Essent Group Ltd. Common Shares

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 speaker's remarks, there will be a question and answer session, and instructions will be provided at that time. I will 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 Marc Casale, 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 Guarantee. Our press release, which contains Essent's financial results for the first quarter of 2023, 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 risks and uncertainties, which may cause actual results to differ materially. For 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 SEC on February 17, 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, and 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 enforced portfolio despite lower origination volumes. As we continue through 2023, we remain 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 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 15%. As of March 31st, our insurance in force was $232 billion, a 12% increase compared to a year ago. Our 12-month persistency on March 31st was 84%, and approximately 80% of our in-force portfolio has a note rate below 5%. Given current rates, we anticipate that persistency could remain elevated in the short term. The credit quality of our insurance and force remains 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 mitigate the risk of near-term claims. On the business front, during the quarter, we continued raising rates through our risk-based pricing engine, Essent Edge. We believe that the pricing environment remains constructive and is reflective of ensuring long-tail mortgage credit risks given the macroeconomic backdrop. As of March 31st, 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, S&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 31st were over $5 billion, and the annualized investment yield for the first quarter was 3.4%, up from 2.1% a year ago. Our new money yield in the first quarter approximated 5%, providing continued tailwinds 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 gap 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. While we have initiated an integration and transition process for the pending title 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 a better value creator for the shareholders over the long term. However, we also recognize that returning capital to shareholders generates meaningful returns for investors. Year-to-date through April 30th, we repurchased approximately 800,000 shares for $32 million. Further, I'm pleased to announce that our board has approved a common dividend of 25 cents. We continue to see our dividend as a meaningful demonstration of the confidence we have in the stability of our cash flows and the strength in 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 in 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 $368,000 loss due to a decrease in the fair value of embedded derivatives in certain of our third-party reinsurance agreements. 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 $180,000 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 31st, the default rate was 1.57%, down nine basis points from 1.66% at December 31st, largely due to favorable cure 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, consistent 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, Essink 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, Essendon has a credit facility with committed capacity of $825 million. Borrowings under the credit facility accrue interest at a floating rate tied to a short-term index. As of March 31st, we had $425 million of term loan outstanding with a weighted average interest rate of 6.52%, up from 6.02% at December 31st. Our credit facility also has $400 million of undrawn revolver capacity that provides an additional source of liquidity for the company. At March 31st, our debt to capital ratio was 8%. During the first quarter, Essent Guarantee paid a dividend of $90 million to its U.S. holding company. Based on unassigned surplus at March 31st, the U.S. mortgage insurance companies can pay additional ordinary dividends of $292 million in 2023. As of quarter end, to combine U.S. mortgage insurance business statutory capital with $3.2 billion, with a risk to capital ratio of 10.3 to one. Note that statutory capital includes $2.2 billion of contingency reserves at March 31st, 2023. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $148 million, while at the same time paying $310 million of dividends to our U.S. holding company. Now let me turn the call back over to Mark.

Thanks, Dave. In closing, our balance sheet and liquidity remain strong, while higher interest rates continue to benefit the persistency of our in-force book and investment income. Also, 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 let's get to your questions. Operator?

Thank you. We will now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 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 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 because it's related. Could you also just talk about what you're seeing across the industry from a pricing dynamic perspective?

Sure, Mark. You know, I know I'm like a broken record here, but, you know, 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 averages 16%, which is, you know, which I would expect it to be by the end of the year, right? I mean, it's a little high in the first quarter, but also, you know, keep in mind, Mark, it's a small market, so that the delta between The number one market share and 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. We have the room. It's not our goal to be number one in market share. And we look at this really as just an opportunity, again, to raise pricing, potentially across the board, certainly in pockets. But again, we want to move back to the middle of the pack if we can. And just in terms of unit economics, I think they're relatively good. We said we kind of targeted that 12% to 15% range. Given the spike in investment yields, they're probably a little bit closer to the 15%. I would have said they were much closer to the 12% a year ago. I mean, there's been a significant kind of 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. We're getting there, which is good. Longer term, that sets the industry up well you know, to be, you know, 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, you know, I think the discipline in the industry is much stronger than people think, and I think that's been evidenced. And I would expect that to continue, you know, through this year. You know, we don't see anything changing. I just, you know, you listen to some of the commentary from for the other MIs. And again, it's just a much more of a financial-led 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, we're pretty encouraged from a pricing environment. And again, just when you think about the nominal cost of MI mark for the borrower, it's still very efficient. It's still very efficient. It's a good value. We're putting folks, you know, first-time homeowners in homes, and it's relatively an efficient process.

Okay, great. Thank you.

Your next question comes from the line of Bose George with KBW. Please go ahead.

Yes, good morning. Just on investment income, you know, the increase this quarter was pretty strong, so just kind of thinking about the cadence of the increase in investment income going forward, can you kind of help us out with that?

Yeah, Boze, good question. You know, I think there's a couple things going on here. You know, we mentioned, I think, in the fourth quarter that, you know, we took an opportunity to do a little bit of repositioning in the portfolio where we had found that we had an accretive trade that we got out of some positions and reinvested at higher rates. And, you know, if you look at today's rates, and Mark commented on this on the script, that we're, you know, investing at 5%, you know, in the first quarter. You know, is there a lot more upside? I think over time, you know, if you look at the yield curve, we're probably going to see nice pickups from year on year, but I don't know that, you know, sequentially it'll 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 LLPAs and, you know, the FHA premium stuff. Any thoughts if that's going to do it much in terms of market share?

No, Bose. Again, I think we've talked about this a couple quarters ago. We kind of see it more as offsetting penalties. So, you know, we don't see a big increase in our share, and neither do we see it on the FHA side. Again, it's a little early to tell, but, you know, right now that's 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're being cautious on, any areas? I mean, obviously, I understand the macro is getting a little weaker. It seems like there's a little bit of DTI inflation, which is also helping price. But is there anything else on the credit side that is driving the price increases?

Uh, I think it's, it's, it's the normal things right here. So, you know, think of it clearly just on the collateral side, you're going to, you know, you're going to price up in certain MSAs where we have kind of different forward looking views, uh, on the HP, uh, kind of where it's going. And like I said, it's flattish, uh, you know, across, you know, 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, uh, I think, again, it's around the layered risk. So it's really going to be cautious around the tails, whether that's higher DTI, lower FICO, higher LTV, very normal things that we're looking at. And again, with our pricing engine, I think 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 DTIs are created equal. Some are actually relatively good values and others you should really stay away from. So it's really

of getting down to that loan level uh kind of analysis there got it and then in terms of just the market share shifts and again not not really so concerned as you as you pointed out about like you know 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, you know, we obviously just get the data at the total NIW level, but, like, maybe from your own internal metrics, you have a view of where your outsized growth came this quarter. Was it just across the board? Were there particular, I don't know, channels?

Well, remember, our NIW was flat quarter over quarter, so we didn't really notice any outsized growth per se. And, you know, some lenders go up, some lenders go down. It's also there's lender specifics, so You know, we saw one of the larger, you know, mortgage banks, you know, in the country kind of sell their wholesale division to another player. So we've seen, you always see turnover, you know, at the top. You know, another large refinance-driven shop last year really lowered origination. So there's movement around lenders. And then, again, it might be different, you know, different lenders. You know, some MIs may have 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 se. And again, we didn't see any spikes either, given the flattish NIW between quarters. Okay. Thank you.

Your next question comes from the line of Jeffrey Dunn with Dowling & Partners. Please go ahead.

Thank you. Good morning. Good morning. Mark, from a rough high level, I'm wondering if you could talk about pricing in a different perspective, more from a cumulative loss assumption. At its low, was pricing getting down towards a 1% cumulative on average? Was it that aggressive? And where do you think maybe the pricing is today, or where does a 4-plus handle potentially imply a cumulative loss assumption?

Yeah, good question. Again, we don't jerk around our cumulative loss assumptions. So again, we've always been, and obviously now with the engine, it's much more loan levels specific, but it's always in that kind of 2% to 3% range. It's driven clearly a little bit with our HPA view. I would say when pricing kind of troughed 12, 15 months ago, I look at it more from the returns, right? So we kind of, in that 12 to 15-ish range, it was pretty much at the lower end of the range. And you can stretch to get it to that level given CRT and leverage and all those sort of things, but you can't hide from the raw pricing. So when pricing dips into the twos, which we saw 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 alone, 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, I think it was the fourth quarter and first quarter, again, 12, 15 months ago. And we said it, we thought it was too low. And again, just given the current environment, so maybe just the uncertainty in the environment last year kind of sparked folks To move pricing up one large mi clearly had backed out of the market and and there You know, we're a bellwether on one side, you know They were a bell well than the other and they're backing out really opened up 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 to whether it's P. Myers or at the state level, and just to chase it down like that, it's just not in the best interest longer term of the industry, to be quite honest. So I think we're encouraged to see where the pricing is. And again, like I said earlier on, 10 basis points, the absolute pricing that we're giving to the borrower today, we think it's pretty cost-effective. especially when you think about a 6% mortgage rate. So we'll see if it can continue, but I would say we're definitely encouraged to where the pricing levels are in the industry today.

Okay. And then with respect to S&K or TM, the statutory side, you've taken dividends up at varying levels over at least the last five quarters. With where you are in your maturity, earnings power, and understanding things like change with the economy, let's On average, do you expect to maximize ordinary course dividends on an annual basis just as a rule of thumb? Or, you know, any kind of parameters around that to give us a better idea of cash inflows to the whole company?

Yeah, great question. I would say given the environment, and we'll take it a – I don't know if we'll take it a quarter at a time. I guess it's a year at a time in terms of guarantee upflow. We would fully expect to max it out, you know, so we have, I think, another 292 – capacity this year. And the reason is it's easy to put it back down to. We kind of like to see the cash, and we like it for investors to see the cash at the whole co. And then whether that gets upstream to group and goes outside the company via repurchases or dividends, it's used to reinvest at the holdings level, keep it in the U.S. I think it's a good picture for investors to see. So yeah, I think given the environment this year, we would fully expect to upstream it.

All right. Thank you. Yep.

Your next question comes from the line of Rick Shane with JP Morgan. Please go ahead.

Good morning. It's Melissa on for Rick today. A lot of our questions have already been asked, but I wanted to come back to the issue of dividends and share repurchase. Certainly keeping in mind your point about having the balance sheet to meet claim needs, going forward, I'm curious what 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?

It'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 significantly over the past 15 years. It doesn't get a lot of credit for it, but when you think about, you know, 95% of our book is GSE-backed, you know, which is in the GSEs, you know, 745 FICO, and the GSEs have made significant improvements over the past 15 years with DU and LP, their quality control, just the level of guardrails they have in addition to the qualified mortgage, right? So the qualified mortgage has kept a lot of that long tail risk business or layered risk business out of the business. And then you have just even the introduction of forbearance and how that means for the borrower. So that goes into that. So I think we're, you know, in terms of the kind of the cash flows of the business, we like the dividend. We've We kept it at 25 cents and we announced it last quarter. We're going to kind of look at that every year, right? So every year we'll take a step back and say, do we want to take it from, do we want to keep it at 25? Where 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 invest mentality. So, you know, whether that's in the core business or 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 monoline per se. That's a creed of the book value per share, right? It's really about maintaining 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, you know, we have altered kind of our view a little bit. I mean, two years ago, we did a $250 million, I think it ended last year, but $250 million repurchase, 10B5 plan, kind of almost like a rote plan, and we chewed 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, you know, what opportunities do we see, you know, kind of capital needs within the business? What opportunities do we see, you know, kind of strategically outside of the business, whether that's title, ventures, you know, other opportunities, should they come up? And then quite frankly, where's the stock trading, right? 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 the opportunity in the quarter. You know, we trade within the KBE index, which is very bank heavy, obviously. And, you know, we felt we got caught up in that. And we thought it was a good opportunity to really to get the stock at attractive prices. Normally, that hasn't been our course of business. But again, just given, again, just that's the strength of the operating cash flow. we're afforded that kind of luxury, so to speak, to invest across that, right? So whether it's dividend repurchases in a new business, and I think with the repurchases, that's another kind of, 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, how much you want to invest in the core business, this is going to be another thing you know, that we'll look at. Special dividends is always, you know, is another tool. We haven't used that yet. But again, we're always going to look ways to, you know, grow book value for share. And obviously, we want to maximize shareholder returns.

That's really helpful. Thanks, Mark. You mentioned Essent Ventures, and that's something that you've talked about in the past as being a source of sort of incremental data and getting some useful information from those companies where you've provided some capital. Obviously, you've got a bigger transaction coming up, but just in terms of the current ventures portfolio, what sort of interesting data points are you guys paying attention to right now? Anything worth noting that you're seeing trending in those companies?

Yeah, no. 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, you know, a couple of private equity. You know, we're seeing clearly valuations. I think kind of that bubble has finally started to burst around ventures. So you're starting to see a much more realistic approach to, you know, to valuations and really more focus we're seeing within the funds and the operating companies on on getting to profitability, which is shocking, is actually the goal all along. But it got to be just kind of chasing revenue and chasing exits, as we like to say, kind of doing that 19 to 22 bubble. And it's coming down back to reality, which is good for us. So we're seeing much more discipline around kind of where the funds are going to invest in 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, is looking at a few new funds to kind of look for some emerging kind of 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 Harder with Credit Suisse. Please go ahead.

Thanks. Mark, I'm hoping you could talk a little bit about the reinsurance market, kind of how XOL pricing is faring and how that is relative to where you think ILNs would execute right now.

Yeah, I mean, I think we, you know, in terms of kind of looking at the market, the XOL still probably trade a little bit more efficiently. The ILN, no one's in the market, so it's hard to tell what the ILN pricing is. I mean, it's been May now, and I don't believe an MI has issued an ILN. I think from our standpoint, Doug, just big picture, we're going to continue to diversify capital sources. You know, for reinsurance, our house view is it's much more important to have the sustainability Patrick Corbett- and availability of reinsurance and so much the price of an individual deal, and I know that it's not necessarily how others view it, which is fine. Patrick Corbett- But it's very important to us if you think longer term that availability of reinsurance is really important part of our capital structure and it's really our leverage right that's why you know we don't have a lot of leverage at the holdco. Patrick Corbett- We really kind of use 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 hasn't 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? It got tested during COVID where it shut down on the IOM side, but then picked up, and I know there were XOL and quota share deals done that year. I thought last year was actually a bigger test. You're talking about rates going, mortgage rates going from three to six, incredible volatility amongst rates, which cause spreads to blow out. You know, just the whole media attraction to high HPA, and that's going to, you know, cause the housing market to crash. And, you know, it's going to hurt the MIs, you know, all that kind of old, I call it dated kind of views on the industry going back to kind of the GFC. And yet, ILNs got issued, XOLs were, you know, we did an ILN, we did an XOL, and we did a quota share. Albeit it's a little bit higher pricing, but in the grand scheme of things, Doug, you know, really not that, you know, if you average out all the pricing we've done over the last five or six years, it's, you know, it wasn't really that meaningful. So, again, I think it's more around the permanence of it and the availability. And I think as we get to eight, nine, ten years of reinsurance, That's also going to impact how we view cash, you know, at the holdco, right, when we talked about, I think, last quarter doing, you know, running different scenarios. And I think we talked about it a little bit in the script today. We run kind of mild, moderate GFC type scenario across our portfolio, you know, every quarter. And some of that, as you get out to whether it's moderate or GFC, you really have to kind of test and see what your capital structure looks like without reinsurance. It's just you have to because you're not sure the availability of it. Again, it's our funding, right? PMARs is our liquidity-type test, and if 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 in our capital and stress models, which I think is really positive. So, again, I don't want to get too caught up. Again, XOL is a little bit more efficient than ILN. 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 XOL and on the quota share. And we have good partners on the ILN 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 have the kind of product that they can purchase from us.

I guess on the ILN, I mean, it's you're the only one that's kind of committed to kind of keeping that capital source open, you know, can it, or does it dry up? Do you need, do you need kind of others to kind of support it as well? You know, just how do you think about that from an availability standpoint?

Yeah, I think that it's always better to have more issuers, but remember we have the GSEs, right? The GSEs are the large, they're the really, they're the ones who paved the way for the MIs. And I think there's, given in terms of the technical aspects of it, the ILNs probably are a little bit better value from an investor standpoint. So again, some of the sharper guys realize that. So we don't anticipate that being an issue. And I don't know, just because we're committed to it, I'm not sure how the other MIs think about it. But everyone's been pretty active in it over time. We'll see what happens this year. But again, I think we very much would anticipate being in the market for an ILN in the 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. I think on the S&3, you commented 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?

Yeah. I mean, if you really kind of You know, because Essent Re, it's in the investor deck. It's really three lines of business. It's the 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 GSEs and their MGA business. So the premium is really coming from the GSE-type business, the third-party premium. But they also get investment income. We have to hold cash So the absolute, if we were going to kind of show you a P&L just for S&RE, it would be a bit higher than the 70 for sure.

Okay, that's helpful. And then anything on the market dynamics there? Yeah, I'm sorry.

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 and force at the third party. Assume we, you know, earned three points on it. and the rest of that's coming from a lot of the fee income from MGA. So it really is how can we grow that $2 billion. It's not really that easy. It's dependent on kind of the GSEs. One comment that's interesting is if you combine our market share between the principal risk that we take with the GSEs and the MGAs, we're shockingly like 15%, 16% share. So we're a nice part of that market, and we're really contingent on that market growing longer term. So can that two 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 MIs there. It's relatively small. So I would say it's a relatively contained business. you know, kind of growth stories, so to speak, very profitable, but not really looking to grow. It's really, you know, when you think about S&RE, it's been a nice addition to the franchise. We're fortunate. We started it. We have a great team there, and it gives us really just the tax efficiency of, you know, the quota share. Also, just with the premiums, it's another way to get capital to the holdco. very efficiently. So it's been all in when you can combine all of kind of the strengths. It's a key part of the franchise.

That's very helpful. It covered most of the second half of my question. What are the sort of returns on that business right now, and where do you expect them to be sort of long term?

Yeah, I would say on a collateral basis, and we're held to a little bit higher level than maybe the typical reinsurer. They're in that 12% to 15% range, probably 12% to 15%, ebbs and flows there. I would say on an economic capital basis, though, they're probably in the 15% to 20% range. So we look at it more because we hold the capital in the trust. That's the real capital. If we were able to kind of do economic, it would be higher. So it's pretty good. And that's, you know, we talked about earlier, you know, we talked about ventures. It's really the same thing. We kind of have that 12% to 15% target, you know, across all the businesses that, you know, that we're investing in.

That's great. Thank you so much.

Sure.

Your next question comes from the line of Eric Hagan with BTIG. 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 typically see higher rate volatility and wider spreads driving higher mortgage rates in the primary market, but can you really say the same connectivity exists for pricing for MI?

No, not really. I mean, I think it's a little bit apples and oranges, right? I mean, I know you're coming about it, given your background, you're coming at it much more from an MBS type perspective, much more interest rate driven. You know, again, we're really credit driven. So 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 interest rates. So again, I think it's more of our credit views. And if you compare just, again, I threw out 2019 pricing, the returns today are probably higher though, even though the pricing is relatively flat. And remember 19, just to remind everyone that the 19 is really kind of coming after the industry lowered pricing, kind of following up to the reduction in taxes. So if you look at Pricing 19 to today, you know, it's at a lower tax rate today, right? The corporate tax rate went down. We have higher investment yields today. And clearly the addition of kind of the credit risk transfer. So most of the book wasn't even reinsured. So when you think about, you know, we're putting a dollar to work today, it's similar pricing to 19, the unit economics. In terms of the predictability of the unit economics, right? You know, and that's where the reinsurance has played such a key part. as I would think are stronger today than it was four or five years ago.

Yep. 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 that's changed meaningfully? And to the extent that it has changed, does that show up as a driver for pricing in the reinsurance market?

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, right, in terms of the GSEs, QMs, You know, their QC work, the strengthening of D, U, and LP. Forbearance is really another tool that protects the borrower. And it's historic. You have to go back and, again, look at history. Post-crisis, you had HAMP and HARP, and a lot of those programs were kind of cleaning up the milk after it already spilled on the floor. And I think with forbearance, which has always been a tool around, you know, with hurricanes and some of those other type of events, was really a COVID – The GSEs very quickly, and I commend them for this, they came out very quickly with forbearance during the COVID time period. And it made sense, right? You know, Eric, you're not allowed to go to work for three months. You know, the last thing you need to do is get a foreclosure notice. It doesn't do anyone good. And this is, you know, higher level. It doesn't do 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 or the government or clearly from a social perspective with families. So coming up with new and innovative tools to keep borrowers in their home is just good for everyone. And I think we saw that with COVID. And I think with the new forbearance rule that, you know, my guess will come down, you know, with us, which is, you know, you have to have ready party contact and you get a six month forbearance and then potentially another six months, that really gives borrowers a chance to get on their feet. And so, yeah, to answer your question, that'll delay the foreclosure timeline. 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 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 sailed and the GSEs are really the only game in town, which is good because you need that type of standardization around mortgage origination. And I think with forbearance, I think it's going to change. I think you're going to see more, again, more folks stay in their homes. And, Eric, if you think about it from the essence standpoint, right, we take first loss risk. We hedge out most of the MES piece. Our biggest risk in the company is reattaching above that. right? That's our ultimate cat risk 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 you're in the mezz protection, if you're providing that mezz protection and there's the ability for, you know, the first loss, you know, to not penetrate that, you know, that helps, clearly helps the cat fees, right? So I think if you're When people, you know, we had a comment, and I think I brought it up once, but it just reminds repeating. We were at an investor conference in May of last year, and some larger investor asked us why we didn't think we were going to go out of business, which, again, just shows you how little some folks know. Because, again, folks on the phone, the companies in the industry, we know this business cold, but the typical portfolio manager reverts back to, you know, reverts back to kind of recency bias. And if you're looking at the MIs of 2023 and comparing them to the MIs of 2007, well, that's, you know, that's probably not the proper analysis. And again, big picture, Eric, and you would understand this, because the way you cover, you know, the way you cover this industry, we're a company now, and there's issues in the economy, right? There's issues clearly around the banking system. There's issues around commercial finance, you're 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%, and 60% is below 4%. I mean, it's a good place to be from an investor standpoint. That's why we're encouraged. Clearly, again, there's uncertainty, but I think from a relatively, just from our position in the market today, we're feeling pretty good about it.

Appreciate your comments very much. Thank you, guys.

Your next question is a follow-up from Jeffrey Dunn of Dowling and Partners. Please go ahead.

Thanks. I just wanted to ask, given the reinsurance conversations, Last year, the island market blew out, and then we kind of gradually saw the traditional reinsurance market adopt changes and basically increase pricing. As things may be improved, the pricing is up on the primary side, returns are up. How long does it take for that information to trickle through on your reinsurance negotiations and the reinsurance pricing? I assume it's better than it used to be, given greater education. Just curious to get an update on that.

And you're thinking about the quota share.

I'm thinking about quarter share, but I'm also just thinking, you know, in terms of XOL, everything, you know, if the underwriting is tighter, maybe their loss assumptions aren't as bad and XOL 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 mindset?

Yeah, let me start and I'll turn it over to Chris because he may have some thoughts. I think it's very helpful on the quarter share side, right? Because we're, you know, you're literally taking a slice of our book and there was pressure from the the reinsurers over the past, again, 12 plus months ago, they saw the same thing. I mean, they see better pricing than any of the markets, right? So they were pushing on a lot of the MIs, and maybe that's another reason that pricing has come up. So we should be able to negotiate better quota share treaties going forward, given the pricing. I'm not sure they care so much on the XOL or ILN side, given that they're kind of really taking credit risk and don't really get compensated. for how we charge. And even then, and before I turn it over to Chris, Jeff, the spreads blew out on the ILN side, but you're talking like one basis point increase. I mean, in terms of just, you know, kind of, we always boil it down to premium rates. And, you know, whether it's four to five, it kind of probably got to six last year on one of our ILN deals, but, you know, kind of big picture. I think that's a, we think that's a small price to pay to keep the sustainability of that open to TASN.

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 in the quota share, it continued 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. You know, even when you just kind of take a step back and you look at the overall credit environment and certainly where the portfolio is with regards to defaults and claims, still very, very low, still relatively benign. But from a reinsurer perspective, there's a demand there. And certainly we value those relationships, and certainly they should benefit certainly with some of the tailwinds that are going on in the MI business.

Yeah, and just to add to that, Jeff, just from a valuation standpoint, if you look at some of the large reinsurers, their investment performance has been outstanding over the last 6 to 12 months. A lot of that, you know, the credit is clearly around the hardening of their core business. you know, if you peer between the lines, mortgage insurance is a big part of their premiums. And so they were awarded a much higher kind of multiple for their insurance premiums than kind of the originators of the product, so to speak. So I'm not quite sure. To me, it's a little bit upside down, but it just gives you a sense that there's clearly a dichotomy in how investors are viewing, you know, the valuation of insurance premium cash flows. And they're being valued much higher for their reinsurers than they are for the primaries, which I think is, again, over time, those things tend to settle. They tend to even out. Okay. Thanks.

There are no further questions at this time. I will turn the call back to the management team.

Okay. Well, thanks, everyone. Good questions today, good discussion, and have a great weekend.

This concludes today's conference call. You may now disconnect your line.