Earnings Call Transcript - ESNT Q1 2023

Operator, Operator

Hello, and welcome to the Essent Group Ltd. First Quarter Earnings Call. All lines are muted to avoid background noise. After the speakers' remarks, we will have a question-and-answer session. I will now turn the conference over to Phil Stefano. Please go ahead.

Phil Stefano, Executive

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 and CEO

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. Furthermore, I am 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 of our capital position. Now let me turn the call over to Dave.

David Weinstock, CFO

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the first quarter, we earned $1.59 per diluted share compared to $1.37 last quarter and $2.52 in the first quarter a year ago. As a reminder, our first quarter 2022 results benefited from the release of approximately $100 million of reserves associated with COVID-related defaults from 2020. Net premium earned in the first quarter of 2023 was $211 million and included $14.7 million of premiums earned by Essent Re on our third-party business. The average premium rate for the U.S. mortgage insurance business in the first quarter was 40 basis points, and the net average premium rate was 34 basis points, both consistent with the fourth quarter of 2022. Net investment income increased $5.4 million or 14% in the first quarter of 2023 compared to last quarter due primarily to higher yields on new investments and floating rate securities resetting to higher rates. Other income in the first quarter was $4.9 million, which includes a $368,000 loss due to a decrease in the fair value of embedded derivatives in certain of our third-party reinsurance agreements. This compares to a $6.5 million decrease in the fair value of these derivatives in the fourth quarter of 2022. The provision for loss and loss adjustment expenses was a benefit of $180,000 in the first quarter of 2023 compared to a provision of $4.1 million in the fourth quarter of 2022 and a benefit of $106.9 million in the first quarter a year ago. At March 31st, the default rate was 1.57%, down nine basis points from 1.66% at December 31st largely due to favorable cure activity on prior year defaults. Other underwriting and operating expenses in the first quarter were $48.2 million, an increase of $1.3 million over the fourth quarter of 2022 and included approximately $3.4 million of transaction costs associated with our announced title business acquisition. The expense ratio was 23% this quarter consistent with the fourth quarter of 2022. We continue to estimate that other underwriting and operating expenses will be approximately $175 million for the full year 2023, excluding expenses associated with the announced title business acquisition and related transaction costs. During the first quarter, 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 U.S. holding company. Based on unassigned surplus at March 31st, the U.S. mortgage insurance companies can pay additional ordinary dividends of $292 million in 2023. As of quarter end, the combined U.S. 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 U.S. mortgage insurance business has grown statutory capital by $148 million while at the same time paying $310 million of dividends to our U.S. holding company. Now, let me turn the call back over to Mark.

Mark Casale, Chairman and CEO

Thanks Dave. In closing, our balance sheet and liquidity remain strong, while higher interest rates continue to benefit the persistency of our in-force book and investment income. Also, the quality of our portfolio continues to drive positive credit performance. Looking forward, our franchise is well-positioned and we remain confident in the strength of our operating model. Our strong financial results continue to generate excess capital, which we will deploy in a balanced manner between investment in growing our business and distribution to our shareholders. Now, let's get to your questions. Operator?

Operator, Operator

Thank you. We will now start the question-and-answer session. Please hold for a moment while we prepare for your first question. Your first question comes from Mark DeVries at Barclays. Please go ahead.

Mark DeVries, Analyst

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 driven 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 and CEO

Sure, Mark. I understand I may sound repetitive, but market share tends to fluctuate from quarter to quarter. Recently, I reviewed our performance over the past seven years and found that our average market share was 16%. I expect it to be around that figure by the end of this year. The first quarter is often a bit higher, but it's important to remember that this is a small market, so the difference between the top and sixth market shares is only about $5 billion, which is quite narrow. As a result, small changes can have a significant impact. There's nothing particularly noteworthy right now, as mentioned in the script. We are continuing to raise rates, and I anticipate we may increase them a bit more since we have the capacity to do so. Achieving the number one market share isn’t our primary goal; instead, we see this as an opportunity to potentially raise prices across the board, particularly in certain areas. Our aim is to return to being more in the middle of the pack if possible. Regarding unit economics, I believe they are quite strong. We aim for a target between 12% to 15%. Due to the rise in investment yields, we are likely closer to the 15% mark now, compared to about 12% a year ago. There has been a substantial increase in pricing, reaching levels similar to those in 2019 for new production. Given the flat outlook on home price appreciation, I think this is justified. I previously mentioned wanting to see pricing starting with a four, and it seems we are approaching that, which is encouraging. In the long run, this positions the industry well for a robust balance sheet because we need to be able to pay claims during challenging times. Over the past 12 to 18 months, we felt pricing was compressed, but it has started to recover, and we expect it to maintain this level. The industry’s discipline is stronger than many may realize, as evidenced by the leadership backgrounds of other companies. Therefore, I feel optimistic about the pricing environment. It's also worth noting that for borrowers, the nominal cost of mortgage insurance remains very efficient and a good value. We are successfully helping first-time homeowners, and the process remains quite efficient.

Mark DeVries, Analyst

Okay. Great. Thank you.

Operator, Operator

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

Bose George, Analyst

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

David Weinstock, CFO

Yes, that's a great question. There are a few factors at play here. We mentioned in the fourth quarter that we took the opportunity to reposition our portfolio. We exited some positions and reinvested at higher rates. Currently, we're investing at a 5% rate in the first quarter. Looking ahead, if you analyze the yield curve, we are likely to see consistent increases year-over-year. However, I doubt that the sequential changes will be as significant as what you've observed in the past.

Bose George, Analyst

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 much in terms of market share?

Mark Casale, Chairman and CEO

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, Analyst

Okay. Thanks.

Operator, Operator

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

Mihir Bhatia, Analyst

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 and CEO

I think it's just the usual considerations, Mihir. Looking specifically at collateral, we plan to adjust pricing in certain markets where we have varying expectations for home price appreciation and its trajectory. Overall, we anticipate a relatively flat market nationwide over the next three to four years, but there will be specific areas where we need to increase prices. Regarding core credit, it really hinges on layered risk. We are being cautious about factors like high debt-to-income ratios, lower credit scores, and higher loan-to-value ratios, which are standard indicators we evaluate. With our pricing engine, we are better positioned to assess these elements compared to our previous model. Not all high debt-to-income ratios are the same; some present good opportunities while others should be avoided. It boils down to a detailed analysis at the loan level.

Mihir Bhatia, Analyst

Understood. Regarding market share shifts, I’m not overly concerned about fluctuations in a single quarter. I'm more interested in the overall growth trends in your portfolio. We typically receive data at the total New Issuance level, but I wonder if you could share insights from your internal metrics on where your significant growth occurred this quarter. Did it happen across the board, or were there specific channels that contributed?

Mark Casale, Chairman and CEO

Our new insurance written remained unchanged from the previous quarter, so we did not observe any significant growth. Some lenders experienced increases while others declined, and the changes were lender-specific. For instance, a major mortgage bank sold its wholesale division to another firm. There is usually a rotation among top lenders. Additionally, a large refinance-driven company significantly reduced its origination last year, leading to fluctuations among lenders. Different mortgage insurers may have varying pricing for certain lenders, but for the most part, especially through our platform, it is primarily borrower-specific. Consequently, we did not identify any notable patterns, nor did we observe any spikes, given the stable new insurance written across the quarters.

Mihir Bhatia, Analyst

Okay. Thank you.

Operator, Operator

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

Geoffrey Dunn, Analyst

Thank you. Good morning.

Mark Casale, Chairman and CEO

Good morning.

Geoffrey Dunn, Analyst

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 is 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 and CEO

Yes, that’s a good question. We maintain our cumulative loss assumption without any changes. Generally, we've been consistent, and with the new engine, it’s more specific to loan levels. We’re typically in the 2% to 3% range, influenced somewhat by our home price appreciation outlook. When pricing was at its lowest around 12 to 15 months ago, I focused more on returns. We were in the 12% to 15% range, mostly at the lower end, but there's potential to stretch it with CRT and leverage considerations. You can't escape the fundamental pricing dynamics. When pricing dipped into the 2% range, which we noticed with one large lender bid that we didn’t win, it necessitated very aggressive assumptions. Honestly, I’m not sure even a 1% assumption would suffice. The cost of capital and origination plays a critical role here. This is why our market share declined significantly during the third, fourth quarters, and into the first quarter of last year. As we mentioned, we felt it was too low. The uncertainty in the market last year likely prompted some to raise their pricing. One significant mortgage insurer withdrew from the market, and while we’re a leading indicator, they were as well. Their exit created opportunities for others to raise prices. Overall, this development is encouraging. Ultimately, we need a strong balance sheet to handle claims and maintain flexibility at the PMIERs and state levels. Chasing long-term strategies like this isn’t beneficial for the industry. So, I'm optimistic about the current pricing levels. Additionally, with the current 10 basis point pricing we're offering borrowers, we believe it's cost-effective, especially given today’s 6% mortgage rates. We'll see how this evolves, but we’re certainly optimistic about current industry pricing levels.

Geoffrey Dunn, Analyst

Okay. Regarding Essent Guaranty on the statutory side, you've maintained dividends at a very low level for at least the last five quarters. Considering your maturity earnings power and factors such as economic changes, do you generally anticipate maximizing ordinary course dividends on an annual basis as a rule of thumb, or is there any guidance you can provide regarding cash inflows on the Holdco?

Mark Casale, Chairman and CEO

Yes, that's a great question. Considering the current environment, we will approach this situation cautiously, likely on a quarterly basis, while keeping an annual perspective regarding guaranteed outflows. We fully expect to reach our maximum capacity, which amounts to another $292 million this year. The rationale behind this is that it's also straightforward to reduce it if necessary. We prefer to see cash available and we think it's beneficial for investors to observe this cash at the Holdco. Whether that cash is used for redistributions to the group through share repurchases or dividends, or reinvested at the holdings level within the U.S., it presents a positive outlook for investors. Thus, in light of the current environment, we anticipate being able to increase our upstreaming activities.

Operator, Operator

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

Unidentified Analyst, Analyst

Good morning. It's Melissa on for Rick today. One of our questions has 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 and CEO

That’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. 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 chewed through it relatively quickly I think in less than a year. So that caused us to kind of take a step back. And I think now we're going to be a little bit more opportunistic about it, which will have much more of an overlay. So as we look and it's really going to be quarter-by-quarter, 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 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 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 are always 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, 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 and CEO

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 is shocking, is actually the goal all along. But it got to be just kind of chasing revenue and chasing exits as we like to 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, Analyst

Thanks, Mark.

Operator, Operator

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

Doug Harter, Analyst

Thanks, Mark. Could you discuss the current state of the reinsurance market, specifically how excess of loss pricing is performing and how that compares to where you believe insurance-linked notes would be executed at this time?

Mark Casale, Chairman and CEO

I think looking at the market, XOL still trades a bit more efficiently, while ILN pricing is hard to assess since no one is currently in the market. It's been since May, and to my knowledge, MI hasn’t issued an ILN. From our perspective, we plan to continue diversifying our capital sources. For reinsurance, our primary focus is on the sustainability and availability of reinsurance rather than the pricing of individual deals. While this may not be the approach of others, it is crucial for us. Over the long term, the availability of reinsurance is an essential element of our capital structure and serves as our leverage. This is why we maintain low leverage at the Holdco. We view reinsurance as a form of leverage that provides us with additional options in case of any disruptions in the reinsurance market. So far, in our six years in the reinsurance market, it has only faced two major tests. The first was during COVID when the ILN side shut down but later recovered. There were also XOL and quota share deals completed that year. I believe last year posed an even greater challenge with mortgage rates jumping from three to six and significant rate volatility causing spreads to widen. There was considerable media focus on high-HPA and predictions of a housing market crash, which would negatively impact MIs. This perspective seems outdated and rooted in previous industry views. Nevertheless, ILNs were issued, and we completed both an ILN and XOL, as well as a quota share, albeit at slightly higher pricing. However, when averaging the pricing we've achieved over the last five or six years, it doesn’t seem particularly significant. Consequently, our focus is on the permanence and availability of reinsurance. As we approach eight, nine, or ten years in the reinsurance space, this will also influence how we consider cash at the Holdco. We regularly run various scenarios, including mild and moderate GSE-type scenarios across our portfolio each quarter. As we evaluate different scenarios, it’s essential to test what our capital structure would look like without reinsurance because its availability is uncertain. Reinsurance is vital for our funding and liquidity tests. If reinsurance continues to remain strong as it has over the past five years, we anticipate greater reliability in our capital and stress models going forward, which is encouraging. Therefore, I don’t focus too much on the inefficiency of ILN compared to XOL. We aim to leverage all three options and have reliable partners in both areas. On the ILN side, we collaborate with four to five top investors who are involved in nearly all of their deals, and we want to ensure they have suitable products available to purchase from us.

Doug Harter, Analyst

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 and CEO

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 ILNs 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.

Operator, Operator

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

Roland Mayer, Analyst

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 and CEO

Yes, Essent Re is outlined in the investor deck. It operates across three lines of business. The affiliate quota share is a significant asset for Essent Re. Additionally, they engage in a third-party business, primarily taking on risk share from the government-sponsored enterprises and their managing general agent operations. Revenue is largely from the GSE-related business and third-party premiums. They also generate investment income. We must maintain cash in the trust, so if we were to present a profit and loss statement specifically for Essent Re, the figure would likely exceed $70 million.

Roland Mayer, Analyst

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

Mark Casale, Chairman and CEO

I'm sorry, but taking a step back, the math is actually quite simple. We have $2 billion of risk in force as a third party, assuming we earn three points on it. The remaining income comes largely from fees associated with the MGAs. The key challenge is how to grow that $2 billion, which isn't straightforward and largely depends on the GSEs. Interestingly, if we look at our market share between the principal risk we take with the GSEs and the MGAs, we hold about 15% to 16% share. We're a significant player in that market, but our growth is closely tied to the overall market expansion. It's unlikely that $2 billion will increase to $5 billion; a rise to $3 billion is more plausible. We would need to explore opportunities outside the GSE business. We do engage in some business in Australia with a few MIs, but that remains relatively small. Thus, I would characterize our growth story as fairly contained, yet very profitable, with no strong push for expansion. When considering Essent Re, it has been a valuable addition to our franchise. We're fortunate to have started it with a great team, benefiting from the tax efficiency of the quota share, and the premiums offer another effective way to funnel capital to the Holdco. Overall, when combining our strengths, it's a critical component of our franchise.

Roland Mayer, Analyst

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 and CEO

I would say that on a collateral basis, we are held to a higher level than the typical reinsurer, which is generally in the 12% to 15% range with some fluctuations. However, on an economic capital basis, they are likely in the 15% to 20% range. We evaluate this more because we maintain the capital and trust, which represents the real capital. If we were able to assess it economically, it would be higher. Overall, it's quite favorable. We discussed this previously, including our ventures, and we have set a target of 12% to 15% across all the businesses we invest in.

Operator, Operator

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

Eric Hagen, Analyst

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 and CEO

No, not really. I think it's a bit like comparing apples and oranges. I understand that your perspective is largely influenced by MBS and interest rates, but our approach is primarily credit-driven. There is an interest rate factor in our pricing as it informs our view on duration, but it's fairly stable and doesn’t fluctuate significantly with interest rates. Therefore, it relates more to our credit outlook. If we look back at pricing from 2019, the returns today are likely higher, even though the pricing itself is relatively flat. It's important to remember that 2019 came after the industry experienced lower pricing following tax reductions. Comparing the pricing from 2019 to today, we are at a lower corporate tax rate now, and we have higher investment yields also. Additionally, the credit risk transfer is significant; most of our book wasn't even reinsured back then. So, when we invest today at prices similar to 2019, the unit economics, especially in terms of predictability, are stronger now than they were four or five years ago.

Eric Hagen, Analyst

Yes. That's helpful. Maybe I could sneak in one more here. I mean how are you thinking about the timeline to foreclosure or liquidation in this environment? Do you feel like that's changed meaningfully? And to the extent that it has changed does that show up as a driver for pricing in the reinsurance market?

Mark Casale, Chairman and CEO

I'm not certain about the reinsurance market in May, so you would need to consult the reinsurers for that. For us, it isn't a significant driver at this point. Forbearance is another key factor, which I mentioned earlier regarding the macro changes affecting the business, including the GSEs' quality management work and improvements in their systems. Forbearance is an effective tool for safeguarding borrowers. It's a starting point. Historical programs like HAMP and HARP tended to deal with issues after they occurred. Forbearance, which has traditionally been used during disasters like hurricanes, proved essential during COVID. The GSEs acted swiftly to implement forbearance measures during that time, which was highly commendable. Given the circumstances, where many couldn't work for months, the last thing anyone needed was a foreclosure notice. Evicting families does not benefit anyone—economically, socially, or otherwise. Developing innovative strategies to help borrowers remain in their homes benefits everyone involved. We witnessed this during COVID, and I anticipate that the new forbearance rule will include provisions for right party contact, allowing for six months of forbearance with the possibility of an extension. This gives borrowers a chance to recover, ultimately delaying foreclosure timelines. This shift may impact other businesses that depend on foreclosures. I don't think things will revert to the previous norm. It's similar to how many expected the ABS market related to sub-prime mortgages to bounce back post-crisis, which clearly did not happen. The GSEs are now the primary players, which ensures necessary standardization in mortgage origination. Forbearance will likely lead to more individuals staying in their homes. From Essent's perspective, we take first loss risk and hedge most of the mezzanine piece. Our main concern is the risk above that, which we need to reserve capital for. If borrowers stay in their homes longer, it reduces our expected losses, which is beneficial for our reinsurers as well. If you're in mezzanine protection and the first loss doesn't penetrate, it positively impacts catastrophe fees. At an investor conference last year, a larger investor questioned why we believed we wouldn't go out of business, revealing how little some understand our industry. We know this business inside and out, but many portfolio managers fall back on recency bias. Comparing today's mortgage insurers to those in 2007 is not a fair analysis. With current economic issues and challenges in the banking system and commercial finance, residential markets are among the most stable. Our portfolio is 95% GSE-backed with an embedded home equity mark-to-market of $75 million, and 80% of our book has rates below 5%, with 60% below 4%. This positioning feels favorable for investors despite the ongoing uncertainty. Overall, we are feeling quite optimistic given our current market position.

Eric Hagen, Analyst

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

Operator, Operator

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

Geoffrey Dunn, Analyst

Thanks. I just wanted to ask given the reinsurance conversations. 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 and CEO

Yes. Let me begin and then I'll hand it over to Chris, as he might have additional insights. The quota share arrangements are quite beneficial for us because they essentially involve a portion of our portfolio. Over the past year, reinsurers faced pressure as they recognized that the rates were more favorable than in other markets. This could be another factor contributing to the rising prices. As a result, we should be in a position to negotiate improved quota share agreements moving forward due to this pricing environment. The reinsurers may not be as concerned with the excess of loss or insurance-linked notes since they primarily focus on credit risk, which doesn't align well with our pricing model. Before I pass it to Chris, I want to note that spreads have widened on the insurance-linked note side, but we are only seeing minor changes—like a one basis point increase when we focus on premium rates. Last year, for one of our insurance-linked note transactions, it increased from around 4% to possibly 6%. Overall, we consider this a small cost to ensure the ongoing sustainability of that asset.

Chris Curran, President of 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 with some of the tailwinds that are going on in the MI business.

Mark Casale, Chairman and CEO

Yeah. To add to that, Geoff, from a valuation perspective, if you observe some of the large reinsurers, their investment performance has been exceptional over the past six to twelve months. Much of the credit goes to the strengthening of their core business, particularly in mortgage insurance, which significantly contributes to their premiums. As a result, they receive a much higher multiple for their insurance premiums compared to the originators of the product. This seems a bit upside down to me, but it highlights a clear difference in how investors are assessing the value of insurance premium cash flows. Reinsurers are valued much higher than primary insurers, and over time, these discrepancies usually tend to balance out.

Geoffrey Dunn, Analyst

Okay. Thanks.

Operator, Operator

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

Phil Stefano, Executive

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

Operator, Operator

This concludes today's call.