Essent Group Ltd (ESNT) 2016 Q3 法說會逐字稿

Good morning. My name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the Essent Group Limited third-quarter 2016 earnings conference call.

(Operator Instructions)

Chris Curran, Senior Vice President, Investor Relations, you may begin your conference.

Thank you, Rachel. 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 2016, 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 in our press releases for both the third and second quarters of 2016, as well as on our website.

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, 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 29, 2016, 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 today. I'm pleased to report that Essent had another strong quarter of financial performance, as the underlying fundamentals of our business remain solid. Portfolio growth, strong credit performance and a leverageable expense base continue to be the primary drivers of our high-quality and growing earnings. As a franchise that invests in US mortgage credit risk, we are well-positioned in growing our insured portfolio and generating strong returns.

We remain positive on housing, as low interest rates, affordability and supply-demand imbalances continue to support our view that the real estate cycle remains firmly in expansion. We also believe that favorable demographics, such as the millennials starting to reach their peak home-buying years, will continue to increase the demand for purchased mortgages. Since our franchise is weighted towards first-time home-buyers and purchased mortgages, we remain optimistic about our prospects.

As investors in mortgage credit risk, we continue to believe that Essent and our industry are well-positioned, given today's strong credit environment, and that industry pricing appears stable. Credit guard rails such as QM and improved quality assurances by the GSEs, lenders, and MIs have strengthened loan underwriting processes and the quality of loans being originated.

On the pricing front, the industry is now evaluating the context of the PMIERs, which shine a light on pricing and increased transparency around returns and capital management. From our standpoint we view the PMIERs which shine a light on pricing and increase transparency around returns and capital management. From out standpoint, we view the PMIERs as pricing guard rails, which are a long-term positive for our industry, policyholders and shareholders.

Now let me touch on our strong results. For the third quarter, net income increased by 46% to $60 million as compared to $41 million for the third quarter a year ago. On a per-diluted share basis, we earned $0.65 for the third quarter compared to $0.44 for the third quarter a year ago. Our annualized return on average equity for the nine-month period ended September 30, 2016 was 17.6%.

Our earnings growth continues to be driven primarily by our insurance in force, which grew 25% to $78 billion from September 30 a year ago. In addition, we continue to leverage our expense base and our portfolio credit performance remains strong, ending the quarter with a default ratio of 41 basis points and a weighted-average FICO of 749. Our combined ratio for the quarter was 34.1%.

Our balance sheet remains strong, with over $1.8 billion in total assets and over $1.3 billion of equity at September 30. Also, we grew adjusted book value per share, 21% on an annualized basis, to $13.76 compared to $13.08 at June 30.

In Bermuda, we remain pleased with Essent Re's growth as it continues to reinsure Essent Guaranty through the affiliated quota share and participate in the ACIS and CERT transactions. In fact, Essent Re's growth during 2016 is stronger than expected, primarily as a result of strong NIW levels in the core business. Because of this, during the third quarter, we drew $50 million under our $200 million credit facility and contributed this amount to Essent Re.

Finally, on the Washington front, USMI remains engaged with FHFA and the GSEs on front-end and deep MI risk share opportunities. Now that the PMIERs are in place and the industry continues to generate capital, we believe that private mortgage insurance should play a larger role in supporting a well-functioning and housing finance system.

As an entity-based industry connected with thousands of lenders and subject to robust oversight through state regulations and the PMIERs, we believe that private MI could be further leveraged within the future of GSE risk share. We look forward to continuing our dialogue with FHFA and the GSEs on this topic.

Now let me turn the call over to Larry.

Thanks, Mark, and good morning, everyone. For the third quarter we reported net income of $60 million or $0.65 per diluted share. Net income for the quarter is up 14% over the second quarter of 2016 and 46% over the third quarter a year ago.

Net income in the third quarter 2016 includes a $2 million favorable valuation adjustment, or approximately $0.02 per diluted share, associated with amending certain Freddie Mac ACIS contracts that had previously been accounted for as derivatives. This favorable valuation adjustment is included in other income in our income statement in the third quarter. As a result of the amendments, these contracts, as well as all other current GSE risk share transactions, are now accounted for as insurance contracts.

Earned premium for the second quarter was $111 million, an increase from $101 million or 10% over the second quarter, and an increase from $84 million or 32% over the third quarter of 2015. The average premium rate of the US mortgage insurance business for the third quarter was 58 basis points, compared to 57 basis points for the second quarter and 55 basis points for the third quarter a year ago. Consistent with last quarter, the increase in the premium yield for the third quarter was primarily due to a higher level of single-premium cancellations income.

Having ending the quarter with a default ratio of 41 basis points, the related provision for losses and loss adjustment expenses for the quarter was $5 million. This reflected an increase from $3 million in the second quarter of 2016 and from $3.4 million in the third quarter a year ago.

Other underwriting and operating expenses were $32.8 million for the third quarter, resulting in an expense ratio of 29.6% as compared to 31.2% in the second quarter and 34.3% for the third quarter of 2015. Our effective tax rate for the quarter was 28.4%, and for the nine months ended September 30, 2016 is 28.8%, which represents our current estimate of the annual effective tax rate for the full-year 2016.

The consolidated balance of cash and investments at September 30, 2016 was $1.6 billion. The cash investment balance at the Holding Company was $45 million compared to $42 million as of June 30, 2016.

As Mark touched on earlier, during the third quarter we drew $50 million under our revolving credit facility and used the proceeds to make a capital contribution to Essent Re to support the ongoing growth of our Bermuda business. The interest rate on the amount drawn under the credit facility at September 30, 2016 was 2.52%, with a remaining undrawn capacity of $150 million.

As of September 30, 2016 the combined US mortgage insurance business statutory capital was $1.1 billion, with a risk-to-capital ratio of 14.8 to 1, flat as compared to June 30, 2016. Finally, Essent Re had GAAP equity of $343 million, supporting $3.7 billion of net risk in force as of September 30, 2016.

Now let me turn the call back over to Mark.

Thanks, Larry. In closing, Essent had another strong quarter of financial performance as we continue to generate high-quality earnings growth and strong returns. The current housing and mortgage environment is positive for our franchise as industry NIW levels are robust and credit quality is excellent. We believe the real estate cycle remains in expansion mode and that Essent is well positioned to continue growing its franchise, both here in the states and in Bermuda. We remain optimistic about Essent's prospects and the role of private mortgage insurance and US housing finance.

Now, let's turn the call over to your questions. Operator?

(Operator Instructions)

Doug Harter, Credit Suisse.

Thanks.

Can you talk a little bit about the premium rate this quarter? It's actually been trending up the past couple quarters. How much of that is tied to single premiums, or what is the underlying rate then?

Hey, Doug, it's Mark.

I think we've said this in past quarters, but I would look for the ongoing premium yield to be closer to the mid 50%s. The increase in the third quarter, the increase in the second quarter, is really probably a little bit faster terminations than we forecasted. But 55% earned premium yield on a $78 billion portfolio is a pretty good run rate for you guys to use going forward.

Great, that's helpful.

Then on the prior-period reserve release this quarter, can you talk about what changed or what were the drivers behind that?

Hey, Doug, it's Larry.

That's somewhat normal for Essent; and if you look at prior quarters, you would see that. It's really favorable development and it's driven by two items. We will have some cures associated with defaults that were in the portfolio at the end of the year. In addition, as we settle claims, we have settled claims at below what we might've expected. So you'll see our year-to-date severity was about 75%, which was pretty favorable. So those are the items. Again, you've seen historical favorable development in prior periods, so it's relatively normal for our experience.

And then given that's been somewhat consistent with the past, at some point does that factor into your expectations on the current period and the expected losses is lower in the current period? Or how should we think about that mix going forward?

Doug, really good question. We typically look at our reserve factors, and we update them every period based on recent experience. We continue to see some favorable experience, but it's something we revisit and adjust every quarter.

Great. Thank you, Larry.

Jack Micenko, Susquehanna.

Good morning, guys.

Mark, growth has been better. You drew down the revolver a little bit this quarter. Curious how you're thinking about capital. I know the revolver pricing appears to be in line with reinsurance cost of capital, but what do you think about a debt raise? Or do you think about a debt raise, or can you up-size the revolver? How do you think about capital from here going forward?

I think in terms of the revolver, yes, we could certainly look to upsize that. The cost is, as you note, is very attractive at 2.5%. I think our view on capital right now, it's really growth capital. We would probably want to draw down on the line a little bit more over the coming quarter should we need it. Again, we're using it in case the growth is a little bit larger or faster than we thought.

Should we draw down on it more? We would look probably to replace it with more permanent forms of capital, and it could be debt or it could be equity. We always judge that based on where the market is. We'd probably then need the line of credit as dry powder, so to speak.

Again, I think we have a lot of flexibility with capital at the current time. We have $40 million of cash at the HoldCo. We have excess capital within Essent Guaranty at this time, and we have the $150 million remaining still on the line. So we feel very comfortable with our capital position right now.

And then can Essent Re do more than the percentage they are doing right now in the reinsurance? Is there anything limiting that?

No, there is nothing limiting it at the current time. Our view is 25%, and we are very comfortable with that percentage. It is something we would evaluate, or continue to evaluate, to increase that over time.

Okay. One last one. Any market share movement notable in the quarter, given the M&A announcement?

No. The deal hasn't even closed. I don't think it is going to close until fourth quarter or first quarter next year. So, no, we didn't see any specific changes.

Too early to note, in my view. I think that is something that will play out, Jack. It's not a quarter by quarter. That will play out over the next 12 to 18 months.

Got it. All right, thank you.

Mark DeVries, Barclays.

Yes, thanks.

I had a question about the other income line that came in higher than what we'd expected. Is that mainly the revenues from your Essent Re business that flows in that line?

Hey, Mark, it is Larry.

This quarter in particular it relates to the change in accounting associated with Essent Re contracts with Freddie Macs that had been accounted for as derivatives. Over the last couple of years, as we've written those contracts, the majority of our contracts were insurance accounting. The first four ones were derivatives and changing the fair value that flowed through other income.

During this quarter we amended those contracts so that they are now accounted for as insurance contracts going forward. We had a $2 million favorable valuation adjustment associated with the change in the accounting for those contracts to insurance contracts this quarter. Going forward, you'll see a smaller and more stable number in our Other Income. You'll see all of the Essent Re business revenues being reflected in earned premium.

Okay. Got it. That's helpful.

Then turning back to the topic of market share, by our estimates it looks like you gained share in the quarter. Mark, is that a product of doing anything in particular or is there a mix shift benefit for you guys? I assume you're a little bit more overweight the large issuers because you naturally started there as you built the business. And then maybe the large issuers are seeing a little more of the refi volume, so your share ticks up a little bit when you see refi activity?

That's not really the case. In fact, I would say we've probably grown our regional clients more so than the larger clients. Remember, we started off with the larger clients. As we continue to increase customers and increase the penetration of those customers, I think that is where we are seeing a little bit more of the pick-up.

The market share is tough to gauge. We said we are kind of in that 12%-plus range. In fact, Mark, we didn't even know what our market share was until the last couple of days. It is hard for us to gauge based on that.

I think our view was we continue just to be focused out servicing our customers, making sure we do a good job for them, helping them grow their business the right way. The reward for that is generally share. I think we're just comfortable with the number of customers we have. The result of it is share, but we don't read too much into a quarter-by-quarter change.

Okay. With some of your newer customers, you are still in a phase of ramping up with them, so you could see some natural share gains just from that?

Yes, I think it is natural to assume as we add customers and continue to get to know them -- some of our competitors, they have been around for years. They have great relationships. So it takes a long time, and I think we have been pretty open about that.

Our view is we're patient with it. We love to get new customers, but we want to make sure we service our existing ones as well as we can. Longer term, again, over the next few years we would continue to increase the breadth and depth of the customers. That's really what leads to our continued growth and insurance in force, which is really the ultimate driver. That is where it all comes out in the wash. I'm pretty pleased with the results there.

Okay. Great. Thank you.

Mackenzie Aron, Zelman & Associates.

Thanks. Good morning and congrats on the quarter.

Mark, can you talk a little bit about your thoughts on the recent Fannie-Freddie risk sharing pilots, thinking about the next year, how you think that opportunity is going to evolve? Maybe any comparison you can make in the economics to those pilots to the back-end transactions that Essent has been involved in?

Yes, Mackenzie, I think the economics are fairly similar. Both of the pilots are really back-end, meaning they are done on a forward basis. So you wouldn't say that volume come through until the fourth quarter and the first quarter of next year. But the structure of them are very similar to the ACIS and cert transactions. So I would say the economics are fairly similar.

In terms of what to expect with risk share over the coming quarters and years, I think we have been pretty consistent. I think the GSEs have done a really good job of sharing risk with private capital. They do it mostly through the capital markets, and that is about 70% to 80% of it. The other 20%-plus is through the multilines. With these two pilots, they're actually expanding that to deal with the USMIs or the monoline MI companies.

So I think that is a very positive sign. I think the GSEs are really working with us on that. Our view is that will continue to grow. We think eventually that has a chance to grow into front end at the lender level, so it's a natural evolution.

As I noted in my comments, we're connected to thousands of lenders. We go down to 67% LTV today. For us to go down to 50% is not that big of a stretch. It is very pragmatic and operationally efficient to do that. As entity-based solutions, we are regulated by all 50 states. We are regulated by FHFA and the GSCs through PMIERs which, as you know, is a lot more than just capital.

We feel like the model in itself can be further leveraged. This will happen over time. Again, there's not a race for this; and I caution folks to look at it quarter by quarter. I would say the GSEs, they have some concerns with it and they are valid concerns. We will continue to work through them.

Longer term, we own and we manage mortgage credit risk. It is what we do for a living. Our view is the capital markets, as good as they are -- and cash execution is excellent -- it is levered, and it is not always going to be there. I think the past has shown us that when credit markets start to soften, capital markets guys are the first ones to the doors.

We won't be. I think we will have the capital. I think PMIERs, especially, is going to make sure the MIs have capital through the cycle. Again, I think we have good opportunity to play a larger role over time; and time will tell.

Perfect. Thanks, Mark.

Sure.

Vic Agrawal, Wells Fargo.

Hey, good morning. Thanks for taking my questions.

Mark, I think in the past you said the ACIS opportunity was somewhere in the $6 billion to $8 billion level. Is that what you're looking at for 2017 as well?

Are you talking about the reinsurance?

Yes.

Yes, I think we have seen that grow 4% to 6% last year, less than 4% last year, 4% to 6% this year. I think, again, it's really going to follow the overall -- there are two components to it, Vic. It is how big is mortgage originations? Which they obviously continue to grow, and our view on housing is they will continue to grow over the next few years. That's one part of it. It will naturally grow just based on that.

The second thing is if the GSEs and FHA decide to share more risk. I think those two components bode pretty well for, I would say, increasingly sharing risk with the private markets.

Okay.

I think, Larry, you were talking about severities earlier. That continues to trend downward. Is that primarily a function of HPA, or are there other factors that are going on in there?

In terms of -- Vic, can you clarify the question?

I think you were talking about severities earlier, so curious. The downward movement in severity, is that primarily due to the function of HPA, or are there other factors in there?

I think I would probably attribute more of that to the lower level of defaults and claims that we pay today. We're still on a very small base. I think individual claim payments can have more of an impact, so I think it's difficult to draw a conclusion. We would expect severity on average to be higher than we've experienced to date.

Overall, there is some benefit to the current environment. But would just caution the fact that it's still relatively early and we have a very small amount of claim payments at this point in time.

Hey, Vic, it's Mark.

I think Doug had an earlier question around losses. I would really focus you guys more on the incurred loss ratios. I think they have some pretty good disclosure now in the stat supplement by vintage, and I think vintages always tell the story over time.

If you look at the 2013 vintage, which is -- probably halfway through its life, the incurred loss ratio is very small. It's close to 3%. Probably in the next 12 months, you will be able to call that vintage; and you'll be able to have a good sense of where it is ultimately going to turn out.

I think longer term, that's going to drive the loss ratios around the business. I would just caution you. I know you guys have to do your models, and we can certainly appreciate that. But don't get too caught up in the ins and outs of defaults and losses and severity. It's very early in the book. I think you want to think of the bigger picture, which is really where housing is going and the overall just from a credit standpoint.

Credit standpoint, here's the thing to really hang your hat on. Our average portfolio is 749. That is a portfolio that pre-crisis, Freddy Mac, high LTV, average FICO, was something along the lines of 705. We don't have a barbell portfolio. Our portfolio is 5% below 680. I think pre-crisis, some of the incumbents -- below 680 was something along the lines of 40%, 35% to 40%. These are big differences in portfolios.

You marry that with QM, so 40% of the business written during the crisis is not even eligible anymore. Then again, layer on top of that, really, the excellent job that the GSEs have don and our lenders. The manufacturing quality that we see, through QA has been excellent. The GSEs have done a good job in terms of the QC and what they're doing and some of the guidelines and how they are looking at it.

You put all that together, we think the portfolio is poised to continue to do well. So that's just to give you guys some color of how we look at it from our seats versus -- again, the detail is obviously extremely important; but I wouldn't try to read too much into it over the near term.

I appreciate the comments, and congrats on the good quarter.

Thanks.

Rick Shane JPMorgan.

Hey, Mark, thanks for taking my question. I'm going to delve a little bit into something you said not to focus on too much. In terms of credit, you talked about loss severities. You've talked about the low delinquency rate. One thing we were seeing in other asset classes is a little bit of movement in cure rates or roll rates. Is there anything that you are seeing in the portfolio that we should be aware of?

At this time, again, given the low level of defaults and the low number of claims that we've paid to date, I would say that we've made very little change around our roll-rate assumptions. It's a really good question. I've noticed in other asset classes, but they're also shorter duration asset classes. I think with us, we really look at it -- and just to refresh everyone's memory -- it's really a waterfall approach.

We have a certain -- for 30-, 60-, 90-, 120-plus, we have a certain percentage or probability that we think will go to claim. There has not been much movement on that. That's obviously something that can change during different economic cycles; but to date in our history, we have not really seen much material change.

Got it. In an observation and maybe a chance to give you a little bit of an open-ended question, it is essentially three years to the day since you guys have gone public. I think it is three years and five days. Where do you think you are versus where you set out to be, and what are the pluses and minuses over those three years?

That's a good question, a little reflection time from us. Thanks, Rick. Halloween three years ago, we went public.

I would say, in terms of the expectations, I think we are right on line. I think we're pleasantly surprised with the growth in Essent Re. I think when we went public, GSE risk share had really just started. Again, I think hats off to the GSEs for the way they've managed that process.

We've obviously given us an opportunity to participate that in Essent Re. So very, very pleased on it, very pleasant surprise. Remember, we talked about that on the road show as being a call option. I think that is one that's been exercised very successfully.

In terms of the credit, we continue to be -- and I don't want to say surprised there. I think we knew the credit was going to potentially be good, given the credit profile and the underwriting characteristics. That has performed really according to expectations, and I would say we are very pleased with our market presence.

We've always really focused on working with our customers and helping them do well and let the results speak for themselves. We haven't really tried to buy or rent share, as I like to call it, on the singles business because that can go up and down. I think that consistency, it bodes well for us.

It bodes well for us with investors, with the rating agencies, with our employees and, more importantly, with our customers. They know where we stand, and we're not -- I had a client tell me recently that we have been telling them the same story since we started the Company and I first started calling on them seven years ago. We take a lot of pride in that and the consistency.

Our turnover rate, I think our retention rate for employees is something along the lines of 98%. I think we take a lot of pride in that. We have an excellent employee base. I would say that the employees to date continue to impress us.

Building that culture, I think it bodes well for the future. We said today, everything we do today will show up in results in 12 to 18 months. We are very pleased with our results today; but once we hang up the phone, we are out trying to build the business for the longer term. It's a good -- we've reflected on I think we're very fortunate. Again, given the current environment, I think we'll continue to work with our customers and hopefully provide them value, which will allow us then to provide value to our shareholders.

Terrific. Thank you very much.

Mihir Bhatia, Bank of America.

Hi, good morning. Congratulations on a good quarter and three years as public. Good performance since then.

I was wondering if you could talk a little bit about the expense ratio and your expense base. Trying to get a feel for how much of the increase this quarter was driven by a larger market and operating leverage? I imagine next quarter from the seasonal slow-down there might be a little bit of an uptick there. Just looking into 2017, how you feel about the expense base and just trying to get a feel for the fixed versus variable piece of that base.

That is a good question. I would say I think we focus more on the nominal costs. I think the expense ratio is, quite frankly, it's simply a calculation. So we don't -- we're really -- I think our nominal expense base is relatively low.

It's ticked up a little bit this year just because there was some variable costs around underwriting. Remember, we underwrite over 50% of the business up front with non-delegated, so more NIW means more underwriters, which we are pleased to do because that gives us a chance to service our customers. That's always a little bit of a variable.

Our headcount's been relatively steady over the past 6 to 12 months. We are always looking for ways to add talent or invest in areas where we think we can strengthen the franchise. So too early to call 2017 expenses. Again, I would focus it more on what you think the expense is going to be this year, and you can add a certain percentage to that.

Remember, it is going to grow because a certain amount of the nominal expenses that just grow because of premium taxes. We pay a percentage of our premiums on that.

Again, we'll continue, I think, over the foreseeable future, to see the revenue growth outpace the expenses. Longer term, I think we are still very comfortable with that 40% combined ratio guidance that we have given folks. We are 34% for the quarter, so obviously went a little bit lower.

You would expect to have the expense leverage to continue to improve as the expense ratio goes down; and then as the book seasons, the loss ratio will go up. Exactly where losses go is a little harder to predict. That's why we think the 40% is still pretty good guidance.

Great, thanks. And then quickly on the price competition. It feels like it's died down from where we were earlier in the year, especially on the borrower paid stuff.

What are you guys seeing on the single-lender paid side? Also, it's my contention that it has died down a little bit lately. What you are seeing too?

Yes, I think it is a good impression. Actually, there are a couple of things going on.

One, the borrower paid has clearly settled down. I think there was a lot of pricing reconfiguration starting late last year and settling out this year with the newer cards. The result of the premium change really wasn't that much, but at least it's settled and it's very clear. There's still one, maybe two, rate engines out there that will turn into one. But I think the pricing noise, I would call it, versus competition on the BPMI side, has really died down.

On the LPMI side, I think it's always been competitive. That's always a lever that an MI can use to get some transient share with a lender because it puts some dollars in the lender pocket. That hasn't really died down much. I would just say given the reconfiguration of the cards with better pricing and the higher FICOs, we've actually seen a lot of -- not a lot, but a percentage of the business shift towards borrower paid.

I think the overall level of singles in the industry probably was in the 30%s the last year. The change in pricing really -- I think it's into the lower to mid 20%s at this point. It's a pretty decent move. I think you've seen a lot -- you've seen our singles percentage go down somewhat. I think we've seen it with others in the industry. LPMI is still that rent-a-share tool. It is just probably not as -- I think investors also see through it pretty well right now.

I think the profitability amongst the borrower paid versus the lender paid, it's pretty clear for folks who understand the business. I think investors and the analysts, the community, has done a great job of calling it out and understanding the all-in profitability. That's how we run the business.

Yes, I think the pricing -- it's really has gotten back down to now the pricing becomes less of an issue. We've seen a lot just continue to focus on the things that really drive the business, quite frankly. We talk a lot about pricing on this call, or on a lot of the earnings calls. But 80% of the business is calling on your clients are showing up, making sure you can supply -- do the training or help underwriting, good turn times on underwriting, find an underwriter in a market.

We had a lot of our lender customers were at incredible volumes to the third quarter and were really scrambling for underwriters. If there's an opportunity for us or another MI to help them find an underwriter, I think that's always considered valuable.

There are a lot of different ways to add value and to get and to earn the business in the field. When I say the field, meaning down below the national level, that has really nothing to do with price day in and day out. It has a lot to do with, again, visibility and hard work and, like we like to say, shoe leather.

We focus on that. I think that's why you see our share being relatively consistent. Would we like it to be bigger and with customers that we love? Of course, but I think given what we think in terms of return targets and where want to run the business and our view on credit, we're very comfortable with our lender base and the growth in our portfolio.

Great. Thank you, and congratulations again.

(Operator Instructions)

Geoffrey Dunn, Dowling & Partners.

Thanks.

Good morning, guys. My actual question is actually kind of a follow-up to that. This quarter you've seen six out of the seven players have pretty notable declines in their singles mix. I'm curious. Is it being driven by the MIs, or is there a decline in single's demand from the lenders or the non-banks? What is changing this pretty quickly?

Yes, I think you have to go to the borrower level. I think the borrower and the loan officer level at the higher FICOs, I think the execution in some of the buckets is just better for the borrower paid. Remember, once loan officers see good execution, they'll continue to go to it. If they were kind of brought up on singles and that's really the only execution they know, they may go to that.

Again, I think that change in the cards sparked, I would say, a welcome surprise in terms of where the pricing is. I think once it gets down to the borrower level -- and we always -- Geoff, at the end of the day, that should drive everything.

The one thing that we always say to our lenders and ask of our lenders is put your borrowers in good loans. If you do, we want to work with you and we want to be your partner. If you don't, we probably don't want to work with you; and we don't really care how much MI you produce on a quarterly or annual basis.

Our view on LPMI always was, yes, we understand it is discounted relative to borrower paid. We are well aware of that; but our view is, if that is the best loan for the borrower, then so be it. I think what you see now, that is really driving it. I don't think the lenders have demanded it any less.

Again, I think the analyst community gets on the MIs around discipline in LPMI. I think there's some of that, but at some point it's really getting driven by the lenders versus the MIs. I think the lenders are driving it because it is getting down to the LL and the borrower level.

Okay. Second question --

It is a nice benefit of the pricing change.

Right. Second question, I've never been able to explain the difference between your 25-C and Archer's 50, just kind of figured that's just the way it is. Today, I think you alluded to the possibility of increasing that 25% over time. What needs to happen to make that change, or what approvals do you need or decisions do you have to make? What moves that up?

It's a very simple answer. It really comes down to capital. As we said before, Essent Re, any capital that it's going to need is really growth capital. For us to increase the C would require probably more downstream of capital from the HoldCo, and that capital has to come from somewhere. Is not going to come from Essent Guarantee.

It's something we continuously evaluate, and it really comes down to capital optimization. Again, that's why there is potential that we could do it in the future, the timing of which is a little uncertain just because of how we think through capital.

So we are on call option part two?

Yes, call option part two, well said, Geoff.

Great. Thanks.

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

Okay. Thank you, Operator.

We would like to thank everyone for participating in today's call and enjoy your weekend.

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