in terms of kind of clouds on the horizon. And they were victims of that swift increase in rates. So these guys are buying the bonds and having to mark the market loss the next day. So that makes it difficult. It doesn't mean you want to continue. We're still believers in it because, again, it's another form. It's in cash. We like the market longer term. Again, just like market share, these things ebb and they flow. And in terms of the structure, yeah, you can certainly tweak it. You can take more first loss position. You can tighten the bands. I mean, there's a lot of different things that you can do. But I do think it's important for our industry and the GSEs to be a participant longer term. And again, if you just look at the execution, It hasn't been that great in the last two deals, but it's been excellent from the history. So if you average it out, I think it's fine. And I think longer term, it's going to be a good market. And again, I think it looks like in terms of the reinsurance market, there's obviously that's not a bottomless pit of capital with the reinsurers and probably worse. worsening when you think about just their alternatives, right, with the P&C, with the pricing hardening so much in the P&C market. You know, I even heard one of our competitors saying they're going to allocate more capital to that, and you're hearing that with others. So that just, like I said earlier, means less for the MI. So you just want to make sure you don't get stuck just on one execution. And, again, you know, financial services 101, diversified sources of capital.

That's really helpful. Thank you guys very much.

Thank you. And in case we have no further questions this morning, I'd like to turn the call back to our management team for any closing comments.

Okay. Well, thanks, everyone, for your participation, and have a great weekend.

Thank you very much. Again, ladies and gentlemen, I will conclude the Essendon Group third quarter 2022 earnings conference call. We'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.