Essent Group Ltd (ESNT) 2017 Q1 法說會逐字稿

Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Ltd. First Quarter 2017 Conference Call. (Operator Instructions) Thank you.

Chris Curran, Senior Vice President, please go ahead.

Thank you, Emily. 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 first quarter of 2017, was issued earlier today and is available on our website at essentgroup.com in the Investors section. Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in Exhibit L of our press release. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, 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 16, 2017, 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 solid quarter of financial results. Portfolio growth, strong credit performance and ongoing expense leverage continue to be the primary drivers of our high quality and growing earnings. As a franchise that invests in U.S. mortgage credit risk, we are well positioned in growing our insured portfolio and generating strong returns. We remain optimistic about our business as the underlying fundamentals of housing are positive and the real estate cycle remains in expansion mode. Strong demographics, such as the millennials entering their peak buying years, continue to drive purchase mortgage demand. This, combined with the increasing supply of new starter homes, leads us to believe that housing will continue to be strong.

Now let me touch on our results. For the first quarter, we earned $67 million, representing a 39% increase from $48 million earned during the first quarter of 2016. On a per diluted share basis, we earned $0.72 for the first quarter of 2017, while also generating a 19% return on average equity. Our results for the first quarter included a $0.03 per diluted share benefit related to the implementation of a new accounting standard on employee share-based compensation. Our increase in net income continues to be driven by growth in our insurance in force, which increased 30% to $88 billion from $68 billion as of March 31, 2016. This growth drove a 25% increase in net premiums earned to $118 million for the first quarter of 2017 from $94 million for the first quarter a year ago. Finally, our expense ratio for the first quarter decreased to 31% compared to 33% for the first quarter a year ago.

We remain pleased with our insured portfolio's performance. Credit guardrails implemented by mortgage lenders and the GSEs postcrisis continue to have a positive impact on our underwriting results and quality assurance reviews. For us, this environment is resulting in a high credit quality portfolio. In fact, we ended the quarter with a weighted average FICO of 748, less than 6% of that portfolio below 680 and a default rate of 45 basis points.

Our balance sheet remains strong with $2 billion of assets and $1.4 billion of equity at March 31. In addition, we grew adjusted book value per share 21% to $15.11 compared to $12.49 as of March 31, 2016. In Bermuda, we remain pleased with Essent Re's performance. It has become another platform to invest in U.S. mortgage credit risk at returns that are accretive to our franchise. To support Essent Re's ongoing growth, we drew another $25 million on our $200 million credit facility during the first quarter and contributed this amount to Re. At March 31, 2017, Essent Re had $453 million of equity capital.

Turning our attention to Washington. It remains our view that the new administration supports less government versus more in housing finance, which we believe is a long-term positive for private mortgage insurance. Looking forward, our industry can play a larger role on a housing finance system, where more private capital can be invested to support housing, while also lowering taxpayer risk.

Now let me turn the call over to Larry.

Thanks, Mark, and good morning, everyone. I will now discuss the results for the quarter in more detail. For the first quarter, we reported net income of $67 million or $0.72 per diluted share. Net income for the quarter is up 6% over the fourth quarter of $63 million and 39% over the first quarter a year ago of $48 million. Note that this quarter's results reflect the FASB's accounting standards update related to employee share-based compensation awards that was effective January 1, 2017. This update requires that excess tax benefits or deficiencies be recorded as a discrete item in the tax provision in the income statement in the quarter the share award bests.

Accordingly, we recorded an excess tax benefit of $0.03 per diluted share in the first quarter. Earned premium for the first quarter was $118 million, a slight increase from $117 million in the fourth quarter and an increase of 25% from $94 million for the first quarter of 2016. The average premium rate for the first quarter was 53 basis points, down compared to 56 basis points for the fourth quarter and first quarters of 2016. The decrease in the average premium rate is due to a lower level of singles cancellation income during the first quarter of 2017. We remain pleased with the credit performance of our insured portfolio, ending the quarter with the default rate of 45 basis points.

Our provision for the quarter was $3.7 million compared to $3.9 million for the fourth quarter and $3.7 million for the first quarter a year ago. This slight decline in our provision this quarter compared to last quarter is primarily driven by a reduction in the number of new defaults, net of cures reported during the quarter, partially offset by the impact of aging of the default portfolio. Other underwriting and operating expenses were $36.3 million for the first quarter, and our expense ratio was 30.9%, both slightly higher than $34.8 million and 29.8%, respectively, for the fourth quarter of 2016. Note that this increase is primarily due to an increase in payroll taxes associated with the vesting of shares and incentive payments in the first quarter.

For the full year 2017, we believe that our first quarter expense level is a reasonable run rate for the remainder of the year. Income tax expense for the first quarter was calculated using an annualized effective tax rate of 26.8% and was reduced by $3 million of excess tax benefits associated with the new accounting standards update I touched on earlier. We expect our estimated tax rate for the balance of the year to be 26.8%, not incorporating any impacts of possible federal tax reform. The consolidated balance of cash and investments at March 31, 2017 was $1.7 billion. The cash and investment balance at the holding company was $41 million compared to $47 million as of December 31, 2016.

As Mark noted earlier, during the first quarter, we drew an additional $25 million under our revolving credit facility and used the proceeds to make a capital contribution to Essent Re. In addition, we contributed another $5 million to Essent Re for a total of $30 million during the quarter. As of March 31, we have $125 million outstanding on this facility with $75 million of undrawn capacity. The weighted average interest rate on the amount drawn under the credit facility as of March 31, 2017 was 2.96%. As of March 31, 2017, the combined U.S. mortgage insurance business statutory capital was $1.2 billion with a risk to capital ratio of 14.6:1 compared to 14.7:1 as of December 31, 2016. Finally, Essent Re had GAAP equity of $453 million, supporting $4.6 billion of net risk in force.

Now let me turn the call back over to Mark.

Thanks, Larry. In closing, Essent had another strong quarter of financial performance as we continued growing our high quality earnings and generating strong returns for our shareholders. We remain positive on housing and believe that the real estate cycle remains in expansion mode. The Essent franchise is strong, and we are well positioned to grow in both the States and Bermuda. We remain optimistic about Essent's prospects and the role of private mortgage insurance in U.S. housing finance.

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

(Operator Instructions) Your first question comes from the line of Doug Harter from Crédit Suisse.

Can you talk about the decline in the premium yield you experienced during the quarter? And in that context, what you're seeing on premium yield on new insurance written?

Hey, Doug, this is Mark. Yes, I think as Larry said in the script, the premium yield decline for the first quarter was really just a decline in singles cancellation income. So to put it in context of kind of in the bigger picture, I would say earned premium yield on the portfolio without singles cancellation and even premium -- net premium written on kind of new business is right around that 50 basis point mark, maybe a basis point above. Singles cancellation normalized is 1 or 2 basis points above that. And then when we hit certain quarters and certainly the third and fourth quarter last year kind of during the Brexit refi wave, that could add anywhere, believe it or not, 3 to 6 basis points to that number. So it's -- I wouldn't read too much into it. I think longer term kind of that guidance in terms of that low 50s mark is a good way to look at it. And more importantly, we grew insurance in force $20 billion year-over-year. So I mean, picking a few basis points. Again, I wouldn't get too concerned about that, it's really around the volatility. But bigger picture kind of 50, low 50s kind of normalized earned premium yield is something for you guys to use as you model out the growth.

And I guess, it looks like the greater than 95 has been increasing. Does that change that premium yield number much? Or is that still -- small enough, it doesn't really move the needle?

It doesn't move that much. I mean the 95s, we look at it more from a risk standpoint versus kind of a premium. The 97s obviously are a little bit riskier. That's mitigated by smaller coverage. But if you take a step back and look at the percentage over 90, that's been right around 53%. So some of the 97s really just cannibalized to 95s. Looking forward, you would expect the 97s to grow a little bit more as the GSEs rollout their programs. But I wouldn't expect -- I would expect the impact on any premium to be minimal at best.

Your next question comes from the line of Philip Stefano from Deutsche Bank.

To follow-up on that last question just a little bit. I'm sure it won't be the last premium yield question there is. It feels like low 50s is the new guidance. Previously, it was more mid-50s was the right way to think about it, I guess. What changed in the past quarter or 2? And how can you help us think about kind of what that underlying premium yield might be moving forward as the higher price business rolls off and assuming pricing stays about flat at today's level?

Yes, hey, Phil. I think that incorporates kind of the newer business that we've been writing over the past year. And also, remember there has been a little bit of a shift in the portfolio is when the industry shifted to the lower BPMI, we ended up seeing a little bit higher credit quality because of the pricing there. So the premium yield maybe a little bit lower, which again is incorporated, but we're seeing kind of sustained higher FICO. So I think, still the portfolio is kind of in that high 740. So I wouldn't read too much into it. Mid-50s could be 54. So I think, you're -- just be careful not to parse it too finely. We don't want to be kind of precisely wrong when we think about this stuff. Again, kind of -- even if you say approximately 50 basis points, think about Essent really is growth and insurance in force. We have $88 billion in insurance in force at the end of the quarter, that's up from $68 million from the first quarter last year. Essent is really going to follow the growth in housing. And as I said in my remarks, and as I said on past calls, housing continues to be strong. Starter homes are continuing to be built. And I think, we'll follow the fortunes of housing. And again, if you try to be generally right -- if you want to be generally right around our growth in insurance in force and [around the] premium rate is, I think year-over-year we'll continue to grow that top line.

Okay. Understood. And then in thinking about that, the insurance in force growth. And if I calculate it correctly, the new insurance written market share was around 16%, which feels like a new quarterly high watermark for the company. Now again, don't want to make too much around one quarter and understanding there's goalposts around all these numbers. Any general feel for where share might be coming from? Is it new customer relationships, more business from existing relationships, market shares shaking out of peers, any color you can provide around that?

Yes, again, I mean, I think we said in the last quarter, we feel comfortable in that 13% to 15% range. And that's really with one -- with the merger of Arch and UG, one competitor has left the market. So we're now -- we're 1 of 6. Again, our long-term goal is to grow a high quality insurance in force portfolio. Market share is always going to be volatile, sometimes quarter-to-quarter a point or 2. Again, we just -- I don't read too much into it. We're not -- it's not a metric where folks are compensated in the company. We're -- 75% of my long-term incentive is growth in book value per share, so we're really focused on that. I wouldn't -- again, you have the merger, you have a lot of noise in the industry in terms of some things. But again, there's not one thing we're trying to pinpoint it on. But I, again, would focus on kind of the growth in insurance in force. And again, how it kind of follows housing. Just again on the premium yield, just one more thing, Phil, to point out for -- I think where Essent is a little different than some of our competitors is just lack of reinsurance. So I think there has been a lot of noise in the market around people trying to figure out premium yield. But I think with ours, it's pretty straightforward. And we've disclosed that earned premium yield every quarter since we've been public. So if you go back to 2014 and look at it quarter-by-quarter, you'll see anywhere from 53 to 58 basis points. So it really hasn't changed that much. So again, a little surprising that folks are looking at it this quarter, that's fine. But again, big picture, it hasn't changed that much.

And one more question for you. Thinking about the big picture and the importance of the growth in book value per share. The messaging to the sales force feels like it's been to focus on that and to grow a strong book. Is that message feel like it's continuing to resonate with the sales force? Has the message to them changed at all over the past year or 2?

We haven't changed our message since the day we started the company. And I think one of the things that's important for investors to realize is, everyone in the shareholder is a -- everyone in the -- every employee in the company is a shareholder. We made them shareholders when we went public and we reinvested in that in the fourth quarter of this year. So we're clearly focused on the long-term, which is -- it's making sure we have good counterparties. It's sitting down with lenders, making sure we can help them grow. We're not going to be with every lender all the time. But really, and I'm still out visiting with our customers and visiting with our sales force. And they get the same -- and I've been telling the same message to customers, and again, employees since that day we started the companies. Think longer term, let's think of ways we can help our clients grow their business the right way and the reward for that is allocation of mortgage insurance. And again, as housing grows, our lenders grow and Essent grows with it. So it's -- there's no need to, from our standpoint, to overcompensate or compensate solely based on the number of loans that someone is able to ensure at the salesperson level, because it could hurt you down the road in terms of risk. So this is the culture and this is kind of the game plan that we've rolled out. Others are different, and that's fine. But this is one we're comfortable with and to date, it's worked pretty well.

Your next question comes from the line of Jack Micenko from SIG.

Guys, wondering if you have the annualized quarterly persistency from the first quarter. Obviously, a big driver of the model and growth in insurance in force. We have the actual annualized, but I didn't see the first quarter number in there?

Yes, I mean, Jack, I would look at it in terms of kind of guidance. I would stick to that high 70s. I think that's good guidance kind of going forward for the year. Rates have come down a little bit from where they were kind of in the fourth quarter. I think, [30 year] fixed rate today is probably right around [4 and an ace]. We wouldn't expect that to change too much for the remainder of the year. I think that high 7 is pretty good guidance as you kind of plug stuff into your models.

Okay. And then on the severity, it's bounced around a bit, but the claims have been more constant. Is that just smaller loans making up a bigger portion of the claims or is there something else in there to consider?

Yes. Hey, Jack, it's Larry. Not necessarily really small loans. I think it's the small number of claims that we've experienced relatively. In the last call, when we sort of looked at the year-end '16 results, I think we guided you more towards 2015 severity, which was in the low 90% range as being a better guide. So again, I think we're still in the -- in an area where our overall claims are relatively low. But we think, kind of probably low to mid-90s is a better long-term severity assumption for the business.

Yes. And Jack, it's Mark. Again, in quarters where the losses are anywhere $3 million to $4 million, I wouldn't read too much into any kind of the details to look for trends. Add that with kind of to date incurred loss ratio, pretty low. Again, our book's relatively new. But I just wouldn't read too much into try to differences in severities and stuff. It's the law of kind of small numbers here.

Okay, fair enough. Just one more. It looks like the positive development was a bit better this quarter from the back book. Is there anything -- obviously, the post '09, '10 books are pretty pristine, but is there anything in this quarter that you saw that caused things to even look better?

No. I think Jack, again, this is Larry. I think it's really just the number of cures we experienced during the period. If you look at the supplement in the fourth quarter, we had about 861 cures, up substantially in the first quarter to a little bit over 1,100. So it's really the level of cure activity that we saw during the quarter. Nothing unusual other than that.

Which could be a little seasonal.

Right.

Your next question comes from the line of Mackenzie Aron from Zelman & Associates.

Can we just talk about Bermuda and given there's now $75 million left on the revolver, how should we be thinking about potential capital needs going forward there given the outlook for the risk sharing and also just strength in the primary market?

Yes. Hey, McKenzie, it's Mark. $75 million on the line. We also have $40-plus million at holdco. So -- and I think, we're in good shape with capital. As we said before, we do look at the line as kind of a bridge to more permanent capital and it was a way to kind of take advantage of growth opportunities. So with that in mind, I think we're always evaluating ways to kind of take the line out with more permanent forms of capital, be it debtor equity. And I would expect us to continue to look at that as we continue to grow Essent Re, which is really a positive sign. And I think, we said before, Essent Re is kind of in capital consumptive mode. That's code word for growth. So if Essent Re continues to grow both on the third party side, and obviously, the affiliates grow and just because the core NIW is so much higher. So it's continued growth capital. So we're really pleased. I mean, I think we're -- I think Essent Re has really blossomed into kind of another platform for us to take on mortgage credit risk. And for me and for us, looking forward, we're -- we'll continue to invest in that platform.

Okay, great. And has there been any development so far this year just with the GSEs and exploring the opportunities around [deeper cover] and risk share on the back end that is incremental?

No, I wouldn't -- I mean, I think they did the [deep end lie] deal last year and I think there's another one in the market now, I believe. So I think, we'll continue to do those once or twice a year. I think they continue to reinsure via Bermuda on the below 80 business. I think we've done 20-plus deals year-to-date. We'll -- that business will continue to grow as the market grows. So as we talked about us following housing, the GSEs obviously follow housing too. So as that market grows, I would expect more business to be reinsured to Bermuda. The other item to consider also is the GSEs have done a really good job around Bermuda in expanding the number of counterparties. So we were early to it, but they've expanded outside of the group and they continue to really look for -- to build breadth and depth in that market, which we look at as a positive. So as they build breadth and depth in the market they may tend to want to reinsure more going forward to the reinsurance business. So again, I think they've done a really good job both on the capital market side, and obviously, on the reinsurance side and we'll continue to benefit from that.

Your next question comes from line of Mark DeVries from Barclays.

I had a follow-up question on Essent Re. Do you -- within that kind of consumptive, the capital consumptive mode that you described, Mark, do you need to first find access to some other reforms of more permanent capital before you think about increasing the amount of primary that you -- of yours that you reinsure through that?

No, I think we're pretty comfortable with kind of the resources we have now. And again, I think we feel like we have pretty good access to the debt markets and to the equity markets. So that's not real. And I think, we're more focused on growth and not so much focused on supplying the capital. I do think, we've been asked this before, and I think we would save our debtor equity versus reinsurance. I think we can more cost effectively finance growth via that versus using reinsurance at this time.

Okay, got it. And then just with the investment portfolio, I think you've got about 21% invested in [munis] here. Just given the prospect of a potential corporate tax cut and income tax cut, how are you guys think about repositioning that? I mean, is it already kind of priced for that or is there an opportunity kind of rotate out of the munis ?

Yes. Again, remember the [munis] -- one of the things on munis , besides the tax situation is the duration of them, so -- of the bond. So we try to -- we're always matching kind of the assets with the liabilities, since our book grows the liabilities tend to extend. So obviously, think through tax reform and would rotate the portfolio accordingly. But again, tax reform is still -- it's still kind of up in the air, so to speak. So we'll wait to see to get some more guidance around tax reform before we make any adjustments, but we wouldn't look to -- and we wouldn't expect any hard time to kind of rotate the portfolio.

Yes. And Mark, it's Larry. Just one other thought on that. We think we're really well positioned to reposition the portfolio if need be. First of all, we're generating a significant amount of cash in the insurance companies each quarter. So we generated almost $80 million of operating cash flow in the first quarter and the portfolio is pretty well laddered. So we have about 17% of the portfolio that matures over the next 24 months. So because of the cash flow as well as the laddering of the portfolio, we think we're really well positioned to take advantage of either movements in relative value of the underlying securities or things like tax reform.

Your next question comes from the line of Bose George from KBW.

So just wanted to follow up on the capital question. The insurance company you guys have said you'll be self-funding. I mean, the growth there is definitely been stronger than, I could say we expected at this point, insurance in force over 30% still year-over-year. Do you think given those growth trends, do you think you might have to revisit the capital needs at the insurance company?

No, I think we're self-generating within Essent Guaranty. It's really the issue still around Essent Re, which the portfolio is younger. And also keep in mind, as you think through longer-term capital needs for Essent Re, that as the affiliate business continues to grow Essent Re will become self-generating too. So this is -- again, that's why we favored the line of credit in shorter-term debt because it really is a bridge. And the permanent capital, more or less, is going to come over time with cash flow generated from the businesses.

Okay. And then can you just remind us in terms of how much you can see to Essent Re? Is it -- can it go up to that 50% over time as -- essentially as capital builds at Essent Re to support that?

Yes, I think 50% is kind of the number we've talked about before. And that's clearly something that's under evaluation. I think it's a little bit of a holding pattern right now, Bose, given where we are with tax reform. But I think you nailed it in terms of if tax reform wasn't on the table, it becomes a little bit about capital optimization. And as we self-generate cash, we'd be able to continue to move up the quote of share. But again, where -- given where tax reform is right now, we're still -- we're kind of on the sidelines.

(Operator Instructions) And your next question comes from the line of Mihir Bhatia from Bank of America.

I was hoping you could talk about the -- go back to the prior period reserve for -- just revisit that for a second. I guess, it's been a pretty consistent trend from pretty much every quarter for the last couple of years. And I was just wondering if you could provide more color on just what's driving that? And how you think about that on a go-forward basis in terms of did you start incorporating that in your expectations for what the provision and results are going to look like?

Yes. Hey, it's Mark. Again, I wouldn't -- we're not going to delve too much into prior period reserves and the changes. It's just too small of a number. And I think, again, you have to take a -- let's take a step back and look at the bigger picture of where losses are. I do think the Exhibit G in our stat supplement around incurred loss ratio is really the page you should study as you think about kind of your view on losses to date and the future of losses. The earlier books, they're small, but they're -- and you can pretty much call them in terms of where the ratio is going to end up and newer book's obviously, trending well. But again really, really young. So it's hard for us to give guidance, and we're not going to get into kind of quarter-by-quarter reserve changes. Bigger picture, let's take a look at our portfolio. It is 748 average FICO and less than 6% of that is below 680. So it's not really a barbell portfolio. Pre-crisis, the MIs are on a different stage, but the average FICO is probably closer to 700 and you had close to 40% of that business below 680. So it's a much different portfolio because of really postcrisis guardrails, QM and enhanced manufacturing at the lender level, which has been fantastic. So you're looking at a much different portfolio. And when you have a bar with an average FICO that high, we see it in our numbers, they have lower DTIs. They have more reserves. And so there -- if there was an event, perhaps job loss that could affect a mortgage payment, they're better equipped to keep the payments current as they look for future employment. So again, I really would study the portfolio in terms of the credit makeup, average LTV is 92. And then look at the performance to date when you're looking the model reserves going forward or incurred loss ratios going forward. I think that's -- to me, those are 2 big things you should look at.

Your next question comes from the line of Rick Shane from JPMorgan.

Most have been asked and answered. But I'd just like to sort of delve into one thing that we should start thinking about a little bit. Our expectation is, with rates rising, persistencies need to go up a bit. And if you could get help us think about the interplay for persistency with credit and how we should be thinking about that? Because I'm assuming that you'll have a portfolio that is frankly a little bit more seasoned, all other things being equal, and how that will impact the future defaults?

Yes. Hey, Rick, it's Mark. Pleasure to take your call. I think in terms of rates rising, they would have to be real sudden for it to have a big swing in persistency. So as we said earlier, I think the high 70s is good guidance. And if there is a big swing in persistency, you're probably going to see a reduction in NIW. So they're pretty well correlated. So again, I wouldn't -- in terms of guidance, I still think the high 70s is a good proxy. As you think about how the book seasons, rates aren't going to have that much of an impact. I really think you have to, again, get back to kind of the makeup of the portfolio. Ultimately, that's going to drive the credit performance. And again, I think we've -- I think what -- the secular change in credit that you picked up on before and others have clearly picked up on is -- around the MIs is: one, much higher credit portfolio than we've seen in the past; and two, just better manufacturing quality. I mean, I was at lenders down in Texas a few weeks ago and just the ability to enhanced income verification, asset verification. I mean, these tools didn't even exist 5, 6 years ago. So as lenders continue to use technology, you're seeing more around collateral evaluation, although that has aways to go given the complexity of appraisals on housing. But kind of the automated verification of assets and income, that reduces the potential for fraud. So it also, over time, will increase efficiencies for both the lenders and the MI. So when you kind of look at the guardrails that we talked with QM, enhanced manufacturing quality, tough QA by the GSEs. GSEs have done a great job around that and the makeup of the portfolio, that's really going to -- that's going to drive the ultimate performance. And you have to factor in macroeconomic conditions. I mean, that's going to be the big driver. And I think what you had in the last downtown, unfortunately, was a weaker portfolio going into a tsunami of a cycle and the result was where it was. So again, we feel pretty comfortable with the portfolio to date. We would expect, over the next couple of years, to have a recession. We never promised on the road show that we would operate the company recession free. So we -- I think that's why you're careful about the portfolio you build, because you know you're going to run into stormy weather once in a while. And we're, obviously, constantly on the lookout for that. But again, we're running this company for the longer term. So we're -- credit kills these businesses, and so we're really focused on credit. Really focused on making sure we put good loans, good counterparties, lenders into the portfolio. We've been fortunate to grow the portfolio at a nice pace. Because again, housing has been strong. And as housing continues to be strong, we'll continue to grow the portfolio. And again, I think we said this last call, but again, folks, it bears repeating, is at the NIW levels for last year were more than the NIW levels for '09 -- 2009, '10 and '11 combined. So these are really strong levels, and we're a benefactor of that. And our view is as housing continues to be strong and as the demand continues to grow for housing -- remember the -- I think the median age for the millennial generation is 25 years old. The average age for the first time homeowner is 32. So the demand is going to continue to come over the next few years. The question really is, where are all these young adults going to live? And I think there you've seen a nice response by the homebuilders. I mean, the publicly traded homebuilders that you can follow, you can see they've all rolled out starter home programs in that $200,000 range. Our average loan size is right around $229,000, $230,000. So you can see the supply coming on. We've seen in some markets where the supply is super tight, so it's been harder for folks to get homes. But again, that will balance out over time. And these are more -- this is a secular wave that, again, I think, looks good for the next, call it, 12 to 18 months for us.

Got it. It's 24 hours on earnings call, [but so old]. I do want to follow up with one other question, which is that you've talked about the structural changes, and I think that, that's really important. We have seen other asset classes' deterioration in credit quality as there has been a little bit of, let's call it, [mission accrete]. Are we seeing any shifts even at the margin that causes -- that you think the lenders are loosening up just a little bit?

Excellent question. And I think in terms of some of the things you've seen in other asset classes. I'd point out two things that I think you know, but again, bear repeating is, one, we're less barbell than a lot of the specialty finance companies. I mean, I've been looking at some of the credit cards companies and they're anywhere from 15% to 30% of their portfolio below 660. We're not even close to that. We're only 8% below 680, and I think our below 660 is obviously much lower than that. Second, we're secured. So we're secured assets. I don't think we're -- I think it's big differences between us and some of the specialty unsecured guys. But to answer to your question, we really haven't seen a lot of creep. And again, I get back to the guardrails. With QM, Rick, it's hard -- it's really hard for the lenders, even if they wanted to, to kind of get outside those that guardrails. And the GSEs also have pretty restrictive pricing by risk, but their loan level price adjustments below 680 are quite burdensome for the lender and that's why you see most of that business go to FHA. And we're perfectly fine with that. I mean, I know we're not trying to get every loan. I think we're focused more on what's the best loan for the borrower. And I think below 680, if most of those loans go to FHA, I think that's fine with us. So again, look at the composition of the portfolio. And again, the rules are pretty strict in mortgage. And again, I think the lenders follow that. Because for a lender, Rick, a good lender is really going to -- the best lenders out there that I talk to, they're focused on process and lowering their origination costs. They are the ones who win at the end. The guys who try to come up with the next product, that's a little riskier. That's kind of playing -- those are small stakes. The big guys are the ones who really look for efficiencies and look at the big picture, very similar to us. We're never going to be -- we're not trying to get every loan from every single lender for every borrower. We're trying to be right down in the middle of the fairway.

Your next question comes from the line of Geoffrey Dunn from Dowling & Partners.

Larry, first, I missed your comment about the outlook for expenses for the year, could you just reiterate that please?

Yes, Geoff. We think the first quarter run rate is a pretty reasonable -- first quarter expense [all those are] pretty reasonable run rate for the balance of the year.

Yes. So call it approximately $145 million, Geoff.

All right, perfect. And then Mark, your comments about additional capital support were clear with regard to debt and equity over reinsurance. But as you think about longer-term risk management, do you see a role in your business or in private MI, in general, for XOL cat covers]?

Yes, yes, we do. I mean, I think we've looked at it, I think we talked about it. We've talked about it before. I think that's the one place where the industry is always vulnerable. If there is a super kind of cat event. I do think -- I think when you look at stuff like that, Geoff, you have to look at two things. One is, what's the probability of an event like that happening over the next 5 years and then what will the impact of that event be on the portfolio. And I think with us, two things. Our view is, over the next few years, we think an event like that, kind of a repeat of 2006, is relatively remote. I think if we were to see a recession, we think it would look a lot more like post 9/11, which, by the way, housing sell-through. But then again -- so if it's relatively remote, and then again, with our portfolio being as strong as it is, we feel pretty good, again, over the next few years. However, from a cat cover standpoint, if we could find it and it could be priced appropriately, certainly something we would evaluate. But again, our view with reinsurance in general that we've seen in the market is, it's primarily quota share or capital markets based. It's really -- it's relatively costly versus our cost of funds rather to debtor equity. So we would certainly look at reinsurance. We felt like it really truly mitigated risk and protected capital. But we're certainly not going to pay for it as an alternative to debtor equity. I think it complicates the story too, quite frankly. I think our access to capital, debt and equity is both very strong right now. And again -- but again, if we do see it and we feel like we can mitigate risk and protect shareholders, we'll certainly evaluate it.

And there are no further questions at this time. I will now turn the call back over to management.

Thank you, operator. We'd like to thank everyone for participating in today's call, and have a great weekend.

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