Essent Group Ltd

NYSE:ESNT

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited Fourth Quarter 2018 Earnings Call. [Operator Instructions] Thank you. Mr. Chris Curran, Senior Vice President of Investor Relations, you may begin your conference.

[Christopher Curran, Senior Vice President, Investor Relations]

Thank you, Lindsay. 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 fourth quarter and for full year 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.

[Mark Casale, Chairman, President and Chief Executive Officer]

Thanks Chris. Good morning, everyone and thank you for joining us. Earlier today, we released our fourth quarter and full year results. And I am pleased to report that 2018 was a very successful year for the Essent franchise. During the year we continue to grow our high credit quality and profitable mortgage insurance portfolio, while also increasing net income and generating strong returns. In addition, we began to take steps to strengthen Essent's business model by increasing our sophistication around risk origination and risk distribution.

Key highlights pertaining to this include the successful pilot of our EssentEdge risk based pricing engine and executing two reinsurance transactions on our 2017 book of business.

Now let me touch on our results. Our insurance in force grew 25% to $138 billion at year end compared to $110 billion at the end of 2017. For the quarter, we earned $129 million, or $1.31 per diluted share. On a full year basis, we earned $467 million, or $4.77 per diluted share. Our results for both periods reflect a $9.9 million, or $0.08 per diluted share reduction in our loan loss provision. This reduction relates to updated expectations on the default associated with Hurricanes Harvey and Irma that hit the US in 2017. Larry will discuss results in more detail in a few minutes.

Our balance sheet remains strong ending the year with $3.1 billion in assets and $2.4 billion of GAAP equity, also we grew adjusted book value per share 24% to $24.29 at year end 2018 from $19.64 as of December 31st, 2017. As a reminder, senior management's long-term incentive compensation is driven by annual growth rates and book value per share. We believe that book value per share growth is a key metric in demonstrating value to our shareholders.

Our outlook for our business remains positive as we believe that demographic such as the millennials coming of age and purchasing homes for the first time continue to drive demand and support housing's longer-term fundamentals. As a reminder, purchase mortgages are positive for our franchise as the AMI penetration rate on this is 3x to 4x that of refi mortgage. With low unemployment rates affordable 30 year fixed rate mortgage and builders increasing supply for first time homebuyers, we remain optimistic heading into 2019.

On the industry front, we continue to see utilization at risk based pricing engines and we've recently announced the rollout of our engine EssentEdge. While EssentEdge mimics our current pricing, we believe it provides flexibility to increase or decrease rates allowing us to better shape our portfolio. The engine also provides the capability of pricing more credit attributes at the loan level. Unlike the current rate card structure which is based on broad FICO, LTV and DTI ranges.

But not all of our customers are using EssentEdge. We believe that over time most vendors will enhance their front end processes and technologies to access our engine. As noted in our press release, we successfully executed in excess of loss transaction with a panel of insurers during the fourth quarter. The reinsurance is on 2017 NIW and attaches above the existing Randor Re insurance link note transaction completed in March of 2018. The ILN transaction was for $424 million protection on approximately $10 billion of risk.

And the XOL transaction adds $165 million layer on top of the ILN. On a combined basis as of year end 2018, the ILN and XOL provide $589 million of protection on top of $225 million first loss layer that we retain. We are very pleased to have completed these transactions and plan on executing additional reinsurance transactions going forward. From Essent's beginning we've taken a long- term approach to insuring and managing mortgage credit risk. Given the cyclical and long tail nature of the MI business, we recognize the limitation of a buy and hold approach. Accordingly, we continue to evolve into a more sophisticated risk manager by distributing risk in diversifying our sources of capital.

This allows us to hedge against adverse stress scenarios and mitigate housing cycle volatility while making Essent stronger and more stable counterparties. In addition, distributing the rest of the capital markets and reinsurers is not only a head store cycle dependent franchise, but can also be accretive to returns by freeing up capital at a lower cost without adding financial leverage to the balance sheet.

We believe that this strategy along with future earnings should generate excess capital going forward. Our objective and best deploying excess capital will be to strike a balance between return objectives and strong capital levels, while also giving consideration to what is in the best long-term interest of our franchise, policy holders and shareholders.

On the Washington front, we continue to believe that Essent and our industry are well positioned to support a well functioning and robust housing finance system. We also believe that this position will strengthen as we execute upon our buy, manage and distribute strategy. We look forward to working closely with new FHFA leadership and we will continue to support US MI and engage with policymakers in promoting the benefits of private mortgage insurance and our strengthening business model.

Now let me turn the call over to Larry.

[Lawrence McAlee]

Thanks Mark. Good morning, everyone. I will now discuss the results for the quarter in more detail. Earned premium for the fourth quarter was $173 million, an increase of % over the third quarter of $167 million, an increase of 17% from $148 million in the fourth quarter of 2017. Note the premium ceded on our reinsurance transactions are reflected as a reduction of earned premium and were $3.7 million in the fourth quarter and $3.2 million in the third quarter of 2018.

The increase in premiums ceded in the fourth quarter is due to the placement of our excessive loss reinsurance coverage, which was effective November 1st. We had no reinsurance in place or premium ceded in 2017. The average their premium rate for the fourth quarter was 49 basis points, which was 1 basis point lower than the third quarter of 2018 due to the increase in premiums ceded under the XOL transaction. The lower level of single cancellation income and the impact of lower BPMI pricing implemented in 2018.

We expect our average net premium rate to decrease to approximately 47 basis points by the fourth quarter of 2019. This reduction in the premium rate is anticipated to be driven by the BPMI pricing changes enacted in 2018 and an increase in premium ceded based on our expectation that we will increase the %age of our insurance portfolio is covered by reinsurance.

Investment income excluding realized gains was $19 million in the fourth quarter of 2018, compared to $17 million in the third quarter and $12 million in the fourth quarter a year ago. The increase in investment income of 12 % over the third quarter of 2018 and 58% over the fourth quarter of 2017 is due to an increase in the balance of our investments, as well as an increase in the yield on the portfolio. The yield increase from 2.2% in the fourth quarter of 2017 to 2.8% in the fourth quarter of 2018, primarily as a result of the impact of the increase in market interest rates for new assets purchased, and an increase in the average duration of the portfolio.

We remain please with a credit performance of our in force book. Our provision for losses and loss adjustment expenses was a benefit of $1 million in the fourth quarter of 2018 compared to provision of $5.5 in the third quarter and $17.5 million in the fourth quarter a year ago. The provision in the fourth quarter of 2018 and 2017 were both impacted by Hurricane Harvey and Irma.

In the fourth quarter of 2017, we recorded a reserve of $11.1 million associate with the increase of 2,288 defaults in the areas impacted by the hurricanes. Based on favorable cure activity and our expectation of the ultimate losses to be paid, the provision for losses and loss adjustment expenses in the fourth quarter of 2018 includes the release of $9.9 million of the reserve previously recorded in 2017. The default rate on the entire portfolio increased 5 basis points from September 30th, 2018 to 66 basis points at December 31st.

Other underwriting operating expenses were $39.4 million for the fourth quarter of 2018, compared to $36.9 million in the third quarter and $36.5 million in the fourth quarter a year ago. We continue to leverage our platform as evidenced by the reduction in our expense ratio from 27.5 % in 2017 to 23.2% in 2018.

For the full year 2019, we estimate that other underwriting and operating expenses to be in the range of $160 million to $165 million. Our estimated annual effective tax rate as of the end of the third quarter was 16.2% as of the year end our final effective tax rate for 2018 was 16%. As a result, our effective tax rate for the fourth quarter was 15.5%. We estimate that our effective tax rate for 2019 will be in the range of 16% to 16.5% %.

The consolidated balance of cash and investment at December 31, 2018 was $2.9 billion. The cash investment balance at the holding company was $78 million. New Capital contributions are dividends between the holding company and operates businesses were completed during the most recent quarter. At year end 2018, we have $275 million of undrawn capacity under the revolving component of our credit facility and $225 million of term debt outstanding.

As of December 31, 2018, combined U. S. mortgage insurance business statutory capital was $1.9 million with a risk to capital ratio of 13.9 to 1 one compared to 14.1 to 1 at the end of the third quarter. The risk to capital ratio at year end 2018 reflects a reduction in risk in force of $589 million for the reinsurance coverage obtained from our insurance linked note and excessive loss transactions. At the end of the fourth quarter, Essent Re had GAAP equity of $799 million, supporting $8.3 billion of net risk in force.

In addition, Essent guarantees available assets exceeded its minimum required assets as completed under PMIERs by $362 million.

Now let me turn the call back over to Mark.

[Mark Casale, Chairman, President and Chief Executive Officer]

Thanks Larry. In closing, Essent generated another strong quarter of financial results as we continue building high credit quality and profitable mortgage insurance portfolios. The operating environment during the quarter was favorable and we remain pleased with credit performance and our market presence. Looking forward, our outlook on our business remains positive and we believe that increased utilization of risk based pricing and reinsurance will make Essent a stronger company.

Now let's get to your questions. Operator?

[Operator]

[Operator Instructions]

Our first question comes from a line of Mark DeVries with Barclays. Your line is now open.

[MarkDeVries]

Thanks. I was just hoping to get your updated thoughts on your abilities/ interests in returning capital here?

[MarkCasale]

Yes, Mark. I think as we look at the end of the quarter or the end of the year, we feel like the excess that we have, PMIERs $360 million, we have HoldCo cash, and we have a little excess at Essent Re. We are probably in the strongest capital position that we've been in since we started the company. That being said, a lot of that excess is being driven by the insurance linked no transaction that we did earlier this year or earlier last year. And they really only covers 30% of our insurance in force.

So once we complete a deal on the 2018 which we would expect to do in 2019, I think we'll have more visibility in the kind of the sustainability of that excess, Mark. So once we do that and I think we'll look at all factors. So first and foremost, we would look to reinvest in the business and I remind you that we grew insurance in force 25 % year-over-year. So there are still opportunities to deploy in the business in the states. Bermuda continues to grow and we really like, we really like so many opportunities in Bermuda like we said it's another platform for us to grow and take on U. S. mortgage risk. So there are opportunities there.

And there are potentially opportunities outside the company. That being said, we will look to, and we'll evaluate capital distribution. I think we've been pretty thoughtful life to date in terms of how we -- how efficient we've been around the use of capital both equity and debt. We're going to -- we'll apply that same thoughtfulness to capital distribution. So I would stay tuned, but it's something that's on our radar screen and we'll be able to update you more in May assuming we can get a deal done in the first half of the year.

Once we get that deal done around the reinsurance, I think we'll be able to give you more visibility around that question.

[MarkDeVries]

Okay. And given how attractively priced the reinsurance is that you can get through the ILN market. Do you think it'll make sense to insure up to a 100% of your risk?

[MarkCasale]

I think at some point that's the plan, Mark. I think that's the plan. I think we're more concerned, obviously with future books, the past books are relatively pretty strong right especially from mark to market LTV standpoint. But if you look and say 2017, 2018 and say the 2019 book, that's going to be 80% of insurance in force by the end of this year. So we're more focused on the newer production, but the plan over time and again we said this before, we would look to, at the end of each year reinsure that book. So over the course of the next few years, we would expect 100% of the book reinsured.

[Operator]

Our next question comes from the line Bose George with KBW. Your line is now open

[BoseGeorge]

Hey, guys, good morning. So just following up on that question on capital. It looks like you guys have a deal in the market island transactions. So mean to the extent that happens I mean could be hear something on capital sooner or do you still think there could be --it's something that you have to assess and be a maybe a little later in the year?

[MarkCasale]

Well, we can't really comment on the deal and I think once, again, our plan is to reinsure 2018 box during the first half of 2019 and once that deal gets done, I think we more visibility that will be able to share. I'm not --I'm not saying there's any answers Bose to be sure, but I do think we are evolving as we continue to generate excess capital; we're going to look for opportunities to put that to work again in the business or in a potentially distributed shareholder.

So we will be thoughtful about it. I wouldn't -- I think once we have that deal, if we're able to complete that transaction, we would be 50% of the book, and a little bit over 50% of the box will be insured. So we will have more visibility, but again we're going to be thoughtful about it. And I think we've been good stewards of capital. So I think that's --that the real message for investors to take away is we're going to be really thoughtful about this. And we're going do what's in the best interest of shareholders. There's no doubt about that.

There's just no rush to do and give answers. I know every quarter folks want to hear answers, but I would say we feel like we're in a good capital position. Remember, capital begets opportunities. We just want to make sure that we get most -- we feel better around the insurability of the portfolio and able to execute those transactions and once we do we'll send a pretty clear signal to the market.

[BoseGeorge]

Okay, makes sense, thanks. And then if just on the XOL transaction that you guys did. Can you just talk about is there an incremental capital benefit to adding the XOL on top of the ILN.

[MarkCasale]

Yes. It's a good question. I mean it does that incremental capital release both from an economic capital and we believe from a rating agency. There is no PMIERs credit for that. So our thought with the XOL was we wanted to tap into an additional source of capital, which is their insurance, the reinsurers which we hadn't done to date. We also want to test higher up in the structure. So we feel we're pretty well covered now from say two and a quarter to closer to kind of nine plus percent. So that's -- we feel in terms of people have asked us, what does that mean in a stress scenario?

It's a pretty good result. So base cases are 2% to 3% claim rate. If we were to hit a mild recession, mild plus maybe with a 5% claim rate, our returns would still be in the mid -teens, right because we wouldn't 5% claim rate which we hit into the reinsurance. If we were to take that 2017 book and put it through the Great Recession, and we think the claim rate would be right around say 12% % which is a little lower than the Great Recession, but keep in mind it's a better credit quality book. That's the case we are probably still low single digit returns.

That's a pretty strong statement. And I think that's the real takeaway with reinsurance is removing not only the volatility from some of our earnings. But removing the volatility from the balance sheet and I think that's a key. So when we talk about rapid and the capital distribution, we want to make sure that stuff is set first before we --the worst scenario would be we do --we start to talk about capital distribution. And we haven't protected the balance sheet and that's our number one goal. Credit kills these businesses and we will go in not sure when we'll go into the next recession.

But I'd much rather go into recession knowing that we have --we have protection on the book.

[BoseGeorge]

Okay, makes sense. And then actually just the run rate cost on that XOL, that's about $1.5 million a quarter. Is that right?

[MarkCasale]

No, not only XOL, I would say, I would look at all in. Those are simpler way to look at; it is probably approximately 5 basis points on the cost of those transactions. So if you think about, lot of work its way into the portfolio over time it clearly impacted some of that in 2018, but I think that's a simpler way for you guys to think about it.

[BoseGeorge]

Yes, okay and the 48 basis point guidance that you gave us with the year the net number, it incorporates the cost of the --this transaction as well as the sort of the lower and I, lower NIW premiums upcoming, right?

[MarkCasale]

Yes. It is. It is a combination of the pricing change that hit its way halfway through the year and the reinsurance. I think the number was 47 that we gave in terms of the guidance of 49 in 2018 trending down to 47 by the end of this year.

[Operator]

Our next comes from a line of Ric Shane with JP Morgan. Your line is now open.

[RichardShane]

Mark, can you hear me?

[MarkCasale]

Yes. I can, Ric. You didn't call in a while so it's very hard to recognize your voice.

[RichardShane]

Hey, I apologize I got dropped off the line for a second. So if I got queued up and got kicked out, I apologize. Look I heard the questions about return of capital and realize that there is --there some of event that need to occur before you approach that, but love to talk to philosophically about how you think about the difference between dividends and repurchase. Obviously, repurchase is accretive to earnings with the stock trading at a premium to book; it does dilute book value a bit. Just want to see how you think about that going forward?

[MarkCasale]

It's something; I think we're going to look at those very carefully. And I don't think we have a good answer for you today. I do think dividends are a strong demonstration of kind of the cash flow generation of the businesses. And I think that will -- it'll become more readily apparent as we move forward and continue to generate excess capital. I think in terms of repurchase I think it's more opportunistic. I don't think you want to get on into a program where you're increasingly buyback shares at an increasingly high share price. Such a dangerous, I think we were -- we lose capital flexibility there.

And again these are balance sheet businesses, strong capital begets opportunities. And you don't want to get into that type of game. I don't think that's in the best interest for shareholders long-term. But short term, I think some folks may like it, but again, we're building this business for the long term. And remember, we're all --the senior management teams all shareholders. So we're pretty focused on providing shareholder value in addition to building a really good business.

So again, it's something more we will be thoughtful about. And just like we did when we raised equity and we raised, we built our line of credit. Some of it's going to depend on market conditions and something that's-- that'll be under evaluation, is under evaluation now and obviously is going to be an increasingly bigger part of the Essent story going for.

[RichardShane]

Got it, yes, look, I think ultimately these are high quality questions you had to ask yourself.

[MarkCasale]

Yes, it's a good problem to have to be honest.

[Operator]

Our next question comes from the line of Doug Harter with Credit Suisse. Your line is now open.

[DougHarter]

Thanks. Can you talk about your outlook for expenses and how much lower you think the expense ratio can go?

[MarkCasale]

Yes, sure. I mean again we are much more focused, Doug, on the nominal expenses. We gave the guidance of a $165 million. In terms of expense ratio, I think it's going to be the math. And don't forget, we're in an environment where the premiums are coming down right. We have those, the compression in premium that hit last year with the rate card change which for all intents and purposes was mitigated by the reduction in taxes. So the returns were similar and then we're obviously ceding premium for the reinsurance, which we think is a great trade offs.

This going to impact on expense ratios. So the old story of premiums being, as they continue to grow and expenses continue to go down, it's going to be a little bit different. So I don't know if it's going to be as important of a gauge. I still think we're still in that 35 to 40 kind of guidance when you put it all together. However, I don't-- I wouldn't expect a continual decline as you may have in the past. I mean there's a little bit of moving around of some of the factors. The important takeaway that our return is still strong. And I think that's the one, I wouldn't get too caught up in the ratios, but I think that the big ratio is where are the --what's the return on equity. And we still feel like that's firmly in the mid -teens.

[Operator]

Our next question comes from a line of Philip Stefano with Deutsche Bank. Your line is now open.

[PhilipStefano]

Yes, thanks. So, Mark, as we think about the building of capital and the opportunities coming out of Bermuda, feel like it's been awhile since we talked about the internal quota share. Are there any updated thoughts around that? Is 25% still the right number? And now you've had a chance to digest the tax reform was open to revisit that.

[MarkCasale]

Yes. I mean I think we are still in the camp of 25%, Phil. Remember; we're still subject or could be in around the V Tax in the calculation. We feel like with the 25% quota share, we are -- we have a nice margin of safety with that. And there's really no-- there's no really -- there's no desire or intent to kind of grow that so very good question. I think that the real story around Bermuda is the continued growth in the third party business. And again, it's relatively small compared to our U. S. business.

But that's not to take away from how well it's done and we've done well over 50 GSE risk share deals. We started to build out the MGA and it's starting to help larger reinsurance companies deploy capital. It's a real platform for us to take on that risk. And some nice optionality in terms of the market. So if the market was to soften and I think there could be more opportunity to write business there.

In Bermuda, it could be some impact on the reinsurance, but those things are always linked. So either we like kind of the optionality that our Bermuda platform links.

[PhilipStefano]

Got it. Mark, earlier, I can't remember who is your favorite remarks or response a question, you said something about additional reinsurance transactions and maybe I'm parsing the words too much ,but is this going higher and tower with additional XOL? Or is this just putting ION and XOL on additional vintages as we look forward?

[MarkCasale]

Yes, it's more toward additional vintages. We are -- I think we are done on the 2017 book and it's -- we are focus now is to reinsure the 2018 book.

[PhilipStefano]

Got it, okay. One more quick one on EssentEdge. Based from your competitors nobody wants to venture number on this, but I mean I'm going to keep bang it. How many pricing inputs and metrics are you guys currently utilizing in the -- the right number that you think about being the tipping point of getting pricing right?

[MarkCasale]

That's a great question. We will be pretty up front. We use approximately 12 to 15 factors around the model. And it's the same factors we've used historically, Phil, to assess losses and to assess our economic capital. We just never really had the ability to pass that on the pricing because remember, up until last June the records were only comprised to two factors. And then after June it went all the way up to four factors. So we never really had the ability to kind of be more granular on the pricing.

So we think that 12 to 15 -- can't really get into the factors, but we do think it's more meaningful. It allows us to deliver more granular pricing. Initially that will mimic the rate card pricing more or less, it will be some-- as more granularity ups in some places were to be higher, some places will be lower, but the goal right now is to keep it right around very similar pricing. Important point around the edge and it gets lost is the flexibility that it provides to both increase and decrease pricing, just didn't have that flexibility with the rate card.

You have to go to 50 stages, you have to refile and you also have very difficult decisions with lenders. We've been doing this now for close to 10 years at Essent. And I've always found when we lower rate cards to lenders, it's very well received. That's never, not well received. It's doesn't really go that way the other side. And I think as you go into a potential slowdown and the industry experiences back in 2008, it's very difficult to pass on price increases.

And I think now with the flexibility of the engine and the fact that we're pricing each borrower separately should we see a slow down or here's a good example of how it's going to the reinsurance. If we go and reinsurers parts of future books and that cost is higher, well, that's the markets telling us something around credit that maybe we're not aware of. And now we have a mechanism to link that back to the front end in a more granular basis. So we don't have to have a hard discussion with the lender, which is very difficult when you're among six competitors.

So there's a little bit of gamesmanship there at the lender level that it's very hard to get across, but if through the engine you may decide to certain regions you don't like. There's a certain pocket of LTVs, DTIs or whatever FICO ranges that you're not as comfortable with given where you think H. P. A. is going in this region. You now have the ability to adjust pricing. And I think that is --that's what's the --that's the real big picture. I think when we talk about getting more sophisticated around risk origination. That's what we mean with EssentEdge. This is a risk tool, it is not a market share tool; it's not a pricing tool originally when the engine hits the market back in 2010 and 2011 when UGI first had, it was a way to pass on a lower price.

And that was a way to do it is priced well below the card, that's not the case anymore. I think you're going to find engines that have higher prices in certain pockets and other ones have lower. Each MI I think eventually will have their own kind of credit appetite and as you think going forward, Phil, it's going to be credit, credit selection is going to be a key differentiator in terms of the MI business. That's never really been the case before. It's all been the same rates. The same underwriting guidelines. And I think that --I think we are relatively well equipped to be in this New World.

And how you work that in the new factors and all so forth will be seen. How successful some guys can b? But I think the flexibility of it is really the important takeaway.

[PhilipStefano]

Thank you, Mark. Your candor around the edge and recessionary returned is refreshing, and I hope that some of your peers are also so forthcoming with the information. We appreciate it.

[Operator]

Our next question comes from a line of Mackenzie Aron with Zelman & Associates. Your line is now open.

[MackenzieAron]

Thanks, good morning. Mark, I guess just comparing the last question for me is I had just related to and your outlook as you look into 2019 on volume, what the opportunity could be this year given what we're seeing on the origination? And then secondly, with rate doing what they've done year-to-date, can persistency continue to improve? And then just what should we be expecting for the year on those two metrics?

[MarkCasale]

Sure, hope all is well with you. We are -- in terms of persistency, I think the guidance this year still in the low 80s and we're tick higher than in 2018, but I think that's good guidance longer term. It's hard for us to give guidance anything above 80%. I would think 80% is a good long-term guidance. In terms of NIW, now clearly I think the market was impacted in the fourth quarter. It was a pre sudden rise in rates, Mackenzie. And I think it took awhile for consumers to adjust to that, which I think is natural and then you historically go into the fourth quarter slowdown.

I think our view one 2019 NIW right now, I think it's - we believe it's still --it would be similar to 2018. I think once we see where the spring season goes that'll give us some more visibility into that, but right now we're not seeing much to say it's going to be different. And remember, we are -- we are lever to the first time home buyer and as you guys know, you cover builders. The builders are still; in fact a lot of builders are increasing their supply around the first time homeowners.

So our average loan size is $230,000 and when you look at some of these newer homes there in that $200,000 to $225,000 range. So it's -- I think we're actually well positioned for that. And we've always said, we believe because of the demographics that housing will be bigger. And it will continue to grow. We never said it would be in a straight line. So there's always going to be fits and stops and those stops could be quarters, they could be a year, but longer term, we still think the fundamentals around housing and the ability for to continue to grow are still in place.

So I think that's what we said we remain optimistic for 201, but I guess we'll see when the spring season ends.

[MackenzieAron]

Okay, good to hear and we certainly agree with that. And just one quick one on the modeling. Does the tax guidance, did that include the expected tax benefit from stock comp in the first quarter?

[LawrenceMcAlee]

No, Mackenzie, this is Larry. That's really great question. That's a discrete event that we would recognize in the first quarter. We expect that to be relatively moderate this year. Last year was a little bit larger because of divesting of certain shares in the first quarter of the year. But we would estimate the impact of that to be between $0.01 to $0.02 per share in the first quarter.

[Operator]

Our next question comes from the line of Jack Micenko with SIG. Your line is now open.

[JackMicenko]

Hi, good morning. Mark, when you talk about EssentEdge a couple times both in prepared and Q&A, you mentioned the word mimic and I am curious. I think you still in pilot so does mimic mean you're just sort of running it and testing and seeing what adoption looks like? Or was that meant to say, hey, we're not letting our customers' arb us on price in our engine versus the rate card, and maybe that has broader implications for what may be the market, what's happening in the marketplace, just curious.

[MarkCasale]

Maybe yes to all of the above. We're certainly just testing. And we're very --we said this last year with pilot. We are focused on adoption by lenders and getting them to use it, ease of use, yes, we don't really want to turn it into arb so and so it's very similar to the overall, I would say premium rate. I think that's the thing to focus on, Jack. We're targeting earned premium rates so certain pockets may be lower sales meeting, some may be higher but there shouldn't be much different from lender perspectives around the card versus the engine at this point in our lifecycle.

And we felt when the rate cards change last year in June with the addition of DTI and the multiple borrowers, we felt like that captured a lot of kind of the inherent risks that, or the differences between the cards and the engines. And it's given us a lot of time now. So we can get the engine out there, get to adopt, get lenders using it and again longer term, it's the more the lenders use it the more you have that flexibility that I spoke about earlier.

So again, it's --there's an operational component to this and that we are very well aware of, and lender market didn't change overnight. I mean lenders still have to close loans and so under --our underwriting and how well we do that is still part of the business. So at the edge is really just another tool of which we can help lenders grow their businesses. So we're not really in it to gain share with it or change pricing that drastically.

We will continue to test and look at additional factors. So we would expect the engine to evolve over time. It's kind of like a journey. And you think about the credit card business evolved over time too in terms of how they use different factors. So I think it's very, very early in its lifecycle, but as I said earlier a longer term, I do think it's just shift some of the pricing power from the lender sitting MIs. And I think that's --it's a subtle point, but it's going to be a real valuable point especially in times of stress.

[JackMicenko]

Okay and then you also said as part of the capital conversation earlier in the Q&A. Opportunities outside of the Essent. Can you elaborate more on how you're thinking about what that means?

[MarkCasale]

Yes, it's, we always look at things outside of Essent and I think that's --we are in the capital allocation business. I wouldn't pay that much mind to it to be honest unless a really good opportunity came up. We are really focused on the two existing businesses. I think that's our -- that's the best place to deploy capital. And we're not going to deploy capital outside Essent just for the sake of doing it. We would certainly rather distributed to shareholders versus do it just to the diversified. That's -- we are very focused on return. So it's-- this is-- we've built a business on being focused.

So really focused on the two core businesses. If an opportunity for a big fat pitch came down in the middle the play Jack. we're going to do it, but what that something -- they happen -- they don't happen very frequently. So we are more focused on the business that we have. And I think capital distribution like I said earlier, something that's really under careful evaluation.

[Operator]

Our next question comes from Mihir Bhatia with Bank of America. Your line is now open.

[MihirBhatia]

Hi, thank you for taking my question. Just starting real quick, had a question on your LTV. 95% LTV seems to have stabilized last few quarters around 17%. Is that a good number going forward?

[MarkCasale]

Yes, I think it is. I mean it's really being driven by the GSEs and there are two takeaways there. One. the coverage is less than a 95%, so the coverage is only 25%. So there's actually --there's a risk mitigant there. The other mitigant is, at least makes me feel good is that FICO are still at relatively high levels not quite where the overall portfolio is but relatively high levels. And the performances have been pretty good.

So unless since the GSEs are really driving that, unless we were at a price up for it, which I know we have the capability within the engine now to do. We may look to do it, but right now I think we feel pretty comfortable, we feel pretty comfortable with that limit and but again as the edge gets rolled down to the market there. We may look to share that if we something in originations that we don't like, but right now we've been pretty comfortable with it.

[MihirBhatia]

Great, thank you. And then just I guess similar topic about how much -- can you comment maybe on the status of non GSE market. Is that something that you are all seeking a little bit more growth in? Is that a market you are all participating in or is it still mostly -- okay, it is mostly all GSE but I'm just curious on how non agency is evolving as rates go up? And maybe there is a little more pressure from the originators to do something -- [Multiple Speakers]

[MarkCasale]

It's good question. I actually break into two parts. 5% of our business is non GSE but that is a 100% bank balance sheet, and that's mainly jumbos, or professional loan programs and that is gone I think we're very pleased with that business, depending on what goes out GSE reform, could that shipped a little bit more loans to the bank balance sheet. Again, I think we are relatively well equipped there. In terms of non QM, clearly a lot of chatter in the market around non QM. I still think it's relatively small compared to the size of the mortgage market.

For all intents and purposes it's almost FHA fall out. So this is a borrower now, they probably can't get an FHA loan, certainly can't get a conventional loans. And they are looking kind of the non QM market. That's not-- again, I think for -- advice we give to lenders is, it's really about efficiencies and leveraging their cost structure. Once you get into some of those products it's very difficult. I think it does soak up some capacity, but it's probably not the best way.

I think from a risk stand for the lender meaning and I think from a risk standpoint, it's not something we really have --we really focused on. And again, it's just such a good conventional business out there and the bank balance sheet. And like we said, we're very pleased with our market presence. We don't feel the need to stretch and you can even see that in our FICO, very limited kind of percentage of our portfolios below is 680. I think the non QM for us is not something we're --really on our radar screen.

[Operator]

Our next question comes from Bose George with KBW. Your line is now open.

[BoseGeorge]

Hey, guys, thanks. Just one had a quick follow up on the comment you made on the tax rate. So does it annual tax rates still end up being around 15% of the first quarter is a penny or two impact, so that's something like 14% and then the others are slightly higher. Is that how is going to work?

[MarkCasale]

No, just to clarify, so the annual effective tax rate excluding discrete items we expect to be in the 16% to 16.5% range. In the first quarter we will have a discrete tax accounting benefits associated with the shares of our plan to invest in the first quarter and the excess benefit on that we expect to be $0.01 to $0.02 per share. So in the first quarter we will have a rate and income tax expense of between 16% 16.5% of pretax income plus or that'll be reduced by benefit about $0.01 to $0.02 per share.

For the remaining three quarters, we expected our rate to be 16% to 16.5%. Does that answer the question?

[LawrenceMcAlee]

On a blended rate though it would be a little lower.

End of Q&A

[Operator]

There are no further questions and yet this time. I'll turn the call back over the management for closing comments.

[Mark Casale, Chairman, President and Chief Executive Officer]

Okay, thank you, operator. Before ending our call, we would like to thank everyone for participating today. And enjoy your weekend.

[Operator]

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