Ladies and gentlemen, thank you for standing by, and welcome to the Essent Limited Third Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Chris Curran, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Whitney. 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 third quarter of 2020, was issued earlier today and is available on our website at essentgroup.com. Our press release also includes non-GAAP financial measures that may be discussed during today's call. A complete description of these measures and the reconciliation to GAAP may be found in Exhibit M 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 18, 2020, and subsequently updated through other reports we filed with the SEC 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. Earlier today we reported third quarter earnings, and I'm encouraged by our financial results, notwithstanding the COVID-19 operating environment. For the third quarter we earned $125 million compared to $15 million last quarter and $145 million for the third quarter of the year ago. The increase in this quarter's earnings was driven by a decrease in new default notices, which resulted in a lower loss provision of $55 million versus $176 million for the second quarter. Our outlook on the COVID-19 economy remains cautious. However, we are pleased with the resilience and strength that housing has demonstrated throughout the year. Unlike the great financial crisis when housing played a big role in the downturn, during COVID-19 housing has been a bright spot in the economy. Low mortgage rates, affordability and rising demand for single-family homes have been the primary drivers of strong refinance and purchase mortgage volumes. For 2020, total mortgage originations are forecasted to be in excess of $3 trillion with over $500 billion of industry new insurance written. During the third quarter, we grew insurance in force 19% to $191 billion compared to $161 billion at September 30, 2019. Our growth this quarter was driven by $37 billion of new insurance written, offset by runoff as our persistency was 64% compared to 68% last quarter and 82% for the third quarter a year ago. We continue to be pleased with the high credit quality of our new insurance written, noting that the last two quarters’ production is stronger than earlier this year. This is due to the credit tightening cited by the government-sponsored enterprises and our industry in response to COVID-19, along with an increased share of refinance mortgages. For the third quarter, our new insurance written maintained an average FICO of 751 compared to 749 last quarter, and 744 for the third quarter a year ago. Since the onset of COVID, our focus has been on enhancing our balance sheet and further strengthening our capital and liquidity positions. Most recently, we closed on a $399 million reinsurance-linked note transaction, increased our credit facility to $625 million and generated $385 million in net operating cash flow during the second and third quarters combined. As a result of these actions and including our $440 million capital raise in May, we now have access to over $1.1 billion of incremental capital versus where we were at March 31st. From a PMIERs perspective, we remain well positioned at September 30th. After applying the 0.3 factor for COVID-19 defaults, Essent Guaranty’s PMIER sufficiency ratio is strong at 156% with $981 million in excess assets. Excluding the 0.3 factor, our PMIER sufficiency ratio remains strong at 132% with $657 million in excess assets. Note that the PMIERs excess does not include the $685 million in cash and investments at the holding company nor the capital credit provided by our October reinsurance-linked note transaction. Essent Guaranty remains the highest-rated model line in our industry at Single A by A.M. Best, and A3 and BBB plus by Moody's and S&P respectively. On the Washington front, we continue to believe that Essent and private mortgage insurance are well positioned regardless of the outcome of the election. As mentioned, housing has been a bright spot in the economy during COVID-19 and private mortgage insurance plays a key role in facilitating homeownership. Certainly, as the political landscape begins to take shape over the coming months, we will focus on any new initiatives pertaining to housing finance and implications for our business. Finally, our bi-managed and distributed operating model provides us confidence in managing our business through cycles and mitigating franchise volatility. In connection with this confidence, along with our strong capital and liquidity positions, our board of directors has approved a quarterly dividend of $0.16 per share to be paid on December 10th. We will evaluate future dividends as we continue to navigate the COVID-19 economic environment. Now let me turn the call over to Larry.

Thanks Mark, and good morning everyone. I will now discuss our results for the quarter in more detail. For the third quarter, we earned $1.11 per diluted share compared to $0.15 last quarter and $1.47 for the third quarter a year ago. Weighted average diluted shares outstanding for the third quarter 2020 were 112 million shares, up from 103 million shares in the second quarter due to the full quarter impact of our equity offerings in May. Net earned premium for the third quarter of 2020 was $222 million, which represents an increase of $19 million or 9% from $203 million in the third quarter of 2019. Third quarter earned premiums are up $11 million compared to the second quarter of 2020, primarily due to a 9% increase in average insurance in force. The average net premium rate for the U.S. mortgage insurance business in the third quarter was 46 basis points, down from 48 basis points in the second quarter of 2020 and 49 basis points in the third quarter of 2019. The decrease compared to the prior quarter is primarily due to a 1 basis point decline in the base premium rates and a reduction in single premium cancellation income of $2.1 million. Single premium cancellation income contributed 5 basis points to the average net premium rate in the third quarter, while ceded premiums reduced the premium rate by 5 basis points. Note that these rates exclude the impact of premiums earned by Essent Re on our GSE risk share transactions related to the ongoing COVID-19 pandemic. During the third quarter, we received 12,614 new notices of default, which is down 66% compared to 37,357 defaults reported in the second quarter. Due to the lower number of default notices during the third quarter, the provision for losses and loss adjustment expenses was $55 million compared to $176 million last quarter. Also as a result of lower defaults, at September 30th, our default rates declined 65 basis points to 4.54% from 5.19% at June 30th. Since April 1, 2020, we've assumed that all reported new defaults relate to COVID-19. For these defaults, we continue to use a 7% claim rate assumption to provide for losses and loss adjustment expenses. This compares to an approximate 9% claim rate, which was used in the first quarter for early stage defaults prior to the onset of the pandemic. We believe programs, such as the federal stimulus, foreclosure moratoriums and mortgage forbearance may extend traditional default to claim timelines. Because of this, we are estimating a lower claim rate on COVID-19 defaults in our historical experience where borrowers did not have access to these types of programs. As of September 30th, our consolidated reserve for losses and loss adjustment expenses was $308 million. Of this amount, $247 million relates specifically to the COVID-19 defaults reported to the company in the second and third quarters of 2020. $12 million of these reserves were ceded under the quota share reinsurance agreement. The COVID-19 related reserve recorded in the second quarter was $189 million. Note that we did not adjust this reserve in the third quarter as this amount continues to represent our best estimate of the ultimate losses to be incurred for claims associated with the second quarters default. Other underwriting and operating expenses declined $2 million to $37 million in the third quarter of 2020 compared to the second quarter. The expense ratio was 16.7% in the third quarter compared to 18.4% in the second quarter of 2020 and 20.4% in the third quarter a year ago. The effective income tax rate for the nine and three months ended September 30th was 16%. The consolidated balance of cash investments at September 30, 2020 was $4.7 billion. Essent Group Limited paid a quarterly cash dividend totaling $17.9 million to shareholders in September. As Mark noted on October 14th, the company executed an amendment of our credit facility, which provided for issuance of an additional $100 million term loan and an increase in the revolving component of the credit facility to $300 million. The proceeds of the additional term loan, as well as cash at our holding company were used to pay down all amounts drawn under the revolving credit facility. Accordingly, we currently have approximately $580 million of cash and investments at the holding company and $300 million of undrawn capacity under the revolving credit facility. The amended credit facility matures on October 16, 2023. On October 8th, we closed our second Radnor Re insurance-linked note transaction of this year, which provided for $399 million of reinsurance protection on approximately $13 billion of risk in force. This transaction pertains to our new insurance written from September 2019 through July 2020, which was not previously covered by our quota share reinsurance agreement. Now let me turn the call back over to Mark.

Thanks, Larry. In closing, while the COVID-19 operating environment persists, we were encouraged by our financial results and the lower number of new defaults reported to us during the third quarter. Even though our outlook on the economy remains cautious, we are confident in managing our business during these uncertain times. With a strong housing backdrop and robust levels of high credit quality new insurance written, our business is operating on all cylinders. Given the measures that we've taken in strengthening our financial and liquidity positions along with having 95% of our portfolio reinsured, the economic engine of our franchise is firmly in place. Now, let's get to your questions. Operator?

Your first question comes from Douglas Harter at Credit Suisse.

Mark, can you talk about the competitive dynamic that you're seeing for writing new business? You guys have been quite successful following your capital raise in writing a lot more business than the industry. And just if you could shine some light on the competitive nature of it?

I mean, Doug, I don't think the competitive nature has changed too much. Although, there's been some changes in the second and third quarter, which I think resulted in higher market share for us. You had a few of the mortgage insurers kind of really back down for credit or capital reasons, and we mentioned this on the second quarter call. I think just our strong balance sheet and liquidity enabled us to probably write more business and take advantage of those opportunities. We're basically open for business. And again, a few other companies backed down which we were able to take advantage of. And I think it's just a good signal of the strength of the franchise. Overall, just in terms of the market, it's very large. So all the mortgage insurers are writing a lot of business. I think the pricing levels remain elevated from a unit economics basis. They're pretty strong, pretty consistent with the 12% to 15% kind of returns that we look for. We continue to grow insurance in force and grew at 19% year-over-year. So I think it's a healthy environment. And a lot of that is because housing is healthy. I mean, strong demand for housing, both with the millennials as we spoke about and then you're seeing kind of the impacts of COVID. I mean, you’re seeing more folks work from home, so they need a bigger house. Maybe the kitchen table isn't the perfect home office anymore. You're seeing folks leave the city probably a little bit earlier. You're seeing people move out, move further on the outskirts of cities, again, with telecommuting makes it easier to live further from the home office. And I think even post-COVID, the work environment is going to change. So you're going to see more kind of a hybrid type model. All these things are positive for housing. Low rates have clearly driven mortgage origination. So we're really the beneficiary of all that. So I think that's much larger than kind of what the competitive environment is for repricing. I think, at some point, sometimes we get too caught up in some of that minutia, so to speak, and not look at kind of the bigger picture, which is we really follow where housing is going and housing in the current environment is quite strong.

And I guess just to follow up on that, now that you kind of had another quarter of market share gains, and where the competitors were backing down, any thoughts as to whether any of that is kind of sticky and your longer-term view as to the share that Essent can get has changed?

No, not really. We want to maintain our long-term goal of 15% to 16% market share, which is roughly where we are now with about 15% of insurance in force. This is a commodity business, largely driven by pricing at the borrower level and the remaining rate card. I expect competition to remain fierce, but we aren't sure where our share will end up in the fourth quarter since we only just received the latest results. As for pricing, the business is evolving into a more opaque system with delivery at the borrower level. Many senior managers at mortgage banks don't even know who is obtaining mortgage insurance, as it's a situation where the best price wins for the borrower. That's beneficial for borrowers, lenders, and mortgage insurance companies, enabling us not to always offer the lowest price. Essent serves as a risk management tool, helping us shape our portfolio. Every mortgage insurance company has been adjusting pricing since COVID hit, showing the industry's ability to quickly respond to changes. If we had rate cards three years ago and wanted to adjust pricing, it would've taken months. Now, most companies have adjusted pricing within four to six weeks, marking a fundamental change in the industry. Looking ahead, whether there will be a PMIERs increase or a tax rate change, the industry is positioned to adjust prices more swiftly than in the past. The power to set prices has shifted more towards mortgage insurance companies than investors may realize. Pricing adjustments depend on unit economics, which significantly influence overall pricing. There's a misconception that people are still viewing the old pricing environment. For example, last summer, we increased pricing on about 6% to 8% of our insurance in force in areas with higher default rates. This indicates a correlation between unemployment and home price appreciation, allowing us to adjust our pricing accordingly. If we can secure that business at higher rates, that's advantageous. If another company can offer a better rate, that's also acceptable. In the long term, our pricing engine represents a significant shift, alongside reinsurance's role in stabilizing our balance sheet. The changing capabilities of pricing engines are becoming a close second in transforming the business.

Your next question is from the line of Rick Shane with JP Morgan.

Mark, you’ve raised some intriguing points regarding the detailed approach you’re taking. As we look ahead and consider the evolving landscape, it's clear that not all credit will be uniform, and some distortions are likely to arise. As you think about how to further expand your portfolio, where do you see the best prospects for improved credit, and where do you perceive the greater risks in the new post-COVID environment?

I believe the answer lies in enhanced analytics. In the past, we based our pricing on FICO scores and loan-to-value ratios, but now we are considering additional factors like MSA and DTI along with other established metrics. The next step is to adopt even more advanced analytics. Different types of borrowers, even those with the same 760 credit score, will perform differently; for instance, a seasoned borrower with a decade of job history contrasts with a recent graduate who has a thinner credit file. Understanding these differences is crucial, as they demand distinct pricing strategies. Until now, we lacked the technology to incorporate a wide range of factors into our pricing and present them at the point of sale, but that has changed. Moving forward, analytics will be pivotal in differentiating mortgage insurers. The traditional model of personal relationships leading to significant volume allocation is outdated and evolving. Over the next few years, we will see this shift. The future of our business will increasingly focus on leveraging analytics, managing costs, and capitalizing on technology, similar to the models used by Geico and Progressive, or the credit card industry. Historically, the industry’s technology constraints, particularly on the lender side, prevented the implementation of more precise pricing at sale points. However, systems like Optimal Blue, Ellie Mae, and Compass are now making this possible. Currently, about 70-75% of industry volume is likely processed through these systems, with 25% still relying on traditional methods. Over time, we anticipate a significant shift towards complete reliance on technology, benefiting those who can effectively use analytics and technology.

And you've understood the question exactly in the spirit and the thought process behind it, I agree with you that there is going to be output to be generated, identifying and above-average 760 borrower versus a below-average 760 borrower. With that in mind, as you develop alternative sources of data. How easy is it to integrate new data strings into your underwriting API?

Five years ago, would have been impossible. Today, it's available and it’s readily accessible.

Your next question is from the line of Bose George with KBW.

I just wanted to ask first about the OpEx line, the expense ratio obviously is very low at 17%. So how should we think about that, the trend for that line item?

Bose, again, I think we're pleased with it. The line's moving, it's been going up for a long time. So it's nice to kind of see it go the other way. A couple of moving parts there. Clearly, now in a remote environment and again, we're not remote. I mean, our home office is actually back in and we've been back in since Labor Day and we're on kind of an alternative schedule and complying with all the safety standards. So we're kind of back in the office and being very productive in terms of looking forward to build a business, but we haven't done a lot of travel. So we saved a ton of money on travel and it's something, quite frankly, you're going to re-examine going forward. In terms of leveraging travel, technology resumes and you're not going to have to go to every single meeting and travel as much as you did before. You still going to go out and meet people and meet investors and meet lenders, absolutely. But you're going to be able to do it a little bit more judiciously and I would say more efficiently. And then the other moving piece is the ceding commission on the quota share. And again, that's a service we provide to the reinsurer and it's a way to leverage our expenses. And you've heard me say just earlier, as this business becomes more analytical and pricing expenses are key. So right now we have the lowest expense ratio in the industry. And we almost have the lowest nominal cost too. I mean, there's one other mortgage insurer that has slightly lower operating expense levels, but their expense ratio is obviously significantly higher. So it's something we focus on all the time. There's the old saying the best risk managers are the best cost managers and we're focused on it. And I think part of that's our heritage. We started the company, a lot of the senior team put their own money into the business. I still sign checks over a certain size. And to me that's a long-term advantage. It's one of the advantages we've had for a while and I think it's starting to actually widen when you start to examine expenses across the industry.

And then actually I wanted to go back to your question just on some of the market dynamic. You just talked about the bulk market. Has that grown as some of these big lenders who use that have become bigger? And then your comment about some of the mortgage insurers backing away a little bit. Was it more in the bulk market or was that kind of a broader comment?

There seems to be a misunderstanding about the bulk market. I would categorize it into lenders who utilize the engine and those who still rely on cards. There are bulk cards that are bid out and also negotiated cards, which serve as another pricing strategy. This segment accounts for roughly 25% of the market. In the bulk market, it's clear that we're the only mortgage insurer involved, as no one else has claimed competition in this area, which we find a bit amusing. Recently, two large lenders approached us this year—one in the second quarter and another in the third—because another mortgage insurer was unable to meet their commitments. We stepped in at a higher price as we raised the cards, which is helping us gain some additional market share. That opportunity was recently bid out again, and we noticed a change in pricing. One of the other mortgage insurers hinted at this during the call, and we decided to move away from that. We believe that market share can fluctuate, and whenever we identify opportunities to take on risk at favorable pricing, we will pursue them, but we’re not desperate. After a decade in this industry, we plan to continue for another ten years. We don’t get overly concerned about market variability, but we also remain open to competition. Our primary focus is on increasing insurance in force while maintaining good economics. Over the long term, we do want to transition more towards the engine, but these changes take time and don’t happen instantaneously. The fact that those two lenders reached out to us is a strong indication of our financial stability and the flexibility inherent in our model.

Your next question is from the line of Mark DeVries with Barclays.

Mark, could you talk a little bit about the demand you saw for the latest ILN? How that compares to demand kind of pre-COVID, and the implications longer-term for the ability to access that market through cycles?

We observed that demand was quite strong, though with slightly higher pricing. It hasn't returned to pre-COVID levels, and we adjusted our approach accordingly. For instance, in our west ILN deal, we moved from a 3 to 6 and removed the band. This adjustment was mainly to minimize the premium basis points we would need to forgo. Overall, with our equity raise, we can retain more of the first-loss fees even in our previous business, despite the revisions we've made regarding defaults, and we don't anticipate reaching those prior levels. From our perspective, we've made a careful risk-reward trade-off, focusing on managing our unit economics, and we were satisfied with the demand. Additionally, it seems that every mortgage insurer has entered the market, which is promising. Close to $13 billion to $14 billion of mortgage insurance linked notes have emerged, which is beneficial. The more participants in that market, the better it is for liquidity, and this aspect is crucial to our model. The swift and robust return of that market is a positive sign for the long term.

And then what was of home price appreciation are you guys assuming in current reserves? And if we remain on trend, kind of what are the implications for the current reserve levels?

I believe we have been conservative with our reserves. Home price appreciation represents a unique opportunity for us. For the second and third quarter, we set the reserve at 7%, which aligns with our normal default severity of about 100%. Looking ahead to the next six to twelve months, as forbearance ends and borrowers may face foreclosure, we see the potential for some not to default, potentially selling their homes instead. This perspective is informed by our current defaults, with a mark to market close to 80%. Even if home prices remain flat or decrease slightly, the equity built up can help limit defaults. Our estimate remains at 7%, though it could rise to 10%, with lower severity still leading to similar outcomes, all of which we have taken into consideration.

Your next question is from the line of Jack Micenko with SIG.

Mark, I was curious how you think about, it sounds like Douglas questions for both business and from competing for it on that basis. How much does persistency or the forward-view persistency factor into your decision, meaning on a per unit basis you make a policy today and that policy on the books for six to eight years instead of three to four. Does that change your pricing or your inclination so that you might increase a little more today because while it onset that per unit transaction may be a little bit lower the duration of it, it's your back into or above sort of your target return requirements?

On the singles business, while that has diminished, we definitely need to consider rates, visits, and LPMI. Shorter policies tend to offer better benefits and unit economics. Regarding BPMI, we're cautious about making predictions on interest rates, as it's not something we excel at. We've maintained a consistent policy duration. When we examine persistency in relation to new originations, we see a correlation, although it's not a direct one. With over 500 billion in new insurance written this year, we anticipate persistency will be in the 60s. Looking ahead, if new insurance written remains robust, persistency is likely to stay low. I'm not avoiding the question; rather, we aim to be generally accurate in our pricing decisions instead of being precisely wrong. Sometimes we can become overly precise when considering these factors.

It seems that credit continues to be the main factor influencing our operations and pricing strategy. Larry, I'd like to ask you about the investment yields for all these companies this quarter. Where are you allocating funds in relation to the portfolio, and how should we consider the potential for further yield compression in the future? Additionally, it's worth noting that you have more cash available due to the capital raises conducted over the summer.

Jack, I mean rates are down. So our yield on new investments purchased during the quarter, the most recent quarter, is about 1.6%. So you're seeing some rates go down. We've invested something shorter into their average duration of the portfolio; it’s come down as well. But we really are continuing to focus on the quality of the investment portfolio and managing a really high-quality investment portfolio but you'll go down. And as some of the existing fixed income securities mature and we reinvest that at some of the lower yields, you'll see the average yield go down. But we continue to generate significant cash, as Mark had mentioned in his prepared remarks. So as a result, we would see the average balance going up. And I think that will drive a nominal increase in investment income ordinarily, but yield will continue to go down in this rate environment.

Again, it's really a philosophy. So we're trying to keep the investment portfolio as clean as possible. And I think that turned out to be a benefit, firstly, when COVID first hit. Because remember companies tend to, and it's natural, your reach for yield when things are good. But with a business like ours with talking 60%, 70% operating margins, the investment income, the reach for that is a little bit like taking pennies up in front of a steamroller, you don't really get paid for it. And then when things go bad you really start to lose focus because you have to manage those type of investments. So we're going to try to isolate the mortgage insurance business, keep it super clean in terms of the investment portfolio. So we're just going to follow rate. So if rates go down, we're obviously going to see lower yields. But again, you saw some of the benefits when new business is being originated. So again, there is a correlation amongst all that but we're trying not to win every event there.

So it sounds like maybe dollars unchanged, because the offsetting growth versus lower yield…

Jack, I think that's fair. And again, the yield actually for the third quarter is about 1.3% for new purchases…

Your next question is from the line of Mihir Bhatia with Bank of America.

I want to revisit the earlier comments briefly. Can you clarify something for me? My understanding is that you always set prices based on a normalized environment, meaning that during good times, you don’t reduce prices. After COVID, you raised your prices, and I assume that was partly due to uncertainty regarding credit. However, housing has remained resilient, providing some support. If we find ourselves back in a pre-COVID scenario with solid housing trends, does that imply we could expect returns of around 12% to 15%, or am I missing something? Considering that in the next one to three years, if we increase pricing and with government support for housing, why are the returns projected to be lower or just 12% to 15%? Why couldn't they be higher?

We typically make three to four-year predictions when planning the business. When we adjust pricing within that timeframe, it's often based on home prices being flat or slightly decreasing. We're seeing that trend continue in the first half of the year, and the outlook remains uncertain. That's why we take a cautious approach. If you project it out, it might appear more favorable than 12 to 15 percent, but we must acknowledge the current reality. The unemployment rate is decreasing but still hovers around 7%. Historically, we’ve priced within this range, and if the outcomes improve, we anticipate better returns. However, it’s challenging to incorporate too many variables into our models, especially in this environment. The question is whether prices will hold steady if home prices stay strong, and I believe they will. The situation is complicated by the nature of the market; mortgage insurance companies can adjust pricing, and it’s quite transparent since providers share monthly market pricing data. Competitors are generally aware of the same market conditions. Therefore, I think our pricing power will sustain in this range. Although some mortgage insurers might adjust pricing slightly over time, the fundamental factors are currently supportive of maintaining pricing at this level.

And just one last question for me. In terms of your October trends, it looked like the insurance in force growth was pretty healthy 2% month to month. Is there anything special worth calling out of October that we should be aware of? That's all for me. Thank you.

No, I mean, just to comment is the new insurance written market and the industry was strong in October, so I'm sure others did just as well. And our insurance in force is a little younger. So we're growing it. And it's a little smaller than some of the other guys, so they're the victim of kind of large numbers. So I think the new insurance written market for October for the industry remain quite healthy.

Your next question is from the line of Phil Stefano with Deutsche Bank.

Going back to the questions earlier around risk-based pricing. Are there metrics that you're capturing that you're not using right now? And just trying to think about the importance of analytics. And I'm wondering, to the extent you have other data points that you're not using in pricing but maybe you're collecting to help augment the analytics that you could do moving forward?

I don't want to delve into specifics. We currently have Essent edge 1.0 available in the market, and we are continuously working on enhancements to it. We are definitely exploring and testing improvements to the model, which we will implement gradually. I expect other mortgage insurers are likely doing the same. This area is becoming more analytical, and we are well-suited for it. We've made investments and have brought in people with credit card experience to analyze various aspects. We are not creating anything entirely new, but rather applying trends and analytics from other industries to our business. This shift towards a more analytical approach seems promising for the industry, as it may lead to better long-term returns and reduced volatility. When considering the hedging on the back end, particularly regarding reinsuring mezzanine risk that contributed to volatility during the downturn in the great recession, we've managed to hedge that effectively. Factors related to the ILN market and the quota share market have been concerning, as some mortgage insurers have placed caps there. It's essential to limit the liability on the balance sheet since credit risk is the primary challenge for mortgage insurance businesses. Changes on the front end are encouraging for the industry, and as investors begin to recognize these developments and see tangible evidence, such as on the ILNs, I believe it will also become apparent on the pricing side. This differentiation could further distinguish some of the mortgage insurers from one another.

I'm talking about the ILN. Structurally, can you just help me understand how they work, when we drop below the rate at which the amortization of the coverage freezes? I think it was somewhere in that 5% range once the default rate got above that, the ILN coverage stops amortizing down. If we drop below that rate, is there a one-time catch up or like a quick change in the amortization to get the portfolio back into alignment, and where are you going with it?

They just start to amortize again. So basically think it just the clock starts again so that there's no catch-up, it just goes back to its normal kind of amortization schedule.

Okay, all right.

We can go offline and walk you through it, if you want that. We'd be glad to do that.

Yes, perfectly. Okay. And the last thing I have for you, feel like it's been a while since I asked about the internal quota share. And maybe it's early days, just given the uncertainty that COVID has before us. But if you could just talk about how you contemplate that in the broader capital management plan, any thoughts there would be appreciated?

We have certainly discussed this over the last couple of months in light of the election. I believe it represents another positive aspect of our model, as we have the potential to adjust our approach, although we haven't done so yet due to capital considerations. However, given our capital positions, we are in a solid position. We'll wait to see the outcome of the election, particularly regarding corporate taxes, as we have the flexibility to mitigate some of any potential tax increases. If tax rates remain stable, we might consider lowering our effective tax rate even further based on our capital position.

Next question is from the line of Geoffrey Dunn with Dowling and Partners.

I wanted to go back to the investment yield discussion and ask, how does your yield expectation play into how you set pricing? And Mark, as you said it's not always good to be too precise, is it one of those factors? Or is there a point at which yields drop enough that you have to think about not hitting the targeted returns versus what you assumed in your pricing scenarios?

We utilize a normalized yield, which has been a long-term yield we've relied on for the past seven to eight years. We adjust it slightly based on the current situation. We do not account for higher yields, and when yields are lower, we acknowledge that too. When I mention the range of 12% to 15%, it indicates that if yields are somewhat lower than the normal term, that is already considered in our calculations.

So if we're envisioning an environment that rates could stay at current levels through '21. Do you think the industry needs to rethink pricing just based on that, or is it really more of a longer term view?

I think it's a longer-term perspective. We certainly wouldn't adjust our pricing based on anticipated investment yields; I would prefer to accept a lower return. Our focus is on analyzing consumer credit and accurately pricing for long-tail risk rather than just responding to changes in investment yields. I don’t believe it significantly impacts our overall performance. If you look at our profit and loss, while investment income is important and contributes to revenue, it is not the primary factor in our long-term profitability.

And Geoff, just echoing Mark's point. I mean, premiums are 12 times investment income, we're just built a lot different than many other insurance companies. Premiums and insurance in force, that really drive economics of the business.

At this time, there are no further questions. I'll now turn the call back to management for final comments.

Well, thanks everyone for your participation today and enjoy your weekend.

Thank you for joining today's conference call. You may now disconnect.