Essent Group Ltd

NYSE:ESNT

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to the Essent Group Ltd. First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

I will now turn the conference over to Phil Stefano. Please go ahead.

[Phil Stefano, Vice President-Investor Relations]

Thank you, Sarah. Good morning everyone, and welcome to our call. Joining me today are Mark 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 Guaranty.

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 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 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.

[Mark Casale, Chairman & Chief Executive Officer]

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 in-force 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 31, our insurance in force was $232 billion, a 12% increase compared to a year ago. Our 12-month persistency on March 31 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 in 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, EssentEDGE. We believe that the pricing environment remains constructive and is reflective of ensuring long-tail mortgage credit risk, given the macroeconomic backdrop. As of March 31, Essent Re's third-party annual run rate revenues are approximately $70 million, while our third-party risk in force was approximately $2 billion.

During the quarter, Essent Re continued to capitalize on the current environment to optimize returns and contribute to the profitability of our franchise. Cash and investments as of March 31 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 GAAP equity, access to $2.1 billion in excess of loss reinsurance and over $1 billion of available holding company liquidity. With a trailing 12-month underwriting margin of 87% and operating cash flow of $595 million, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective.

We continue to take a measured approach to capital and remain committed to managing it for the long term. Our strong financial performance affords us the ability to take a balanced approach to capital between distribution and deployment, which includes the $100 million for our planned title acquisition announced in February. 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 $0.25. 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.

[David Weinstock, Chief Financial Officer]

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 US 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 agreement. This compares to a $6.5 million decrease in the fair value of these derivatives in the fourth quarter of 2022.

The provision for loss and loss adjustment expenses was a benefit of $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, Essent Group paid a cash dividend totaling $26.8 million to shareholders. In March, we repurchased $16.6 million of shares under the authorization approved by our Board in May, 2022. We repurchased an additional $15.1 million of shares in April 2023.

As a reminder, Essent has a credit facility with committed capacity of $825 million. Borrowings 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 Guaranty paid a dividend of $90 million to its US holding company. Based on unassigned surplus at March 31st, the US mortgage insurance companies can pay additional ordinary dividends of $292 million in 2023. As of quarter end, the combined US mortgage insurance business statutory capital was $3.2 billion with a risk-to-capital ratio of 10.3:1.

Note that statutory capital includes $2.2 billion of contingency reserves at March 31, 2023. Over the last 12 months, the US mortgage insurance business has grown statutory capital by $148 million while at the same time paying $310 million of dividends to our US holding company.

Now, let me turn the call back over to Mark.

[Mark Casale, Chairman & Chief Executive Officer]

Thanks Dave. In closing, our balance sheet and liquidity remains 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?

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] One moment please for your first question. Your first question comes from the line of Mark DeVries with Barclays. Please go ahead.

[Mark DeVries, Barclays]

Thank you. Mark, I know you 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?

[Mark Casale, Chairman & Chief Executive Officer]

Sure, Mark. I know I'm like a broken record here, but the market share always kind of ebbs and flows quarter-to-quarter. I think, we looked at -- I looked at it the other day. The last seven years our market share average 16% which is -- 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 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 just as 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 target that 12% to 15% range. Given the spike in investment yields they're probably a little bit towards -- 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'd 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 to be -- to have a strong balance sheet because remember we're there to pay claims in times of stress. So again we thought the pricing got pretty compressed 12 months -- 18 months ago and it's really started to rebound. And we would expect it to stay at this level again given I think the discipline in the industry is much stronger than people think. And I think that's been evidenced. And I would expect that to continue through this year.

We don't see anything changing. I just -- you listened to some of the commentary 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 I'm pretty -- we're pretty encouraged from a pricing environment. And again just when you think about the nominal cost of MI Mark for the borrower still very efficient. It's still very efficient. It's a good value. We're putting folks first-time homeowners and homes and it's relatively an efficient process.

[Mark DeVries, Barclays]

Okay. Great. Thank you.

[Operator]

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

[Bose George, KBW]

Yes. Good morning. Just on investment income the increase this quarter was just 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?

[David Weinstock, Chief Financial Officer]

Yes, Bose good question. I think there's a couple of things going on here. We mentioned, I think, in the fourth quarter that -- we took an opportunity to do a little bit of repositioning in the portfolio where we have found that -- we had an accretive trade that we got out of some positions and reinvested at higher rates. And if you look at today's rates and Mark commented on this on the script that we're investing at 5% in the first quarter.

Is there a lot more upside? I think over time, 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, sequentially, it will be as dramatic as what you might have seen.

[Bose George, KBW]

Okay, great. That's helpful. And then just actually a regulatory question, just with the changes in the GSE, LLPAs and the FHA premium stuff. Any thoughts if that's going to do it much in terms of market share?

[Mark Casale, Chairman & Chief Executive Officer]

No, Bose. Again, I think, we've talked about this a couple of quarters ago. We kind of see it more as offsetting penalties. So, we don't see a big increase in our share and if we do, see it on the FHA side. I think it's a little early to tell. But right now that's kind of what we're seeing.

[Bose George, KBW]

Okay. Thanks.

[Operator]

Your next question comes from the line of Mihir Bhatia with Bank of America. Please, go ahead.

[Mihir Bhatia, Bank of America]

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?

[Mark Casale, Chairman & Chief Executive Officer]

I think, it's the normal things, right, Mihir. So, think of it, clearly, just on the collateral side, you're going to price up in certain MSAs where we have kind of different forward-looking views on the HPA, kind of, where it's going. And like I said, it's flattish across the country over the next three to four years. But it's certainly going to be pockets and we kind of know where the pockets are, where we're going to have to price up.

In terms of just core credit, I think, again, it's around the layered risk. So it's really going to be cautious around the tails, whether 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 -- 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 kind of getting down to that loan level kind of analysis there.

[Mihir Bhatia, Bank of America]

Got it. And then, in terms of just the market share shifts and again, not really so concerned as you pointed out about, like, one quarter your market share will be higher, one will be lower. But more just generally, where is the growth?

Where was the growth, if you will, in your portfolio on a little bit -- like, we obviously 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?

[Mark Casale, Chairman & Chief Executive Officer]

Our NIW was flat quarter-over-quarter. So we didn't really notice any outsized growth per se. And some lenders go up, some lenders go down. It's also there's lender-specific. So we saw one of the larger mortgage banks in the country kind of sell their wholesale division to another player.

So we've seen -- you always see turnover at the top. Another large refinance-driven shop last year really lowered origination. So there's movement around lenders. But -- and then, again, it might be different lenders.

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.

[Mihir Bhatia, Bank of America]

Okay. Thank you.

[Operator]

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

[Geoffrey Dunn, Dowling & Partners]

Thank you. Good morning.

[Mark Casale, Chairman & Chief Executive Officer]

Good morning.

[Geoffrey Dunn, Dowling & Partners]

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. On its low, was pricing getting down towards a 1% cumulative on average, or it that aggressive? And where do you think maybe the pricing is today, or where is a 4-plus handle potentially implying a cumulative loss assumption?

[Mark Casale, Chairman & Chief Executive Officer]

Yes, good question. Again, we don't jerk around our cumulative loss assumption. So, again, we're -- 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, we just -- 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, right?

You can't hide from the raw pricing. So when pricing dips into the 2s, 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 -- it's 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 gets so low in that third.

And I think it was the fourth quarter and first quarter again, 12 15 months ago. So -- 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 they're -- we're a bellwether on one side, they were a bellwether on the other. And they're backing out really opened up room for others, to kind of increase. So, I think it's been positive, right?

And again, at the end of the day we need to have the balance sheet to pay claims and make sure we have the flexibility, whether it's PMIERs or at the state level and just to chase it down like that, it's just not in the best interest longer term in the industry to be quite honest. So that's -- I'm very -- I think we're encouraged to see where the pricing is.

And again, like I said earlier on 10 basis points, the pricing -- 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.

[Geoffrey Dunn, Dowling & Partners]

Okay. And then with respect to Essent Guaranty on the statutory side, you've taken dividends up a very low level with at least the last five quarters. With where you are in your maturity earnings power and understanding things like -- change with the economy, but on average do you expect to maximize ordinary course dividends on an annual basis just as a rule of thumb, or any kind of parameters around that to give us a better idea of cash inflows on the Holdco?

[Mark Casale, Chairman & Chief Executive Officer]

Yes, Great question. I would say, given the environment and we'll take it -- 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 outflow. We would fully expect to max it out. So we have I think another 292 capacity this year. And the reason is, it's easy to put it back down to. We kind of like to see the cash and we like it for investors to see the cash at the Holdco.

And then, whether that gets upstream to group and goes outside the company via repurchases or dividends, it's used to reinvest along -- within at the holdings level keep it in the US. I think it's a good picture for investors to see. So, yes, I think given the environment this year, we would fully expect to upstream it.

[Geoffrey Dunn, Dowling & Partners]

All right. Thank you.

[Operator]

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

[Unidentified Analyst]

Good morning. It's Melissa [ph] on for Rick today. One 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?

[Mark Casale, Chairman & Chief Executive Officer]

That's -- 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 95% of our book is GSE-backed, which is in the GSE's 745 FICO. And the GSEs have made significant improvements, over the past 15 years with DU and LP their quality control and 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 to the borrower. So that goes into that. So I think we're – in terms of the kind of the cash flows of the business, we like the dividend. We kept it at $0.25 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 $0.25? 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 whether that's in the core business, we clearly entered into the title business. We like that longer term. We think it's better for shareholders in terms of diversified revenue stream, less of a monoline per se, that's accretive to 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 – we have altered kind of our view a little bit. I mean last – 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 road plan. And we chew through it relatively quickly I think in less than a year. So that caused us to kind of take a step back.

And I think now we're going to be a little bit more opportunistic about it, which will have much more of an overlay. So as we look and it's really going to be quarter-by-quarter, what opportunities do we see kind of capital needs within the business, what opportunities do we see kind of strategically outside of the business, whether that's title, ventures, other opportunities, should they come up. And then quite frankly, where is 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 thought – we saw the opportunity in the quarter. We trade within the KBE index, which is very bank-heavy, obviously. And we felt we got caught up in that and we thought it was a good opportunity to really to get the 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 have – we're afforded that kind of luxury so to speak to kind of to invest across that right? So whether it's dividend, repurchases in the new business, I think the – with the repurchases that's another kind of really I would say another kind of tool in the toolbox that we'll look more strategically and really within kind of the normal course of business. So just like we analyze pricing and how much business we – and how much we want to invest in the core business this is going to be another thing that we'll look at.

Special dividends is always as another tool. We haven't used that yet. But again we're always going to look ways to grow book value per share. And obviously, we want to maximize shareholder returns.

[Unidentified Analyst]

That's really helpful. Thanks, Mark. You mentioned Essent Ventures and that's something that you 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 big – 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?

[Mark Casale, Chairman & Chief Executive Officer]

Yes. 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 there, both on the venture side and some of the couple of private equity. 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 valuations and really more focus we're seeing within the funds and the operating companies on getting to profitability, which shocking is actually the goal all along. But it got to be just kind of chasing revenue and chasing exits as we like to see – say kind of do that 2019 to 2022 bubble.

And it's coming down back to reality, which is good for us. So we're seeing much more discipline around kind of what's – where the funds are going to invest in. In terms of opportunities we're – I think there it's a matter of we're starting to look a little bit about investing a little bit outside, looking at a few new funds to 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.

[Unidentified Analyst]

Thanks Mark.

[Operator]

Your next question comes from the line of Doug Harter with Credit Suisse. Please go ahead.

[Doug Harter, Credit Suisse]

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

[Mark Casale, Chairman & Chief Executive Officer]

Yeah. I mean, I think, we -- in terms of kind of looking at the market the XOL still probably trade a little bit more efficiently and 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 in MI has issued an ILN.

I think from our standpoint Doug just big picture, we're going to continue to diversify capital sources. We're -- for reinsurance our house view is it's much more important to have the sustainability and availability of reinsurance and so much the price of an individual deal.

And I know that it's not necessarily how others do it, which is fine. But it's very important to us, if you think longer term that availability of reinsurance is a really important part of our capital structure and it's really our leverage, right?

That's why we don't have a lot of leverage at the Holdco. We really kind of -- we think of reinsurance more as kind of leverage and having 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 ILN side, but then picked up.

And I know they 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 caused spreads to blow out.

Just the whole media attraction to high-HPA and that's going to cause the housing market to crash. And it's going to hurt the MIs all that kind of old I call it dated kind of views on the industry going back to kind of the GSE.

And yet ILNs got issued XOLs were -- 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 really not that -- if you average out all the pricing we've done over the last five or six years it wasn't really that meaningful.

So again, I think, it's more around the permanence of it and the availability. And I think as we get to eight, nine, 10 years of reinsurance that's also going to impact how we view cash at the Holdco, right. When we talked about I think last quarter doing -- running different scenarios. I think we talked about it a little bit in the script today.

We run kind of mild moderate GSE type scenario across our portfolio every quarter. And some of that as you get out to whether it's modern or GSE, 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?

It's our -- PMIERs 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 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 to five top investors that are pretty much in every one of their deals. And we want to make sure that they have kind of product that they can purchase from us.

[Doug Harter, Credit Suisse]

I guess, on the ILN, I mean, you're the only one that's kind of committed to kind of keeping that capital source open. Can it does it dry up? Do you need do you need kind of others to kind of support it as well? Just how do you think about that from a viewpoint?

[Mark Casale, Chairman & Chief Executive Officer]

Yeah. I think, it's always better to have more issuers. But remember, we have the GSEs right? The GSEs they're really the ones who pave the way for the MIs. And I think there's given in terms of the technical aspects of the islands probably a little bit better value from an investor standpoint.

So again, some of the sharper guys realize that. So we don't anticipate that 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.

[Doug Harter, Credit Suisse]

Great. Thank you, Mark.

[Operator]

Your next question comes from the line of Roland Mayer with RBC Capital Markets. Please go ahead.

[Roland Mayer, RBC Capital Markets]

Hi, good morning. I think on the Essent Re, 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.

[Mark Casale, Chairman & Chief Executive Officer]

Yes, I mean if you really kind of -- 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 in the trust so that the absolute -- if we were going to kind of show you a P&L just for Essent Re would be a bit higher than the 70 for sure.

[Roland Mayer, RBC Capital Markets]

Okay, that's helpful. Anything on the market dynamics--

[Mark Casale, Chairman & Chief Executive Officer]

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 in force as a third party assuming we earn three points on it. And the rest of that is 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.

I would one comment that's interesting is if you combine our market share between the principal that we take principal risk that we take with the GSEs and the MGAs were 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 kind of growth story so to speak very profitable and not really looking to grow. It's really -- when you think about Essent 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 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 real -- it's a key part of the franchise.

[Roland Mayer, RBC Capital Markets]

No, that's very helpful. Covered most of the second half of my question. Where are the sort of returns on that business right now? And where do you expect them to be sort of long-term?

[Mark Casale, Chairman & Chief Executive Officer]

Yes, 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 and the trust. That's the real capital.

And if we were able to kind of do economic it would be higher. So it's pretty good. And that's -- we talked about it earlier. We talked about ventures. It's really the same thing. We kind of have that 12% to 15% target across all the businesses that we're investing in.

[Roland Mayer, RBC Capital Markets]

That’s great. Thank you so much.

[Mark Casale, Chairman & Chief Executive Officer]

Sure.

[Operator]

Your next question comes from the line of Eric Hagen with BTIG. Please go ahead.

[Eric Hagen, BTIG]

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?

[Mark Casale, Chairman & Chief Executive Officer]

No, not really. I mean I think it's a little bit apples and oranges, right? I mean I know you're coming at given your background you're coming at a much more from an MBS-type perspective much more interest rate driven. 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 throughout 2019 pricing the returns today are probably higher though -- even though the pricing is relatively flat.

And remember 2019 -- just to remind everyone 2019 is really kind of coming after the industry lower pricing kind of following up to the reduction in taxes. So if you look at pricing 2019 to today 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 we're putting $1 to work today at similar pricing in 2019 the unit economics -- in terms of the predictability of the unit economics, right? And that's where the reinsurance has played such a key part as I would think stronger today than it was four or five years ago.

[Eric Hagen, BTIG]

Yes. That's helpful. Maybe I could sneak in one more here. I mean how are you thinking about the time line 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?

[Mark Casale, Chairman & Chief Executive Officer]

I'm not sure in -- the reinsurance market in May, right? 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 QM their QC work the strengthening of DU and LP. Forbearance is really another tool that protects the borrower. And it's a start. And if you 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 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 makes sense right, Eric you're not allowed to go to work for three months.

The last thing you need to do is get a foreclosure notice. It doesn't do anyone good and this is higher level 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 family.

So coming up with new and innovative tools to keep borrowers in their homes is just good for everyone. And I think we saw that with COVID and I think with the new forbearance rule that my guess will come down with us which is you have to have right 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, yes, to answer your question that will delay the foreclosure time line. 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 sub-prime 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 Essent standpoint right we take first loss risk we hedge out most of the mezz 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 the first loss to not penetrate that that helps -- clearly helps the cat fees, right. So I think if you when people -- we had a comment and I think I brought it at once but just if you mind repeating we were at an investor conference in May of last year. And some larger investor asked us how -- 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 we're -- folks on the phone the companies in the industry we know this business cold.

But the typical portfolio manager reverts back to kind of a recency bias. And if you're looking at the MIs of 2023 and comparing them to the MIs of 2007. Well, that's probably not the proper analysis. And again, big picture and you would understand this, because of the way you cover 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 million. 80% of our book is below 5%. So it's -- 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.

[Eric Hagen, BTIG]

Appreciate it the comments very much. Thank you, guys.

[Operator]

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

[Geoffrey Dunn, Dowling & Partners]

Thanks. I just wanted to ask given the reinsurance conversations. The last year the ILN market grew out and then we kind of gradually saw the traditional reinsurance market adopt changes and you basically increased pricing. As things may improve 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, if you could update us on that.

[Mark Casale, Chairman & Chief Executive Officer]

And you're thinking about the quota share?

[Geoffrey Dunn, Dowling & Partners]

I'm thinking about quota share but I'm also just thinking in terms of XOL everything. 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?

[Mark Casale, Chairman & Chief Executive Officer]

Yes. Let me start and I'll turn it over to Chris because he may have some of the thoughts there. I think it's very helpful on the quota share side right because we're -- you're literally taking a slice of our book. And there was pressure from 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 it should be -- 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 ION side given that they're kind of really taking credit risk and don't really get compensated for how we charge. And even then -- before I turn it over to Chris Geoff the spreads blew out on the ILN side but you're talking like a one basis point increase I mean in terms of just kind of -- we always boiled down to premium rates. And whether it's 4% to 5% it kind of probably got to 6% last year on one of our ILN deals. But kind of big picture, I think that's -- we think that's a small price to pay to keep the sustainability of that open to asset.

[Chris Curran, President-Essent Guaranty]

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 continues to be high. Certainly, now with some of the primary business kind of repricing to the upside I think from a reinsurance perspective certainly they'll see that. And I think the interest will continue. Even when you just kind of take a step back and you look at the overall credit environment and certainly 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.

[Mark Casale, Chairman & Chief Executive Officer]

Yeah. And just to add to that Jeff just from a valuation standpoint if you look at some of the large reinsurers there, I mean, their investment performance has been outstanding over the last 6 months to 12 months. A lot of that the credit is clearly around the hardening of their core business, 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 -- than 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 the valuation of insurance premium cash flows. And they're being valued much higher for the reinsurers than they are for the primaries which I think is again our over time those things tend to settle tend to even out.

[Geoffrey Dunn, Dowling & Partners]

Okay. Thanks.

[Operator]

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

[Phil Stefano, Vice President-Investor Relations]

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

[Operator]

This concludes today's [Abrupt End]