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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Chris Curran, Senior Vice President of Investor Relations, you may begin your conference.
Thank you, Chris. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer. Our press release, which contains Essent's financial results for the first quarter of 2018, was issued earlier today and is available on our website at essentgroup.com in the Investors section.
Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in Exhibit L 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 SEC on February 20, 2018, 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, Chris. Good morning, everyone, and thank you for joining us. I am pleased to report that Essent had another solid quarter of financial results as portfolio growth and credit performance continued to drive our high-quality and growing earnings.
For the first quarter, we earned $111 million compared to $67 million for the first quarter a year ago, while also generating a 23% annualized return on equity. Contributing to our strong results for the quarter was a 31% increase in our insurance in force to $115 billion from $88 billion as of March 31, 2017, and a lower effective tax rate of 16.5% compared to 27% for the first quarter a year ago.
On a per diluted share basis, we earned $1.13 compared to $0.72 for the first quarter a year ago. Our results for the first quarter include a $0.10 per diluted share tax benefit relating to share-based compensation compared to $0.03 for the first quarter a year ago.
Our outlook remains positive for private mortgage insurance, as we believe our business and industry are correlated to U.S. housing and the broader economy. Strong demographics such as the millennials entering their peak buying years continue to drive purchase mortgage demand, combined with an increasing supply of new starter homes and an economy in which unemployment rates are low, we believe that the operating environment remains strong despite rising interest rates.
As a franchise that invests in U.S. mortgage credit risk, we remain well positioned to continue growing our high-quality and profitable mortgage insurance portfolio. On the competitive front, given recent developments around pricing, we think it is important to take a step back and provide some context. While we continue to evaluate the pricing landscape, we view the recent competitive changes as a recalibration of rates post tax reform.
Given the 40% reduction in the corporate tax rate from 35% to 21%, it appears that this benefit has been reinvested into lower cost for borrowers with overall returns essentially flat to returns prior to the pricing changes.
In terms of risk-based pricing, our industry has been evolving towards this since the financial crisis. Initially, this was accomplished through rate cards, whereby more granular FICO and LTV bands were developed. A couple of years later, a loan-level, risk-based pricing engine was introduced to the market. And post PMIERs 1.0, industry pricing was adjusted in response to the more granular and risk-based GSE capital requirements.
In our opinion, what is also taking place in the market today is further deployment of risk-based pricing. This pricing is being delivered through published rate cards, pricing engines, bidding processes and integrations with front-end loan origination systems. Risk-based pricing is gaining more lender acceptance, and we believe will continue to be employed in the marketplace.
One of the benefits of risk-based pricing is that it provides flexibility to increase or decrease pricing, allowing us to shape our portfolio to the desired risk and return profile. As managers of long-tail mortgage credit risk, we believe that the prudent application of risk-based pricing is positive for our franchise.
In addition to our strong quarter, another key highlight was the execution of our first credit risk transfer deal, in which we obtained $424 million of reinsurance on risk related to $41 billion of NIW from 2017. We believe that credit risk transfer is significant for our franchise, as it provides a layer of protection against adverse credit losses and is another source of efficient capital.
While pricing and competition ebbs and flows, credit is what ultimately drives the success or failure of these businesses. We believe that our recent CRT deal helps to mitigate credit volatility as it hedges against an adverse loss scenario.
Looking forward, we believe that given our Bermuda structure and a flexible capital strategy, inclusive of CRT, we can generate mid-teen returns even after giving consideration to the PMIERs 2.0 draft.
Turning our attention to the draft PMIERs, we continue to work with our industry, the GSEs and FHFA in finalizing these. The PMIERs serve as an important set of national standards that give counterparties added confidence in the claims paying capacity of our industry.
We believe that the updated PMIERs will represent the ongoing strengthening of our industry and underscore the meaningful role that we play in supporting a robust and well-functioning housing finance system.
In regards to Freddie Mac's IMAGIN pilot, we believe that the GSEs and FHFA will continue to explore options in prudently managing and distributing risk. As evidenced by our own CRT execution, we are supportive of testing alternative risk transfer strategies.
However, we do not believe that IMAGIN or similar pilots will have a meaningful impact on the long-term prospects of our franchise, nor do we believe that the enterprises want to circumvent the use of private mortgage insurance.
In addition, we believe that Essent's Bermuda-based reinsurer, Essent Re, provides us another platform to participate in such programs if beneficial for our franchise.
Now let me turn the call over to Larry.
Thanks, Mark. Good morning, everyone. Before I discuss the results in more detail, let me first take a moment to review our recent credit risk transfer transaction.
On March 22, we closed our first transaction with Radnor Re, an unaffiliated Bermuda-based special-purpose insurer. As part of this transaction, Essent Guaranty obtained $424 million of fully collateralized excess of loss coverage from Radnor Re on mortgage insurance policies written in 2017.
Radnor Re issued $424 million of mortgage insurance-linked notes to capital market's investors. The Radnor Re reference pool had an aggregate unpaid principal balance of $40.6 billion and net risk in force of $10 billion.
Under the terms of the transaction, Essent retains the first loss of $225 million or 2.25% of the risk in force of the reference pool. Radnor Re is initially providing reinsurance on $424 million of losses in excess of the $225 million first loss. The amount of reinsurance will gradually decline based on the paydown of the mortgage insurance-linked notes.
Now turning to our financial results. Earned premium for the first quarter was $153 million, up $5 million or 3% over the fourth quarter of 2017, and up $35 million or 30% compared to the first quarter a year ago.
The average premium rate for the first quarter was 52 basis points, down one basis point compared to the fourth quarter. Our CRT transaction had minimal impact on the premium rate in the first quarter, given the late March closing. For the balance of the year, we expect there will be a one basis point reduction in our earned premium yield as a result of premiums being ceded to Radnor Re.
The provision for losses and loss adjustment expenses was $5.3 million in the first quarter of 2018 compared to $17.5 million in the fourth quarter of 2017. As a reminder, the fourth quarter provision included a reserve of $11.1 million for defaults we'd identified as related to Hurricanes Harvey and Irma.
In the first quarter, we observed a decline in the number of hurricane-related defaults of 520 or 23% due to cure activity. As of March 31, 2018, the remaining defaults associated with the hurricanes totaled 1,768. We made no change to the reserve for hurricane-related defaults of $11.1 million, as this amount continues to be our best estimate of the ultimate losses we incurred for claims associated with these defaults.
We remain pleased with the credit performance of our insured portfolio. The number of defaults unrelated to the hurricanes increased by 179 during the first quarter. The default rate on the portfolio declined 10 basis points from year-end 2017 to 86 basis points at March 31, 2018.
Other underwriting and operating expenses were $38.1 million for the first quarter, and our expense ratio was 25%, which represents increases from $36.5 million and 24.7%, respectively, for the fourth quarter of 2017. The increase in expenses over the fourth quarter is primarily due to an increasing level of payroll taxes associated with the vesting of shares and incentive payments, which historically occurs in the first quarter.
As communicated in our earnings call in February, for the full year 2018, we expect other underwriting and operating expenses will be the range of $150 million to $155 million.
Income tax expense for the first quarter was calculated using an estimated annualized effective tax rate of 16.5% and was reduced in the quarter by $9.5 million of excess tax benefits associated with the vesting of restricted shares and share units issued to employees.
For the full year 2017, our effective tax rate was 26.9%, excluding discrete items related to a reduction of deferred taxes for tax reform and excess tax benefits on share vestings.
The reduction in our annual effective tax rate from 26.9% for the full year 2017 to the estimated rate for 2018 of 16.5% is due primarily to the reduction in the U.S. federal corporate tax rate from 35% to 21%.
The consolidated balance of cash and investments at March 31, 2018, was $2.5 billion. The cash investment balance at the holding company was $76 million compared to $104 million as of December 31, 2017.
During the first quarter, we drew an additional $50 million under our revolving credit facility and used the proceeds to make a capital contribution to Essent Guaranty. No capital contributions were made to Essent Re during the first quarter.
As of March 31, we have $265 million outstanding on the credit facility. The weighted average interest rate on outstanding borrowings under the credit facility as of March 31 was 3.8%.
On May 2, 2018, we executed an increase in the amount committed to our credit facility by $125 million to $500 million. Revolving component of the facility was increased by $25 million to $275 million. We also issued $100 million of term loans. The proceeds of the term loans at closing were used to pay down amounts drawn under the revolver.
After completing this increase in the credit facility, we have $235 million of undrawn capacity under the revolver. The pricing, tenor and terms of this new commitment were identical to those of the prior amounts committed under the credit facility.
As of March 31, 2018, the combined U.S. mortgage insurance business statutory capital was $1.6 billion with a risk to capital ratio of 13.6:1 compared to 14.2:1 as of December 31, 2017. The risk to capital ratio at March 31 reflects a reduction in risk in force of $424 million for the reinsurance coverage obtained from our CRT transaction.
Essent Re had GAAP equity of $685 million, supporting $6.6 billion of net risk in force. As of March 31, 2018, based on our interpretation of PMIERs 1.0, Essent Guaranty's available assets exceeded minimum required assets by over $380 million, primarily as a result of our CRT deal. To the extent that PMIERs 2.0 are finalized, based on the draft that was shared with our industry, we would expect that this excess will be reduced.
Now let me turn the call back over to Mark.
Thanks, Larry. In closing, we posted another strong quarter of financial results as we continued executing upon our goal of building a high credit quality and profitable mortgage insurance portfolio. The closing of our first credit risk transfer deal was a milestone for our franchise. We view this evolution as a positive force that will drive innovation and allow us to continue to play a significant role in supporting a robust and well-functioning housing finance system.
Now let's get to your questions. Operator?
[Operator Instructions] Your first question comes from Mark DeVries of Barclays. Your line is open.
Yeah, thank you. So it seems pretty clear based on where the stocks are trading at the market, remains concerned on how the pricing dynamics within the industry and fear that there is more cutting to come. Mark, could you help us understand kind of why you think the tax benefits got passed on faster than most people would have thought? And kind of where we go from here? Do you expect - as an industry and for Essent, in particular, do you expect kind of one adjustment and then we find a new equilibrium?
Mark, it's a complex question. I would say, for you, I would focus on returns. I think, again, why it got competed away. I mean, I would look and say, lot of lender pressure out in the market. But again, it's not unexpected, that it would happen across a lot of industries over time. Yes, the timing was a little bit of a surprise. But when you cut right through it, the returns are essentially the same.
And we think this is a mid-teens return business. So how it got there maybe was a little awkward, but at the end of the day, it got to the same place. So I think, if you really focus on returns, and returns is really part of, you can think of the unit economics of the business.
Premium yield is one part of it, and we disclose that every quarter. Credit is a big part of it. And we believe credit is a relatively - is relatively benign in the current environment, but one of the, I think, the positives of our CRT transaction was we hedged that out.
So we made that certain. Remember, credits would kill these business. It killed them back in the '80s, it killed them in the recession. Credit is the biggest risk, it's not pricing. And then you really have to look at the E. And I think when we - from an Essent perspective, when we put all that in, and remember there's a lot of changes, you have tax reform, PMIERs 2.0, other changes in the market.
When it all comes out, we're still solidly in the mid-teens. So we feel pretty good. And then when you add kind of the tailwinds that we see from housing, you add that up, we feel pretty good about our future.
Okay. Got it. And then on your recent CRT transaction, can you just talk about what that does in terms of capital relief? What it does to kind of your incremental returns? And how the cost of reinsurance compares to your more traditional forms of reinsurance?
Yes. I mean, I think in terms of the costs, we don't get too caught up in the cost. I mean, the cost of capital is pretty good. But those - that pricing will ebb and flow, just like it will for equity and for debt. I think it's really around the loss mitigation. So remember the capital, since the term is four to five years, is somewhat fleeting, it's a little bit more like debt. It is not permanent capital, like equity.
So the real key to the CRT, Mark, in addition to the capital relief, which is material, is really the hedging of the risk. So now when we say our expected loss for the '17 book, and we always say kind of claims rate, 2% to 3%, we're pretty much hedged - we're hedged against that up until the first kind of 2.25%. We retain the first 2.25% and then from 2.25% up to a certain detachment, we're covered, that's pretty significant.
And remember, as folks said, the industry is a little bit of a binary, kind of boom or bust. And by removing kind of that mezzanine part of the capital structure, we've really started to reduce the forward volatility around credit. And again, I think that's important. Not really appreciated yet, I think, by the market given the focus on pricing.
But I think, over time, we're seeing the MI business continue to evolve where we would hold the equity layer of the transaction and, obviously, keep the catastrophic part and then tower out the mezzanine piece. And again, it's significant going forward. It will be appreciated over time, but, to me, that was the biggest news of the quarter. And again will - and that's something we'll continue to look out down the road.
Okay. Thanks.
Your next question comes from Douglas Harter of Credit Suisse. Your line is open.
Thanks. Just to build upon that question about the reinsurance, I guess, when you look forward, is this something that you look to replicate and ultimately kind of build-out to kind of the entire portfolio? And I guess, how should we think about the pacing of rolling out more of this type of reinsurance?
Yes. Excellent question, Doug. I would say we would look to execute this on a programmatic basis going forward. Some of that will depend on the markets. We would expect - our view is, we studied the market pretty extensively before we entered it.
And we feel pretty comfortable that the market is deep. Where the pricing is and kind of the attachment points and detachment points could - they could obviously change over time given where the market reaction is or where the markets are.
We would also look to complement that with the reinsurance market over with Bermuda or other sources. So again, I think, going forward, yes, we would - this is going to become, in our view, a standard part of our kind of capital and credit management.
And remember, these tools didn't exist pre-crisis and same thing with the pricing. A lot of the ability to change pricing and to manage and shape your portfolio on the front end, as we talk about risk-based pricing, everyone thinks about it. I think it's taken more in a negative connotation than it is.
Remember, risk-based pricing allows us to shape the portfolio and that could mean increasing pricing down the road. And that's a tool. Remember, rate card is really a blunt instrument, and the insurers didn't really have the ability to kind of manage and model and shape the portfolio on the front end.
The evolution of the reinsurance markets, both with the reinsurers in Bermuda and the capital markets, now allows us to just kind of shape that on the back-end too. So again, I think two big movements and sophistication around the front end and the back end will make these franchises much more stable going forward.
Thanks. One more question on the reinsurance. I guess, when you look at the pricing that you've got on Radnor Re and compare that to the reinsurance deals you do out of Bermuda, I guess, how do you view your ability to kind of - on the pricing - or, the comparability of the pricing on kind of what you can get as taking risk versus offloading risk?
Yes, I mean, it's - they are correlated. So again, our view is on the Bermuda side, that will ebb and flow, too. The pricing has gotten tighter, and I think we are able to take advantage of that in CRT market. Remember, in Bermuda, though, we have other ways to - we don't talk a lot about kind of Essent Re, but remember, we also have an MGA there.
And we represent five different insurers, and we help them and help them price and manage the deals that they're bidding on. So it allows us to still participate in the CRT transactions in Bermuda.
When I say CRT in Bermuda, I mean, the ACIS and the CIRT transactions. It allows us to participate, kind of be in the market, both as a risk taker and as a fee generator. But your question is a good one. We do - you obviously watch both, kind of how you take on risk in Bermuda and lay it off in the capital markets.
Great. Thanks, Mark.
Your next question comes from Bose George of KBW. Your line is open.
Yeah. Good morning. Actually just on excess capital. I mean, just going back to the comment about the excess capital currently in under PMIERs 2.0. I just wanted to confirm, so even under PMIERs 2.0, you would still have an excess, is that right, as proposed?
Yes.
Okay, great. And then actually switching over to the new pricing, the - in terms of the changes that are out there in the market, can you just talk about what do you think that potentially does to volumes moving from the FHA?
Yes, it's a good question, Bose. I would say, it is clearly opportunity, right. I mean, when you look at the kind of the 700 to 720 buckets and the 720 to 740, you can see in certain sales where the execution is now firmly in the conventional camp. And I think that could add anywhere from 5% to 10% of the market. So it's not immaterial, given the size of today's market. So I think it's definitely an opportunity and a nice byproduct of some of the pricing recalibration.
Okay. Great. That's helpful. And then just a couple of little things. Your share count looks like it fell a couple of hundred thousand. Curious what drove that?
Yes, Bose, this is Larry. Really what drove it is, for the most part, we talked about earlier the excess tax benefits. We had some shares we'd vest in the first quarter and certain employees, and in fact most employees will tender shares to pay their payroll taxes. So that really drove the reduction in the share count in the first quarter.
Okay. Great. And then just - actually, one on the portfolio yield. Is there a good kind of back-of-the-envelope way to think about how that moves as rates goes up?
Bose, I guess, to give a little color to the quarter, the singles cancellation income had the impact in the first quarter. So that's down one basis point.
I was talking about investment portfolio yields, sorry.
Yes. Okay, my fault. Bose, on the investments, in terms of a rise in premium rates, we think we're really well positioned for a rise in rates. So the duration of the portfolio is just about 4. So it's relatively moderate. We have about 30% of the portfolio that will mature in the next 12 months.
So we'll have a chance to reinvest that at higher rates. But I think the one thing that we focus on, and that's really helpful, is the amount of cash that the company is generating. Last year, we generated over $370 million of operating cash flow. So we get to invest that at higher rates as well. So we think we're really well positioned to take advantage of rising rates because of the profile of the portfolio and the cash we generate.
Bose, this is Mark. You touched on another kind of important point which is, when you think about the unit economics of a business, investment yield is a key component for insurance companies. For mortgage insurers, it's never been that big, just because the operating margins are so big otherwise.
But as you start thinking in this new world, it's clearly a lever. And we feel like the position is clearly positioning for higher rates. So one point increase in yields over time is pretty significant to an ROE standpoint. And it all sets some of the other kind of pricing compression that you may see on the front end.
Again, it is a little known fact that we haven't heard a lot of folks talk about. But again, when you take a step back and just look at unit economics, what are the drivers we talked about, there's pricing. And that is - and it's easy to see where our pricing is because you can look at our accounting yields over time.
Credit, when we talked about credit, we feel like now with credit, we have a decent hedge on the credit part of it. Investment income, as yields rise, that is a benefit to unit economics. And clearly, taxes, our tax rate went from 27% to 16.5%, another kind of lever. And then when you think about capital, yes, there is some capital. The [indiscernible] is going to become a lot more important in the future.
And again, I think that's - we primarily finance this company via core equity. And we've added in the line of credit over the last couple of years. The CRT now is another source of efficient capital. And again, good financial services companies have multiple sources of capital.
And I think when you add that up and, obviously, you want to try to optimize that and lower the cost of capital as everyone does. When you put that into the mix, that's why we feel confident around kind of the unit economics.
And when we say mid-teen returns, I mean we're not just saying that. There is a lot of math behind that. And I think you touched on a good point with the investment income, and I just wanted to kind of give you some more color.
Okay. Thanks a lot.
Your next question comes from Mackenzie Aron of Zelman & Associates. Your line is open.
Good morning. First question on the yield, just because it has been in the attention of investors right now. Could you just give us a little bit of an update on looking out the next year or so what the kind of blended yields would be? And also how the ION will impact that?
Mackenzie, it's Mark. I would say right now, I think, it's 52 basis points for the first quarter, probably a bit was associated with CRT. So yes, if you factor in kind of the new pricing that's in the market along with CRT, you can expect conservatively another basis point drop next year, could be two basis points. But remember, it takes a long time for it to roll through the portfolio.
And that's assuming we do CRT every year. We're kind of building that in and I think that's kind of our plan. But when you think about $110 billion, $115 billion portfolio with a mid-80s almost persistency rate, it's going to take a while for that to roll in.
We'll be very clear with that on the accounting yield. So if you see that, we'll actually show it both gross and net of CRT so you can get a good sense of it. But again, I think part of the focus around premiums, rightfully so, it's a part of the unit economics, as we've talked about, it will be a while before it works its way through the portfolio.
Okay, that's helpful. And then appreciate all the commentary around pricing and potentially an evolution to more risk-based pricing and granularity. Just curious, if the market does go to a model where there is more black box systems, is that something that Essent would be able to implement relatively quickly? Or would it take more investment and kind of behind-the-scenes work on your part to implement something that is even more granular than what you already have?
I think we have the capability, Mackenzie, and we have been testing it with clients. So we have that capability. We've had it for a while. We haven't talked a lot about it. But now as the world moves more towards risk-based pricing, we are very equipped to handle it. And it's really - again, it's an evolution.
So we're going to work with lenders really the way lenders want to work with us. If they want a rate card, they will have the ability to use the rate card. And you've seen the rate cards now become a little bit more complex.
If they want to use a pricing engine, if they want to price through Optimal Blue or Encompass or any of these other systems, bidding processes, whatever, it's really how the lender wants to works with us, we are equipped to do that.
And I'll also add with that comment, we haven't been asked yet. But around IMAGIN, it's really the same thing, right? We talked about Bermuda as another platform for Essent Re. So we're really good. Our core competency at the end of the day is managing mortgage credit risk, right, for the long term.
So no matter what form we take that in, we're really going to focus on generating mid-teen returns. And I think what we try to do as a company is be equipped to handle the risk whatever way it comes in because we don't set the market, right. So lenders evolve, capital markets evolve, but what we understand, which is mortgage credit risk.
We know how mortgage banking works extremely well. We have close to 1,500 lender relationships. So we understand the process and how the pieces fit together. And I think from an Essent standpoint, we're trying how best to leverage that capability. In the beginning, for the last 8 to 10 years, we leveraged that capability through the private mortgage insurance business and how we did it.
If that evolves, and again, this is always evolution. It's not revolution. Our view is we're going to move the company to where it needs to be to take advantage of that.
Perfect. Thanks a lot.
Your next question comes from Jack Micenko of SIG. Your line is open.
Good morning. On the $4.6 million positive development in the quarter, just to clarify, I think you said there was no hurricane benefit in there. So was that just - help us with where that improvement came from? Is it claim rate? Was it severity? Anything you can shed some light on, on that positive development?
Jack, it's Larry. Yes, as we said in the prepared remarks, there was no impact on the provision related to the hurricane reserves during this quarter. We've held that reserve constant. So the development is a little bit in terms of severity. As you saw in the data we provided, severity is about 76%. And then also, just a normal cure rate as was favorable in the quarter as well.
Okay. And then bigger picture, Mark. Everybody has been talking, obviously, about price, and the Genworth card seems to be an evolution. And Radian spoke about it as well. My question to you, why not just have the whole industry go black box?
When you look at banking or look at property-casualty or other businesses, they've passed some of the price, they have the tax benefit on and has seen nowhere near the reaction, if not even a positive reaction. It seems to me that would take all the focus off pricing, put it on returns.
So I guess, the question is, what would be the limiting factor there? You talk about having the technology and the infrastructure to do so. Is it state regulation? Is it customer preference? And more importantly, do you think we just ultimately get to that point where it's just - the rate cards go away and it just removes this distraction from the investing thesis.
Yes, Jack, a little knowledge is dangerous, right, in terms of transparency. Yes, I think over time it's going to go. It will go the way of auto insurance and pretty much every other insurance business out there. I'm sure auto insurers change their pricing pretty much every day, and they don't see this type of reaction. The fact that it's so transparent and such a focus, you know what, it's a negative or you could look at it, is a positive.
Because the fundamentals of the business didn't change over the last 90 days, to be quite honest. So I would look at it - we look at it as an evolution. And I think really to answer your first part of the question, I think it's really the lender systems that are a limiting factor.
And again, that will change over time. I mean, one of the largest banks out there that we - one of the larger ones, not the largest, one of the larger banks is employing risk-based pricing today on the front end. So I mean, the banks will eventually get there. I think the non-depositories, it's a little easier for them to get there given the use of Encompass or Optimal Blue, but I would see the market going there.
And we're kind of in that transition now. And I think you saw some of that in the first quarter. I think you will continue to see that. And again, it's actually a net-net positive because it allows, again, us to shape kind of the portfolio. It allows you to increase pricing just as much as decrease pricing.
So if these type of tools were in place kind of pre-crisis, I think the industry would have managed through it a lot better. So I would - I know people - the transparency is tough, I think, for people to kind of go through this, but it's just an evolution. And I think risk-based pricing is really an opportunity, and I look at the rate card more as a blunt instrument.
And again, it's been that way because of lender desire, but as that changes because of the systems change, you're going to see it evolve into more of a black box type environment.
Do you need the rate card at the state level?
You have to file rate. So whether you file a rate card or you file algorithms that can support those rates, yes, you have to file. Does it have to be a rate card per se? No. But I think as long as certain lenders need a rate card, that has to be a part of it.
Your next question comes from Sean Dargan from Wells Fargo Securities.
Would it be fair to say that pre-tax reform, that your targeted returns were a point or two higher than your onshore competitors because of the tax advantage?
I wouldn't say targeted returns. I would say, we generated stronger returns because of the tax advantage, yes. But I think we still target mid-teen returns. I think that was - we never used our tax - our lower tax rate as a tool from a pricing perspective. We price competitively, and we always will continue to price competitively. What we did was, the lower tax rate allowed us to achieve higher returns.
Sean, it's Larry. Just to provide a little bit more color. The corporate statutory rate is 21%, and you still see that we're taking and we do receive a benefit from our Bermuda structure. Our estimated rate for this year is about 16.5%. So there still is an incremental benefit that we generate from the Bermuda structure and having Essent Re in place.
Yes. And also keep in mind, Sean, credit has been really good. So - I mean, that's the other driver. And just because of the timing too in terms of how losses seasoned, that's why the GAAP numbers have been so high.
Got it. Okay. And then just a question about Radnor Re and the insurance-linked notes. How deep do you think this market will be? And I ask this because for [indiscernible] I think the notion was that it's an uncorrelated risk. And so it's kind of a new asset class for institutional investors. They have many ways to get access to mortgage risk as it is. So I'm just wondering, how big do you think this market can get?
Well, I mean, a lot of it was driven early on by the GSEs. They will continue to be active issuers in the market. And I think certain mortgage insurers will also continue to be active issuers. I think it - really they're - this is - when you think about the CRT investors, before they - these were very similar investors that invested in the non-agency side of the business.
And that market, as you know, has been relatively quiet for the last 8 years and, I would think, would continue to be relatively small. I mean, what drove that was sub-prime and that's not - that's never coming back. Non-QM is still a pretty small piece, and I would expect that to continue to be a small piece. The other big driver of that market was jumbo.
And that's clearly going to the bank balance sheet. So CRT is kind of like the new non-agency. And we went up and we met. We had very good investor receptivity on the deal, and we had gone up late last year and met with a lot of the investors because we are trying to figure out the same thing as you, like how deep is this market, how sustainable is the market.
And I think we came away thinking it's pretty sustainable. Does that mean we're going to have excellent execution every time we go to the market? Most likely not. They will be driven by the same kind of fears of credit as others, but we feel like we can always structure a deal.
And I think that was the biggest part of it. And we also feel like the reinsurance market continues to develop. And we're helping to develop that with our MGA. So we're helping 5 much larger and better-rated insurers understand the mortgage credit business.
And we're helping them do that and obviously adding some fees. But yes, I would say, the market continues to get more sophisticated around risk transfer. And I think that's a real positive for the franchise. And I think certainly would have helped it, again, when you think back through the crisis.
Your next question comes from Geoffrey Dunn of Dowling & Partners.
Larry, just a quick number question. The $380 million over the MRA, what is that in terms of a percentage cushion?
We'll do the math for you. Maybe we'll just take it off-line but - and we actually will disclose the gross parts of it in our 10-Q, which we'll be issuing early next week.
All right. And with respect to the systematic approach on the Radnor Re, is that something you are looking at on an annual basis or semi-annual?
That depends, Geoff. I think it's a good question, and as we thought about, a lot of it is going to be dependent on size of kind of originations, but certainly, something we'll look at. We'd like to be a regular issuer. So whether that's once a year or twice a year, a lot of it's going to be dependent on the size and the investor appetite.
And just as a follow-up on that one, I believe under PMIERs traditional reinsurance that the cost of capital these days is a positive ROE leverage point. Is it true that the - does it work the same way with these transactions?
Yes, it does.
Okay. And then, the bigger picture on this stuff. The GSEs talk about wanting to diversify the distribution of risk and counterparty risk. In your discussions, both as an individual company and what you're aware of around the industry, are the GSEs acknowledging that the MI business is no longer really a buy-and-hold business either, that the MIs are also distributing risk off the back-end? Or do they just still view their exposure to the MIs as more of a gross exposure?
Not at all. I think they've been very supportive of the CRT transaction. And I think they understand where we're going with it. And I would say they're very supportive. Because the point is, this does make us a stronger counterparty, right?
So instead of just looking at the industry as a buy and hold, now we are also be able to distribute the risk. So in times of stress, when they look over, Essent is still going to be there. And I think that is a key component.
And we would expect, Geoff, over time, that to work its way in the ratings. I mean, I think there's some work to do. But over time, these become much stabler businesses. And I think that is, at the end of the day - and I know there is a lot of noise on pricing and I can't help that, but at the end of the day, credit kills these businesses.
And my job is to make sure we have adequate capital and leverage tools that can help us survive the next down period. Because that's - again, pricing, it's uncomfortable, and people don't - they worry about returns.
I'm worrying about making sure we have returns through the cycle, and I'm not so much worried about investor sentiment over three to six weeks. I can't control that. What I can control is to make sure we're out, making sure we really understand the risk. I think it's back to the risk-based pricing.
If we can price the risk on the front end at a more granular level and then leverage capital and leverage multiple sources of capital, be it debt, equity, or the reinsurance markets, these are just better businesses flat-out.
Okay. And then last question. In terms of the XOL band that you are laying off through the CRT, is the detachment point the equivalent of where kind of the bottom end of your stress test loss scenario, I mean, you're kind of laying off the risk above normalized up through kind of a wave of stress test hitting you again?
The attachment point - the detachment point is a little tricky because of the tenor. That's why we did the 2-year call, so we could secure it for a longer period of time. But it really depends on what stress test we run. I think it gives us kind of mezzanine coverage.
I'm not sure it gives us total stress coverage. So we may also, in the future, look at a layer above that too. So we're really looking, when I think - when I say a tower, as I said earlier, Geoff, a tower of reinsurance, we would look and say, could we complement that with reinsurance on top of that or potentially take the structure off. But it gets us a big part of it in terms of stress loss, but it doesn't get us all the way there.
Your next question comes from Phil Stefano of Deutsche Bank.
Just following on that question a little bit. Thinking about the Radnor, you're taking in around 2.25 basis points and then maybe providing another 4-or-so on top of that - of coverage in the reinsurance tower.
How can we think above that in the historical stress scenarios? I mean, have we really hedged up the tail risk here? Or is this more of just a different source of capital that may be something like a quota share that we've seen some of your peers do?
Well, I mean, I can't speak. The quota share is a little bit of a different animal. But I think, here, we haven't - it depends on what the stress scenario is. So I think you haven't hedged it at out, but also, we have access to $424 million of capital. So just think through it logically, Phil. If there was a stress, you have the first $225 million were on the hook for, and the next $424 million we're tapping the restricted cash of this transaction.
So yes, if it goes above that, we would have to tap the Essent cash accounts again. But it goes a long way to boosting kind of the capital and the ability to withstand those type of environments. And again, we'll keep working. Again, we're always going to get paid to hold the catastrophic risk and first loss piece. We are - we'll continue to work on that tower, so to speak.
Got it. And just a quick one. No change in thoughts around the quota share at Essent Re? I'm assuming it's at 25%, but everything otherwise is unchanged?
Yes. Right now, we're still comfortable with the 25%.
Your next question comes from Mihir Bhatia of Bank of America.
Wanted to just go back to risk-based pricing for a second, if you will. I think you talked about how risk-based - the industry will shift towards risk-based pricing over time, in your view.
Can you just talk about what have the recent trends been? How fast is this happening? And what - if you were to ballpark it, what percent of the market is currently already using risk-based pricing as opposed to your rate cards?
Just to take a step back, the rate card is a risk-based price, right. I mean, because it is [indiscernible] income. I would just say, what you're seeing is the more granular approach to it, and I think that continues to evolve. How fast? That's an excellent question. And again, I don't think it's going to, because of the system limitations, I don't think it's going to be overnight.
But I do think it may be a little quicker than people think. So it will be over a relative time period. I wouldn't focus too much, again, on the speed of it. I would focus more to us, more kind of around the positives and the additional tools that gives the mortgage insurers to adequately price risk.
Got it. Okay. No, that's helpful. I guess, just on that - just staying on that though, you guys do, like, the black box pricing, if you will. Any - just in terms of how dynamic do those tend, that type of pricing model, is that something where you're changing prices on a much more frequent basis? Or is that more, you set the algorithm and then that's what it is till the next rate card evolution, if you will?
I wouldn't - it's not going to be daily. Credit doesn't price - it's not like mortgage bankers, which have two to three rate cards a day. We don't drive off of interest rates. Credit doesn't reprice daily.
But I would say, you would have regular checks on it, right, because you're going to look at across different MSAs, where is HPA going, you're going to look at different lenders, you're going to look at other aspects of the credit bureau that you may not have looked at.
But again, they don't change every day. But I would say, on a regular basis, you have the ability to kind of move pricing up or down. And I think that's - again, the part of it is, there is a chance again, as we focus more on returns, we'll use this as another tool, and I think an important tool, to allow us to achieve those mid-teen returns.
Got it. And then just on just single premium share, I think it's like 20% this quarter, similar to last quarter, but that's a little bit higher than you've run maybe for the last couple of years. Anything in particular driving that?
No. I think we're 80-20 on our portfolio. So it's $115 billion. So it ebbs and flows. We don't really pay attention to it much, to be honest. I mean, it's pretty much been in that ballpark for so long.
And the returns on the single premium business, still a little bit lower than the borrower paid or...
Again, I think we - when we say mid-teens we focus on - we put both of those into the equation. So I think an 80-20 mix allows us to have a really good solid mid-teens expectation on new business.
Okay. And then just last question on just the vintage performance. I noticed that 2017 vintage loss incurred - I understand it's early days, but loss to date, I think it's 7%. None of the others have really got to that point even accounting for it being early days. Just wondering is that just a hurricane impact, small number impact? Or is there anything in particular you want to - you would call out?
It is pretty much the hurricane impact that's driving most of that.
Your next question comes from Chris Gamaitoni of Compass Point.
Most of my questions have been asked. I guess, I'll ask one on the CRT. With the GSEs recently announcing REMIC structures for their CRT securities, do you think that is a potential that you could structure to open up the investor pool to maybe a wider audience with potentially longer coverage durations?
Little early to tell. I mean, we just heard that yesterday, too. So I think it's a little early to tell. But yes, I think anything that opens up something to investors is a positive. So it's a good question, good insight, but I do think it's just another that the market will continue to develop over time.
There are no further questions at this time. I will now return the call to the Essent Group for final comments.
Okay. Thank you, operator. Before ending our call, we'd like to thank you, everyone, for participating in today's call. Keep the faith, and enjoy your weekend.
This concludes today's conference call. You may now disconnect.