Essent Group Ltd (ESNT) 2017 Q4 法說會逐字稿

Good morning. My name is Jessa, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Essent Group's Limited Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions)

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

Thank you, Jessa. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer.

Our press release, which contains Essent's financial results for the fourth quarter and full year 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 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 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. Earlier today, we reported our fourth quarter and full year financial results. Overall, 2017 was another successful year for Essent as we continued building a high credit quality and profitable mortgage insurance portfolio. During the year, we produced high-quality and growing earnings, while also generating strong returns. We also achieved a significant milestone for the Essent franchise of reaching $100 billion of insurance in force. As we head into our ninth year of writing mortgage insurance, our outlook for 2018 on our business and housing remains positive.

Our financial results for the fourth quarter reflect the impact of increased defaults associated with the hurricanes that affected the Texas and Florida regions during the third quarter. However, we continue to believe that the ultimate economic impact on Essent will be minimal. Our results also reflect the impact of tax reform legislation and the reduction in the U.S. corporate tax rate from 35% to 21%. When applying this new rate and remeasuring our deferred tax liability at year-end, it resulted in a onetime benefit to net income of $85 million.

For the fourth quarter, we earned $163 million compared to $63 million for the fourth quarter a year ago. The primary drivers of this increase were the $85 million tax benefit and a 33% increase in our insurance in force to $110 billion at year-end compared to $83 billion at December 31, 2016. As a reminder, insurance in force drives our top line revenue, net premium earned and profitability.

Our earnings for the fourth quarter were also impacted by an increase in our loss provision to $17 million compared to $4 million for the fourth quarter of 2016. On a per diluted share basis, we earned $1.65 for the fourth quarter, including $0.86 per diluted share associated with the deferred tax benefit compared to $0.68 per diluted share for the fourth quarter of 2016. For the full year, we earned $380 million or $3.99 per diluted share.

Since our third quarter earnings call in November, we have observed more data points relating to our hurricane-related defaults. Additionally, we also obtained and analyzed default data associated with Hurricane Katrina in 2005. Based on our analysis, we have updated our loss estimates on the hurricane defaults to reflect a higher cure rate than our estimate on nonhurricane defaults. Larry will discuss defaults in more detail in a few minutes.

Our balance sheet remains strong, ending the year with $2.7 billion in assets and $1.9 billion of Gap equity. Also, we grew adjusted book value per share 36% to $19.64 at year-end 2017 from $14.49 as of December 31, 2016. As a reminder, senior management's long-term incentive compensation is driven by annual growth rates in book value per share. We believe that book value per share growth is a key metric in demonstrating value to our shareholders. Throughout 2017, our growth exceeded expectations as industry NIW levels were robust. To support our growth, during the fourth quarter, we contributed $75 million to Essent Guaranty and $25 million to Essent Re. As of year-end, we had $104 million of cash and investments at holdco and have access to $125 million of capacity on our revolving credit facility.

As you know, the FHFA and GSEs have provided our industry a draft of PMIERs 2.0 to review and comment on. While we are bound by confidentiality in discussing details, our industry is having an ongoing dialogue with the GSEs and FHFA in providing feedback. From our standpoint, if the final PMIERs were to reflect what has been outlined in the draft, we believe that we have adequate resources to support the new standards. In addition, we would also look to further increase our financial flexibility by evaluating capital market solutions, such as equity or debt or other options, such as reinsurance or CRT transactions. This approach is consistent with Essent's long-term strategy of managing and optimizing capital.

While the fourth quarter was certainly eventful, heading into 2018, we remain positive about our prospects as our industry and product is correlated to the macro housing and economic environments. We believe that housing fundamentals remain solid, some of which is being driven by tailwinds, such as the millennials coming of age and buying homes. We believe that Essent and our industry remain well positioned within a robust and evolving housing finance system.

Now let me turn the call over to Larry.

Thanks, Mark, and good morning, everyone. Mark already spoke about our fourth quarter and full year net income, so I will begin with earned premium.

For the fourth quarter, our earned premium was $148 million, an increase of 7% over the third quarter of $138 million and an increase of 27% from $117 million for the fourth quarter of 2016. The primary driver of the increases was the growth of our insurance in force to $110 billion at year-end, which was up 6% compared to September 30, 2017 and 33% compared to December 31, 2016. The average premium rate for the primary mortgage insurance business for the fourth quarter was 53 basis points, which was consistent with the third quarter and down from 56 basis points for the fourth quarter of 2016. The decrease in the average premium rate compared to the fourth quarter of last year is primarily due to a lower level of singles cancellation income.

Credit performance for the fourth quarter was affected by defaults in the areas impacted by Hurricanes Harvey and Irma. For the fourth quarter, our loss provision was $17.5 million compared to $4.3 million for the third quarter of 2017. During the fourth quarter, our default portfolio increased by 2,630 to 4,783 compared to September 30, 2017. Of this increase, we identified 2,288 as hurricane related. As Mark noted, our provision for these hurricanes defaults does reflect a higher cure rate assumption than the estimates used on nonhurricane defaults. Of our total provision for losses in the fourth quarter of $17.5 million, $11.1 million pertain to the hurricane defaults. As of December 31, 2017, the reserve recorded for hurricane-related defaults of $11.1 million represents our best estimate of the ultimate losses to be incurred for claims associated with these defaults. Looking forward, we will continue to gather information on this segment of the default inventory and update our reserves if needed.

Other underwriting and operating expenses were $36.5 million for the fourth quarter compared to $37 million for the third quarter of 2017 and $34.8 million for the fourth quarter a year ago. Given our increase in earned premium, our expense ratio continued to decline during the fourth quarter to 24.7% compared to 26.8% for the third quarter of 2017 and 29.8% for the fourth quarter a year ago. For the full year 2018, we estimate other underwriting and operating expenses to be in the range of $150 million to $155 million.

On December 22, 2017, the Tax Cuts and Jobs Act was passed. The provision of the Act include broad tax reforms that are applicable to the company, including a reduction in the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. This change in tax rates required us to remeasure our deferred tax assets and liabilities as of the enactment date, resulting in a onetime $85.1 million income tax benefit recorded in our consolidated statement of comprehensive income in the fourth quarter. The effective tax rate for the fourth quarter of 2017, excluding this adjustment to deferred taxes was 26.5% compared to 27% for the third quarter of 2017. Going forward, Essent will benefit from the reduction in the U.S. federal corporate rate to 21%. In addition, the Act includes a Base Erosion and Anti-Abuse Tax, the BEAT. The BEAT is an alternative tax which must be paid if the company's regular tax liability -- if it is greater than the company's regular tax liability. This alternative Base Erosion tax, if applicable, may limit or eliminate the tax benefit associated with certain base erosion payments.

Premium ceded by Essent Guaranty to Essent Re under the quota share reinsurance agreement are considered base erosion payments under the provisions of the Act. In 2018, we estimate that Essent will not be subject to the BEAT tax. The company may be subject to this BEAT tax in future periods depending on the earnings of our U.S. insurance companies and the level of premium ceded to Essent Re.

In addition to the impact of the new tax reform legislation, we expect to record a discrete excess tax benefit in the first quarter of 2018 associated with the vesting of restricted shares granted to management and estimate the benefit to be approximately $0.10 per diluted share. Excluding this excess tax benefit, we estimate that our effective rate for 2018 will be in the range of 16% to 17%.

The consolidated balance of cash investments at December 31 was $2.3 billion. The cash investment balance at the holding company was $104 million compared to $128 million as of September 30, 2017. As Mark noted, we made capital contributions of $75 million to Essent Guaranty and $25 million to Essent Re during the fourth quarter. Additionally, at year-end, we have $125 million of undrawn capacity under the revolving credit component of the facility. The weighted average annualized interest rate on the total amounts borrowed under the credit facility as of year-end was 3.49%.

As of December 31, 2017, the combined U.S. mortgage insurance business statutory capital was $1.5 billion with a risk-to-capital ratio of 14.2:1 compared to 14.7:1 as of September 30, 2017.

Finally, Essent Re had Gap equity of $663 million supporting $6.3 billion of net risk in force.

Now let me turn the call back over to Mark.

Thanks, Larry. In closing, Essent had another strong year of financial performance, and I'm proud of the Essent team and the company that we have built. Entering into our ninth year of writing mortgage insurance, our goal remains the same, and that is to build a high credit quality and profitable mortgage insurance portfolio. Our entire team's focus, whether in Winston-Salem; Radnor, PA; Irvine, California or in the field is providing best-in-class service to our customers. Looking forward, we remain positive about housing and our long-term prospects. Both Essent and our industry are well positioned and continuing to play a significant role in supporting a robust and well-functioning housing finance system.

Now let's get to your questions. Operator?

(Operator Instructions) Your first question comes from the line of Phil Stefano from Deutsche Bank.

I appreciate the updated narrative on the reserving process. I guess, it feels a little different than maybe what we got in the third quarter. So felt like coming out of the third quarter, they were going to be reserved for kind of that full tilt, like a normal default. At this point, it feels like they're not quite as far as maybe some of the peers have gone with the adjustments, but somewhere in the middle. I guess, can you confirm if that's right? What changed the narrative? Was there any pushback from auditors? Any color on that will be appreciated.

Yes. Sure, Phil. No -- and it did change. And like I said in the third quarter, it was really our initial estimate, and we had just probably gotten the default data 10 days before just for October. So we got November data, we got December, and we, obviously, got January. And I think -- and we also had access to Triad's hurricane performance back in 2005. So when we put that together and analyzed it, we really looked and said, we expected to get a higher cure rate on that part of the portfolio. The simple way to look at it though is, there's approximately, I think, 2,288 loans in default at the end of the year. Assume it's about a 10% of those defaults will go to claim. And that's really -- we kind of boxed it. Now we think that is our loss going forward. So we really -- we took that charge in the fourth quarter, and we wouldn't expect, unless there is a change, to increase that or lower that over time. So I think, that's the big change. Rather than having it flow-through kind of a different buckets, we sized it up. Because remember that at the end of the day that's what we're trying to do. We're trying to give everyone and -- our best estimate future losses, and at the end of the day, I think, we got there.

Is that 10% assumption, how different is that than the new defaults on more traditional inflow?

Well, again, it's different. Because the normal defaults will flow through the buckets. This is -- we tried to size ultimate. We took a different approach. So we tried to size the ultimate claim rate just for this discrete bucket.

And Phil, just to clarify the reserve factor is lower. It's tough to quantify exactly that because they're in different buckets. But I think the way that Mark explained it to you is we would look at of the 2,288 defaults, the reserve of $11 million, pretty much assumes about 10% of them will go to claim.

So again, Phil, to keep that in the context of your overall balance sheet. So we're saying that's why when we say the ultimate economic impact is minimal, we're comparing a $11 million charge to roughly a $2 billion equity base.

No, no, no. Understood. And thinking about the tax rate. I guess, I was a little surprised to hear you weren't subject to the BEAT in 2018. Maybe you can give us a little color on why that's the case. And to the extent you were, do you have any sensitivity you can provide around how the rate would be impacted?

Yes, certainly. Really 2 things are driving the rate. And it's relatively the calculation is complex, but it's really going to be driven by the amount that we quota share. So we're at 25%. And really, it's going to be driven by the combined ratio. So -- and given our expense ratio, it'll be relatively stable. It's really going to be driven by losses. So our view is -- and so we're at kind of 16% to 17% in 2018, looking forward, which is what I'm sure you guys are looking at too. As long as we stay within that guidance of combined ratio, kind of that 35% to 40%, which we've done in the past, and keep the quota share at 25%, we would not anticipate being subject to it over the next couple of years.

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

Can you speak to the cure trend on those 2,288 in the month of January? Do you have that information?

Jack, I think 260 of them cured in January.

Okay. Okay. Great. And then looking at the singles mix, it looked like you trended a little higher, certainly still below industry trend. Just curious is that strategic or is anything there or is that just sort of the business that came in in the quarter?

Yes, again, I think it's just -- it's the business that came in the quarter. I would say -- again, we looked at this -- I looked at this a few weeks ago. We've been 80-20 pretty much since we started. So sometimes we are above, sometimes we are below. But I wouldn't read anything into the quarter.

Okay. Okay. Just one last one. Mark, you'd always talked about sort of 78% to 80% persistency, obviously, better than that this quarter, I guess, with the move-in rates. Is that enough to get you to think that number's maybe a little bit higher on a go-forward?

Yes, I think it does. It's hard -- I'm trying really hard to stick to that 78% to 80%. But especially, with interest rates coming up a little bit, it has been trending kind of ended the year in the -- closer to the mid-80s. So I think, low 80s is probably better guidance, at least for 2018. You'd be careful projecting that out to further years, though. I think that's the one -- that's the harder thing to project out. But I think for this year, I think, that's a pretty good -- low 80s is a pretty good number.

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

I think you mentioned if PMIERs goes through as proposed that you would look to a couple alternatives for increasing flexibility. I think, you mentioned equity debt, reinsurance. Could you just give us a little more context about how you're thinking about each of all those alternatives and the relative appeal and which might be more likely?

Absolutely. You know us, we like to have financial flexibility, capital begets opportunities. And again, I think, on the debt side, we've been able to increase the line of credit last year, put some of it into term, that's something we would look to continue to do. That's gone very well. We had a nice kind of secondary in August, and that went relatively smooth. We have been speaking with folks in Bermuda, and we've been watching the CRT transaction. So for a company of our size now, Mark, we just think it's smart to continue to look at diversifying our capital sources. So reinsurance is interesting, and obviously, the capital market transactions are interesting. Really twofold; they are a source of capital and they mitigate risk somewhat. So again, as we get to scale, I think those are -- we're going to look at all 4, and we probably could end up doing one or a combination. But it's, again, we like having -- really pleased to see how those capital sources have evolved over the last couple of years.

Got it. And it sounds like it's just kind of natural evolution. Are these conversations you probably be having, even if they kind of moderate the initial proposals?

Absolutely.

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

First question, just bigger picture, Mark, how you're seeing the market as we head into 2018 on the purchase and refi side? And just any thoughts you could give us on what you think NIW could be or at least directionally, given how robust the trends were this year.

Yes. I think, big picture, we would expect the market size to cut to the chase to be relatively similar to where it was last year. And I know rates have gone up and that could potentially impact some of the refinancings. But as you know, our penetration on the refinance side is not that great. We have not seen really any signals to slow down the demand on the purchase. So when you think about housing, you think about consumer confidence, that's up. Interest rates, although up, is usually a sign of a stronger economy. Housing affordability is well above previous levels, which is a strong sign. And then we talk a lot about the millennials entering the market. And we thought that the home ownership creeping above 64%, which is -- it's the highest it's been in several years, they're all pretty good data points that housing will be strong. Obviously, there's supply issues in certain markets. We think those are still temporary. And as you know, following the builders, the builders have been very active. And I think they'll continue to be active. And I think that will -- those supply-demand imbalances will balance out over time. But everything we can read and talk to our lenders, we would expect 2018 to continue to be kind of robust on the NIW levels.

Okay, great. Yes, we agree with you on that. And then just thinking about your -- the company share, that volume, obviously, the share growth has been very impressive this year. Just how would you characterize directionally the further opportunity to grow Essent's customer breadth and depth? Is there further room for increased penetration?

Yes, I mean, I think we continue to grow. I think, we added -- we added quite a number of customers in 2017. However, a number of customers went out of business. So we're continuing to grow, but clearly not at the -- we're not growing at the pace we would've probably 3 or 4 years ago. So it's kind of slow and steady there. But I think our share, we look at it, look, we're 1 of 6 guys. I think pricing and competition is relatively stable in terms of our view is. So we set that range at 13 to 15. That's really just being conservative on our part. We would expect in 2018 most likely to be at the higher end of the range. And again, as you know, Mackenzie, it's really about insurance in force. So we grew it over 30% in 2017. We would expect to continue to grow it. And that's really what's driving -- we ended up, I believe, well over $500 million of premium earned in 2017. And a lot of that, as we said, insurance in force drives premiums and it's going, obviously, right to the bottom line given our combined ratio. So if we can maintain that share range, we feel like we're going to continue to do really well.

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

The tax benefit in some ways could be viewed as sort of a capital windfall for you. I am curious as we start to see sort of a leveling off of NIW over the next year or 2, how you think about the capital position and the potential to eventually start returning some capital?

Sure, Rick. I mean, 2 things to think of. One is, we're still not done growing, and this is evidenced by the capital we downstream in the fourth quarter. I think, that will slow in 2018. But we've been in capital-consumption mode longer than we would have anticipated because of the larger market size. And also factoring in the PMIERs are still in, we're still in discussions and that's in draft mode. So we'd really want to see kind of where that ends up and where we are and combined with our growth. I still think we're -- it's a good discussion to have at some point, but we're still growing, and -- which I think is a more positive sign. So we're probably not at that stage yet where we're going to be returning capital to shareholders.

Got it. I mean, it is interesting, I mean, it equates to about $85 million of incremental capital. Objectively, you have grown faster than expectations, raised capital -- more capital than expected to fund that, and so just sort of raises the question of, Okay, does this effectively fund all potential future growth for the next couple of years given the natural capital formation of the business?

And again, I would say, take a step back and look at kind of how big the industry is. So if you look at insurance in force for the industry, Rick, it's probably about $1 trillion and that's growing. And if you look at some of the larger players and how fast they've grown off a large base, you could see that grow 5% plus per year over the next few years. We're still only 11% of that kind of pie. So -- and -- so we still have kind of micro growth because our share is higher than 11%. So we'll be a bigger piece of that pie, but more importantly, the pie is growing, which I think is good for the industry and is, obviously, good for us. And so as long as that -- those trends continue, we'll continue to be kind of investing capital into the business, so -- which I think, are positive trends.

Yes. No, I would agree. It's pretty remarkable when we think back over this that you have 11%, 12% of that overall market at this point.

Yes, we've been very fortunate. Thank you.

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

Actually, just one more on capital. When you think about capital management and the new -- with the new tax regime, I guess, there's no reason to push more capital down into Essent Re, absent some big increase in risk sharing, is that fair?

I would say -- remember, what really drives capital in Essent Re, Bose is the 25% quota share. So that's going to stay intact. So if we keep growing, we would put capital into Essent Re. And the second part is really the third party. And just to be clear with everyone, for third-party business, it's business as usual. So we'll continue to grow that risk in force. We'll continue to expand that franchise. It's a great -- it's an additional platform for us to take mortgage risks. So it doesn't really impact it much at all. And I think from a tax reform standpoint, we're looking at a 27% effective tax rate going down to that 16% to 17% range. It's almost a 40% reduction. So it came in -- we came out in a good place there.

And then just in terms of the ceding, you will keep that at the 25% just to maintain the tax rate at the 16% to 17%?

Yes, that's -- again, it's really -- it's a little bit more complicated than that with kind of how the BEAT is -- how it works. But yes, it's really around keeping that quota share right at 25% and then, obviously, if losses stay or combined ratios stays within that 35% to 40%, we feel pretty good about the 16% to 17% rate assumption.

And actually, on the earned premium, is the expectation still that, that goes down a couple of basis points over time?

Good question. It hasn't really gone down. So we're kind of in that 53% -- 53 basis point range. Yes, we still think it's kind of in the lower end of the -- in the 50s range going forward.

Your next question comes from the line of Mihir Bhatia from Bank of America Merrill Lynch.

Just wanted to start, maybe on your investment portfolio. Just any updated thoughts on how you're thinking about duration and just managing that given the recent move in rates and tax reform, et cetera?

Yes, I mean, I can start. I think obviously, with rates going up, we're relatively well positioned to ride the curve up a little bit. So as the shorter-end maturities come due, we're able to replace them with higher rates. It's relatively small movements. Not too much change on the -- around tax reform. And I would think the duration is in relatively good shape. Because remember we match that with the liabilities in the portfolio, which continue to lengthen. But I think, from -- we've been relatively, I shouldn't say relatively, very conservative in the fixed income portfolio, and we would expect to be.

Yes, Mihir, just maybe a couple of additional thoughts. This is Larry. Our duration as of year-end of the bond portfolio is about 3.9. So that's moderate. And we think we're well positioned in terms of any movements in the interest rates up. About 27% of the portfolio matures over the next 12 months and a full third of it matures over the next 24 months. So we'll be able to reinvest those at higher rates. And I think, one really important item is the operating cash flow the business is generating. Operating cash flow for the full year 2017 was about $370 million. So again, that also gives us an opportunity to invest them at higher rates.

Got it. Great. And then on pricing, just a quick question. Obviously, it sounds like there's no desire to just reduce pricing to compete with the other private mortgage insurers. But what are your thoughts around, maybe, targeted reduction in prices post tax reform for like, on -- say to compete with the FHFA? Because right now when you look at the grid, I think, it's about 740. Clearly, PMI is better and then below 6 -- maybe below 680, FHFA is better. But, like, in that 720 bucket or something, do you guys have any thoughts around that, any views?

Yes, that's a good question. I would say -- I don't think there's really any price competition within the industry. I think the competition in the industry where it's the most intense is really around calling on clients and customer service, a lot of the day-to-day stuff that isn't seen by the market. I think pricing has been relatively stable. There is a sense that you could use some of the pricing to help be more competitive with FHA in certain buckets. I would say that's -- it's a possibility. However, the big mitigant to that is PMIERs. And until, I think, PMIERs, the drafts are settled, it's really -- and find out what the new capital standards are going to be, I think it's going to be difficult for Essent or can't speak for our competitors. But I think, it will be difficult for -- to make any price moves until you really know what your capital is on that business going forward.

Okay. That makes sense. Great. And then another question, just on -- have you guys seen any additional risk clearing or any areas of the market that may be getting a little ahead, maybe a little more -- little, I guess, credits getting a little looser? Has there been any tightening around the edges or anything whether it's single premium or borrowing?

Yes, I mean, -- not really. I mean, 97s have kind of gone up with the GSE programs from a couple of years ago. That's really moving -- it's really moving borrowers out of the 95 bucket. We are bringing in some FHA borrowers, which is nice. The FICOs in those areas are elevated, which is good and also we have lower coverage. So there's a mitigant there. You've seen some of the DTIs increase around the edges. But again, taking a step back, you're looking at $110 billion portfolio with an average FICO in the 740s. These are strong borrowers. They generally have better reserves. So they're more able to withstand kind of economic uncertainty. And just with that strong of a portfolio, I really think it's going to depend on the economy and employment versus kind of underwriting, weakening and so forth. It's just -- the underwriting is not only at a FICO strong, the procedures at the lenders in terms of how they're underwriting, the QC that's done by the MIs and the GSEs is much tighter. It's a different environment than it was 10 years ago. So again, I think it's going to get back to kind of the old fashion, real reasons for losses, which is going to be kind of people losing their job, death, divorce, all those sort of things. And if the economy weakens, you may see higher losses. But I don't think it's going to be around the underwriting this time.

Got it. That make sense. Great. And then just last question, just to clarify. Just -- did I hear right, the tax reform -- not tax reform, sorry, the tax benefit in Q1 is going to be $0.10 per share, up from $0.03 last year?

Yes. If you remember there was a change in the accounting rules that we implemented last year, where we have to run the excess tax benefit associated with divesting of certain restricted shares that are granted to management. So our estimate of the impact to that in the first quarter, there'll be a discrete tax benefit of about $0.10 a share.

Your next question comes from the line of Sean Dargan from Wells Fargo.

Just to go back to the tax rate, just so I understand it. Last quarter, you were talking about perhaps recapturing the affiliated business ceded to Essent Re. And so that's the way I'm hearing it now, is that's off the table until the combined ratio moves north of 35% to 40%?

Well, I think you've heard the first part right. I think right now, yes, when we talked about that in -- on the November call, we didn't really know where tax reform was going to land. The way it landed is our quota share is intact. So we'll continue to be at that 25% level. The second part is really around the BEAT tax and how much we would have to pay or what would we be subject to. And I think there is, if we stay within that 35% to 40% range, and in fact that's conservative, we could be a bit above that. But if we're in that range, which we would expect to be over the next couple of years, and we keep the quota share at 25%. So there's an interplay, there, Sean. But as long as we do that, we would expect to be in that 16% to 17% tax rate.

Okay. And just as a point of clarification. I assume there's an excise tax affiliated with the ceding to Bermuda and that runs through the other underwriting and operating expense line?

Yes, Sean. The excise tax is unchanged with the new tax reform. But we show that as a reduction -- we show that as -- in operating expenses. So you're correct. But again, that's sort of unchanged between the older regime and the new regime. That excise tax continues.

Yes. And Sean, when we spoke about it back in November, we thought the worst case was we'd be at 21%. And I think the way the final legislation came through with the BEAT that we ended up well below that.

Okay. And then I just have a question on debt as reported, looked like it ticked up. Is that just you drawing down on the revolver or?

Yes, Sean. This is Larry. Yes, that's correct. In terms of funding the capital contributions to Essent Guaranty, we used the revolver to fund those contributions.

Okay. Great. And then just, you may have addressed this earlier. But your year-over-year NIW growth seemed a little weaker than some of your competitors. Is that a function of just doing less singles business?

I think year-over-year, we were quite strong. Quarter-over-quarter, I think, it's varied. So again, we don't -- as we talked about it before, we don't read too much in the quarter-over-quarter. I just think 33% increase in insurance in force year-over-year is a pretty good -- is a pretty good metric.

Your next question comes from the line of Chris Gamaitoni from Compass Point.

Most of my questions have been answered. The only follow-up is, do you have a sense of what the kind of current spreads on your new investments are that you're putting in your investment portfolio?

Yes. So we probably can take that off-line. It sort of varies from month to month and quarter to quarter.

(Operator Instructions) You next question comes from the line of Geoffrey Dunn from Dowling & Partners.

I got a few questions here. Just on the first quarter tax benefit. Is that something that's recurring in each first quarter going forward or is this a onetime thing?

No. Jeff, this is Larry. The first quarter we had it was the first quarter of 2017. There was a change in the tax rule. We always had that tax benefit, but it previously went directly to equity. So we would expect it to be recurring in the first quarter of each year because we have a number of our restricted shares that vest in the first quarter. We would expect, however, the benefit going forward to be smaller than the benefit this year. We had a little bit higher vesting of restricted shares because of some shares that were granted in connection with the IPO that vested in the first quarter of this year. But it is recurring, albeit, we would expect it to be at lower levels in future periods.

Got you. Okay. And then with respect to expenses, your guidance, obviously, is a dramatic deceleration of year-over-year growth, something at the high-end, maybe more in line with the more mature peers. Is a kind of mid- to upper single-digit annual run rate for expense growth more reasonable now given your scale?

Yes. Geoff, I don't think that's unreasonable. This is Larry.

Okay. And then I want to understand your comments on PMIERs. Understanding that you like your flexibility, but as the proposal stated today, do you have the existing resources through debt or I guess, capacity on your credit facility and cash at the holdco to be compliant? Or are some of those actions that you're talking about needed to be compliant?

Good question. And no, we have the resources today in-house.

Okay. And then the last question is with respect to hurricane notices, I'm not sure I completely followed this kind of discrete treatment. Where are we in terms of the level of notices in January? Are we back down to normal, meaning that the first quarter provision is going to be kind of "clean" provision? Are you expecting more distortion from the hurricanes in the Q1 in cured loss provision?

Yes, excellent question. Yes -- no, they went down by -- the total defaults went down by 260, is that the (inaudible) number?

Yes.

So that includes cures and new notices, which went down dramatically. No we would expect the first quarter now to be clean. Unless there's a change, this is -- again, that was kind of the purpose was to kind of box adjust in the fourth quarter, give our best estimate and then put it behind us. And then going forward, it would be clean. So if the reserve is that $11 million is somewhat higher or lower than our original estimate that will flow through, but that will flow through over 6 to 8 quarters. It'll be really hard to even identify. But that was really the purpose of it, as we sat down at the fourth quarter and discussed it with our auditors, was to really give our best estimate of future losses and kind of box it.

And then also to be just be clear on the accounting. Because that $11 million is designed to discretely box the issue, you're not expecting significant development in the next couple of quarters coming out of the 4Q reserve?

Yes. Jeff, this is Larry. That's correct. We're going to monitor it, and we would expect to not have any significant changes in that unless we get significant new additional information. And so we would -- as Mark said, we expect this to sort of play out over 6 to 8 quarters.

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

Okay. Thank you, operator. Before ending the call, we'd like to thank everyone for participating in today's call. And also, congratulate our Philadelphia Eagles on winning their first Super Bowl championship. Go Birds and enjoy your weekend.

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