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Essent Group Ltd  (NYSE:ESNT)
Q1 2019 Earnings Call
May. 03, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is. Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited, First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you, Chris Curran, Senior Vice President of Investor Relations, you may begin your conference.

Christopher G. Curran -- Senior Vice President of Investor Relations

Thank you, Christina. 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 2019 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 M of our press release. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially.

For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, the risk factors included in our Form 10-K filed with the SEC on February 19, 2019. and any other reports and registration statements filed with the SEC, which are also available on our website.

Now let me turn the call over to Mark.

Mark Casale -- Chairman, President & CEO

Thanks, Chris. Good morning everyone and thank you for joining us. I'm pleased to report that Essent generated another strong quarter of financial results as the operating environment remains favorable and credit continues to perform well. Also during the quarter, we continued making progress in transitioning our franchise to a buy, manage, distribute model. Key highlights relating to this includes the broad rollout of our risk-based pricing engine EssentEDGE and reinsuring our 2018 NIW with Radnor Re and a panel reinsurers.

Our outlook on our business and housing remains positive, as low unemployment and affordability continue to support a purchase mortgage environment. Combined with demographics, such as the millennials coming of age and builders increasing supply for first time homebuyers, we continue to believe in housing's longer term fundamentals.

Since our business is weighted toward the first time homebuyer and higher MI penetration in purchase mortgages, we believe that we are well positioned in continuing to grow our business.

Now, let me touch on our results. For the quarter, we earned $128 million or $1.30 per diluted share, compared to $111 million or $1.13 per diluted share for the first quarter a year ago. Our annualized return on average equity for the first quarter was 21%. Our financial results continue to be driven by our insurance in force, which ended the quarter at $143 billion representing a 24% increase from $115 billion at the end of the first quarter a year ago.

Finally, our balance sheet remains strong, ending the quarter with $3.4 billion in assets and $2.5 billion of GAAP equity. On the business front, we formally rolled out EssentEDGE and remain focused on the operational interface as customer adoption is a key component in the engine's success. We believe that the engine provides value to both Essent and our customers, especially as MI pricing is integrated into best execution frameworks.

For us EssentEDGE provides flexibility for more granular pricing and for our customers it provides improved efficiencies in obtaining Essent's best rate based on the borrower's credit profile. Also during the quarter, we successfully completed a side-by-side XOL reinsurance transaction on our 2018 NIW with Radnor Re and a panel of reinsurers. The aggregate transaction initially provides $592 million for protection on top of a $254 million first loss portion that Essent retains. After completing four reinsurance transactions relating to our 2017 and 2018 NIW, we now have $1.2 billion of reinsurance protection covering approximately 60% of our insured portfolio.

Looking forward, we plan on continuing to reinsure our portfolio and increase sophistication around pricing and our use of EssentEDGE. Our plan also includes evaluating reinsurance on our back book. We believe that the combination of risk-based pricing on the front end and risk distribution on the back end, allows us to hedge franchise volatility during down cycles, making Essent a more sustainable franchise over the long term.

On the capital front, we continue to generate excess capital and we'll look to reinvest in both Essent Guaranty and Essent Re since they continue to grow. We are also evaluating capital distribution strategies and would look to provide more detail on this, once we have 75% to 80% of our book reinsured. Also keep in mind that PMIERs excess does not correlate directly to excess capital from a regulatory standpoint, which we view as the binding constraint. Since the founding of Essent we've been very thoughtful on managing capital and we'll continue to do so based on what we believe is in the best long-term interest of our franchise, policyholders and shareholders.

Turning our attention to Washington, we believe that we will see a renewed focus on GSE and housing finance given new leadership in Congress and the FHFA and an administration that is in the second half of its term. While the probability of legislation remains low, we believe that there will be meaningful discussions and proposals on the future of housing finance and GSE conservatorship. This should also include increased scrutiny on the GSE pilot programs and the practical utility as such, given the role that our industry and private capital already plays.

Now. let me turn the call over to Larry.

Larry McAlee -- Senior Vice President, Chief Financial Officer

Thanks, Mark, and good morning everyone. I will now discuss our results for the quarter in more detail.

Earned premium for the first quarter was $178 million, an increase of 3% over the fourth quarter of $173 million and an increase of 17% from $153 million in the first quarter of 2018. Note that premium ceded on our reinsurance transactions are reflected as a reduction of earned premium and were $6 million in the first quarter of 2019, $3.7 million in the fourth quarter of 2018 and $300,000 in the first quarter a year ago.

The increase in premiums ceded in the first quarter is due primarily to the execution of the insurance-linked note transaction and placement of excess of loss reinsurance coverage with a panel of reinsurers on our 2018 new insurance written.

The average net premium rate for the first quarter of 2019 was 48 basis points, which was 1 basis point lower than the fourth quarter of 2018, due to the increase in ceded premiums under our reinsurance transactions. Investment income excluding realized gains was $19.9 million in the first quarter of 2019, compared to $18.6 million in the fourth quarter and $13.7 million in the first quarter a year ago.

The increase in investment income of 7% over the fourth quarter of 2018 is due to a modest increase in both the balance of our investments and the yield on the portfolio. During the first quarter, we recorded a gain of $1.4 million for the increase in fair value of embedded derivatives associated with the insurance-linked note transactions. This gain is included in other income and our consolidated statement of comprehensive income.

We remain pleased with the credit performance of our in-force book. A provision for losses and loss adjustment expenses were $7.1 million in the first quarter of 2019, compared to a benefit of $1 million in the fourth quarter of 2018 and a provision of $5.3 million in the first quarter a year ago. The benefit reflecting the provision for losses in the fourth quarter of 2018 includes the release of $9.9 million of the reserves associated with hurricanes Harvey and Irma that had previously been recorded in 2017.

The default rate on the entire portfolio decreased 1 basis point from December 31, 2018 to 65 basis points as of March 31, 2019. Other underwriting and operating expenses were $41 million for the first quarter of 2019, compared to $39.4 million in the fourth quarter of 2018 and $38.1 million in the first quarter a year ago.

The increase in expenses over the fourth quarter is primarily due to an increase in the level of payroll taxes associated with the vesting of shares and incentive payments, which historically occurs in our first quarter. As communicated in our earnings call in February, for the full year 2019, we expect other underwriting and operating expenses will be in the range of $160 million to $165 million.

Income tax expense for the first quarter was calculated using an estimated annualized effective tax rate of 16% and was reduced in the quarter by $2 million of excess tax benefits associated with the vesting of restricted shares and share units issued to employees. For the balance of 2019, we currently forecast our effective tax rate to be 16%. The consolidated balance of cash and investments at March 31, 2019 with was $3 billion. The cash and investment balance at the holding company was $74 million. No capital contributions or dividends between the holding company and the operating businesses were completed during the most recent quarter.

At the end of the first quarter of 2019, we have $275 million of undrawn capacity under the revolving component of our credit facility and $225 million of term debt outstanding. As of March 31, 2019 the combined US mortgage insurance business statutory capital was $2 billion with the risk-to-capital ratio of 13.5:1 compared to 13.9:1 at year-end 2018.

The risk-to-capital ratio at March 31, 2019, reflects a reduction in risk in force of $1.2 billion for the reinsurance coverage obtained from our insurance-linked note and excess of loss transactions on our 2017 and 2018 NIW. At the end of the first quarter Essent rated GAAP equity of $847 million to $48.6 billion of net risk in force. In addition, Essent Guaranty's available assets exceeded its minimum required assets as computed under PMIERs by $806 million.

Now let me turn the call back over to Mark.

Mark Casale -- Chairman, President & CEO

Thanks, Larry. In closing Essent generated another strong quarter of financial results, as we continued building a high credit quality and profitable mortgage insurance portfolio. The operating environment during the quarter was favorable and we remain pleased with our credit performance. Looking ahead, we believe that as more risk is originated through EssentEDGE and is distributed via the reinsurance markets, it will strengthen our buy, manage and distribute business model and enhance our ability to manage long tail mortgage credit risk through the cycle.

Now let's get to your questions. Operator?

Questions and Answers:

Operator

(Operator Instructions)

Our first question comes from Douglas Harter from Credit Suisse. Your line is open. Please go ahead.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. Mark, just hoping you could talk a little bit more about the comment of wanting to get to 75% or 80% reinsured before looking to distribute capital or return capital to shareholders. Can you just talk about kind of the thought process that goes behind that number and kind of why you're thinking that number?

Mark Casale -- Chairman, President & CEO

Sure, Doug. I mean it kind of goes to the old 80/20 rule. I think we really -- our goal is to remove volatility from the balance sheet and protect and box the tail, right. That's the biggest risk we have in the business and I know we'll have a number of questions about different risks and there's many In the business, but credit kills these businesses. And the biggest mistake the industry made in the last downturn was paying out, distributing a lot of capital right before the crisis. And I think, they really went into the industry because these tools didn't exist. They went into the crisis with an uncapped liability on their balance sheet. And our view is the tools are out there. The markets are strong, those with the reinsurers and with the capital markets. It's in our best interest to box that risk. Once we do and we think 75 to 80 is a good number for us to get started, I think then we'll have a much clearer vision around excess cash flows.

And the other thing we mentioned in the script, which I think is important is $1 of PMIERs is not a dollar of excess capital. Read a number of reports that kind of jumped to that conclusion. And remember, that's an asset test and the real test around excess capital is coming from statutory. That's the real cash flow and I think that's a smaller number than our PMIERs excess, which was I think little bit over $800 million. So as we look at it, you kind of have to balance those things, but I think we want to protect our portfolio, first and foremost, and that's the number one priority.

Douglas Harter -- Credit Suisse -- Analyst

That's helpful. Thank you, Mark.

Mark Casale -- Chairman, President & CEO

Sure.

Operator

Your next question comes from Phil Stefano from Deutsche Bank. Your line is open. Please go ahead.

Philip Michael Stefano -- Deutsche Bank AG -- Analyst

Yes, thanks. In thinking about that idea, little bit farther in excess capital. Mark, I think you had mentioned that you're at least contemplating looking at reinsuring the back book. I mean, as we think about getting to the 75 or 80, can you help us think about the balance between new ILNs on business going forward versus reinsuring the back book to help you get there.

Mark Casale -- Chairman, President & CEO

Yeah, good question. I think we're looking at both, right. I think we're going to look -- continue to look at kind of the current book and forward book and that could in ILN and that may be most likely next year that we would -- we're kind of on a flow now where we did the '17 book in '18 and the '18 book in '19. We're expected do the '19 book in '20. So the quickest way to get to that 75% to 80% is the back book and that's why we're evaluating it now.

Again, we think the markets are reasonably strong and the appetite strong for that type of risk. So we're looking at that currently, and we'll have an update on that probably in the August call.

Philip Michael Stefano -- Deutsche Bank AG -- Analyst

Did the appetite around the reinsurers and the alternative capital providers change at all that you have them side by side now as opposed to the XOL on top of the ILN with the '17 book?

Mark Casale -- Chairman, President & CEO

No, not at all. I think the appetite's fairly the same. As we said last year, we're testing different structures. So we're looking at it, we're testing kind of how deep each market is. We're obviously still concerned longer term about the sustainability of those markets, but I think we're trying to test different things.

We have not done a quota share yet on the forward book, but that's something also we would look to do or look to evaluate I should say. Again, we're always looking to increase our sources of capital and I think kind of testing different structures is a great way to do that. And as I remind everyone, we're still kind of in this transition. We talked about it last year. We're really transitioning from a buy and hold business model, which was you really just fund everything through the balance sheet via both debt and equity, and you hold the risk for a long time. And we're transitioning now from the buy, manage and distribute. And there's two keys to that. One, clearly is the reinsurance on the back end, which is distribution part of it. Just as important is the kind of the EssentEDGE and the pricing engine on the front end, which now allows us to price each risk discreetly versus kind of the rates part, which is a blunt instrument.

So, we're able to look at different ways to price the risk and also factor in any color we get on the reinsurance market. So if we were to go into a slowdown and the cost of reinsurance was to rise. We now have the ability to pass that on to the front end and that's a good second set of eyes for us. As we come across the reinsurers and the folks in the capital markets, these guys know -- they know mortgage risk really well. So it's a good way for us to take their feedback and then to incorporate that learning or market color, so to speak into the front end.

Philip Michael Stefano -- Deutsche Bank AG -- Analyst

Okay. And one more for you. So I know you don't run the business to a new business number and operating returns is the right way to look at things. But it feels like share picked up in the quarter. Did EssentEDGE have an impact in some way that you were able to get more shots on goal or better shots on goal? Or anything you feel like the competitive dynamics that's changed that allowed new business to be a bit better than maybe we were expecting?

Mark Casale -- Chairman, President & CEO

Yeah, I mean again with share, it's tough for us Phil. We don't really get these numbers till the last minute. And when everyone reported the last couple days, so for us it's hard to have a quick conclusion. I think our view is we're still in that kind of mid-teen share. I mean we're one of six. I do think with the engine and with some of the bid cards out there, you are going to see some volatility in share and I wouldn't read too much into that. I mean, from our standpoint in terms of EssentEDGE it's gone probably better than expected in terms of just adoption and ease of use. We're really focused, as I said in the script, on the operational implementation of it to make sure it's easy for our customers to use and it ties into with how they do their business. So it's one thing just to have a price, but you also have to make sure the loan closes and there's not too many changes between initial price and final price and we've been focused on that. I've been on the road a lot talking to both big and smaller customers. So I think we're really more focused on that. I think the share is just kind of an output.

I would add though that we're still increasing customers. We added a little bit over 20 customers in the first quarter and we've added more in the second quarter. So we continue to add customers. I do think the engine may be helping us add some customers because it's something a little different, it's a way to get into a client, but we don't talk about how many active customers we have any mortgage. I think we've reached a critical mass, but I would remind you that we're still growing in that aspect of it. Does that have some impact on share? It could be. But again, I wouldn't focus too much on it. I would really focus more on, we're continuing to grow insurance in force and I do think just with these engines out there that the volatility in market share will continue over the near to intermediate term.

Philip Michael Stefano -- Deutsche Bank AG -- Analyst

Got it. Thank you.

Operator

Your next question is from Bose George from KBW. Your line is open. Please go ahead.

Bose Thomas George -- Keefe, Bruyette, & Woods, Inc -- Analyst

Yeah. Good morning. Actually, just going back to the ILN, the one you guys did or -- so you retained some of the senior tranches. Can you just talk about the drivers of that and have you since sold them? And also just more of a philosophical question on that. Just with the XOL you guys did last time as well, on top of the ILN, are you still sort of experimenting with what the sweet spot is in terms of how much risk to retain?

Mark Casale -- Chairman, President & CEO

Yeah, absolutely. I think we retained the top layer on both deals both in the '18 and in '19 Bose. So really it's around, think of it more -- we're more focused on the attachment points, so where do we attach. And then we kind of get up to 7%, 8%, 9% depending on the appetite, how strong the bids come in, the top layer that we did last year was a test. Quite frankly, that was a little thin in terms of some of the reception, not that we wouldn't go back to it, and we can get into this little bit more detail in terms of how that operates.

We try to do this side-by-side. This year, again, is another test, and it was actually very well received. So we don't think about -- I think we're kind of, we look at it and say what's the stress losses as to what extent would we have to start taking the risk back on our balance sheet. And we feel like kind of 2.25% up to that kind of 8% or 9%, we're pretty well insulated against most economic environments.

Not all of them. I think if you stressed the Great Recession and said (inaudible) claim rates are kind of 10% to 12%, which will be really high-based on the credit quality of our portfolio. We're still probably breakeven ROE, maybe slightly negative, but we're not depleting the capital that the industry had to do last time. So I think we feel pretty good with the structures, even more pleased I think with the reception and the strength. I mean the deal we did in 2018, we had close to 20 investors, the deal we did in the first quarter this year. Just on the ILN was another 20 customers -- 20 investors, some new which was nice. And then we've had probably 10, 10-plus reinsurers in these transactions.

So we really, when we think about kind of sources of capital and the number of different kind of investors and reinsurers, it's really another capital base. And as I explained to people, just to put it in more context, roughly $2.5 billion of equity on our balance sheet, we have another $1.2 billion of off-balance sheet capital that can be used to withstand kind of shocks.

And again, I know the environment's great, unemployment, saw the numbers this morning is good, our credit quality has been excellent. But you never know the bullet that's going to get you. So we look at it and say, as I said earlier, protecting that portfolio is first and foremost, what we're after. And we just believe the reinsurance markets and the evolution of them is the biggest transformational thing that happened to the MI business since we started Essent.

Bose Thomas George -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay, that makes sense. Thanks, Mark. And then actually, just switching to the premiums, what was the premium on the new insurance written during the quarter?

Mark Casale -- Chairman, President & CEO

We don't disclose that, Bose. I mean I think we still think, I'll go back to kind of earned premium yield on the portfolio and we now do a pre-ILN or pre-reinsurance and post-reinsurance and that's kind of in -- I think it's in the 48 basis points and that could -- that's net. That could, that does not include any back book that we may look to do this year and that would obviously probably reduce it by another maybe basis points. But to remind everyone, the cost of reinsurance in general longer term's about 4 basis points to 5 basis points. So if we're writing kind of in -- I've seen other MIs and we're not much different than the other MIs. It's about 4 basis points to 5 basis points of that for the cost of reinsurance.

Larry McAlee -- Senior Vice President, Chief Financial Officer

And also, Bose, our ceded premium in the first quarter only includes a partial quarter effect for the ILN and the XOL that we compute in the first quarter. We'll have a full quarter effect that next quarter.

Bose Thomas George -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay. And actually, can you just remind us what you've said about the direction of the premium? Is it sort of a few more basis points down or just can you just remind us that?

Larry McAlee -- Senior Vice President, Chief Financial Officer

Yes, Bose, this is Larry. Based on the current reinsurance that we have in place, we would expect our premium rate by the fourth quarter to line between one and two basis points from where we were in the first quarter.

Operator

Okay, perfect. Thank you. Your next question comes from Rick Shane from JP Morgan. Your line is open. Please go ahead.

Richard Barry Shane -- JP Morgan Chase & Co -- Analyst

Hey, guys. Thanks for taking my questions this morning. Is the industry moves to engines and curious if you're seeing that that's driving more and more efficiency and as a result, potentially areas where you get concentrated risk in different segments, because of that increased efficiency? And how you -- what safeguards do you have in place to make sure that you don't get concentrated in certain pockets?

Mark Casale -- Chairman, President & CEO

That's a good question. I actually think this tool is the best way to mitigate against that. We can't change because of how the compliance works in terms of filing rates. We have certain customers where we can change the rate every week. And I think what we've been doing and we've actually taken a page, Rick, out of the credit card book. So we're just testing things. We're testing a lot of different things in terms of price elasticity, in certain markets really geographically, kind of concentrated different parts of the credit higher LTVs, lower LTVs, higher FICOs, lower FICOs. and I think we're going to -- just like we did, as we talked about earlier with reinsurance, we're just going to continue to test and we're learning. And a lot of it is you're competing with five other players, and I'm sure they're doing the same thing. So I mean there's a lot of learning involved.

I do think with the tool, you can dial up and dial down relatively quickly. Not dissimilar to kind of the credit cards and I think that's, again, as I try to make the point, the pricing power is really shifting a bit from the lenders to the mortgage insurers, not totally. Obviously there's a clearing in terms of market price with six participants, but with this new tool, you really have the ability to kind of zero in on things.

And then, the game's going to be longer term, I think it's going to be around credit selection. And never really was that before, right? You had similar underwriting guidelines, similar pricing, the lender originated, you got your share and you got what the lender gave you. And you couldn't go back and say, hey, I'm getting too much of this or too much of that. It was kind of -- it was binary. If you didn't like it, you left. You didn't go-to-large clients and just kind of said, hey, you know what, there are certain geographies I like, there are certain I don't like, any chance we could? There was no -- MIs have zero power around that. And I think this is -- it's changing. And also as I said, we all have now the ability to give each borrower our best price. It may not be the lowest price. I mean another MI may have a lower price. And what that is Rick, that's good for the borrower, it's good for our lenders , it's good for the borrower and to have each of the kind of the MIs competing around price could help and also means you don't have to be the lowest price to win.

So you can always be -- or you don't have to always be the lowest price, which means in times of stress, you get chance to raise your pricing or in terms of certain market niches, you can raise your pricing. Because as we get into this kind of new model around reinsurance on the back end and EssentEDGE on the front end, it's really going to be about managing average premium, right. You didn't have to do that before too. You didn't have the ability to manage average premium other than maybe kind of modifying your singles mix with your borrower-paid monthly mix. So, again, I think these two new tools, both on the front end and the back end are kind of like entering into kind of the next phase in the mortgage insurance industry.

Richard Barry Shane -- JP Morgan Chase & Co -- Analyst

Yeah, it'll be interesting to see how the front end and the back end actually start to interact over time because presumably as the ILN markets become more sophisticated, you're going to be more granular in your thought process in terms of what you're contributing as well and you'll use the engines to drive that.

Mark Casale -- Chairman, President & CEO

Absolutely. They're going to learn. The markets are going to learn more too and they're going to have more feedback for us that we can then channel into the front end.

Richard Barry Shane -- JP Morgan Chase & Co -- Analyst

Okay, great. Thanks, Mark.

Operator

Your next question comes from Jack Micenko from SIG. Your line is open. Please go ahead.

John Gregory Micenko -- Susquehanna Financial Group -- Analyst

Good morning. First question, looking at the loss ratio, you came in a little bit higher than we had thought. Again, a 4% loss ratio is not a concern in any way. But was there anything in the quarter, maybe around assumptions, or the underlying modeling around that or was this just pure seasoning.

Mark Casale -- Chairman, President & CEO

It's pure seasoning Jack. I mean, again, as we continue to grow, insurance in force and the book starts to season, you're going to see the loss ratios go up just by pure math.

John Gregory Micenko -- Susquehanna Financial Group -- Analyst

Sure, OK. And then Mark bigger picture, we talk about the front end, we talk about the back end. There is definitely an appetite on the back end. They're buying the milk. I guess the question is when some of these participants start thinking about buying the cow, does that ever occur like -- how do you think about M&A in the space, given the business has changed so significantly over the last year, around some of the issues that may be larger insurers have had with the business model historically?

Mark Casale -- Chairman, President & CEO

Yeah. It's a good question. I would look at M&A in 2 different ways. I think from a new -- someone outside the industry coming in, I do think it's still not their expertise, right. If you really think about the larger kind of reinsurance companies, that would have the balance sheet to take on kind of an MI business. They still don't really have the expertise and I think they -- if you look at some of the larger reinsurers that have participated in the MI reinsurance transactions, they really kind of fashion themselves as being in a bunch of different lines of business and they kind of come and they go as they like. They like that. That's their business model. And we've recently even heard that the P&C market -- the retrocession part of that market has really started to dry up and rates are going up a little bit. So they could quickly turn their attention, hence that's why we want to hold more capital too, right? You don't want to jump and assume the sustainability of this stuff, so I think it's a relatively never say never. But I think right now, until the model continues to get proven out, I think the kind of the guys who participate in the business today probably are not players. Would another larger P&C be interested down the road? I think the model still has to be proven out. Like I said, we're still in the transition phase of it. So I would leave it -- so from that, I would never say never, but right now I think it's probably little early.

John Gregory Micenko -- Susquehanna Financial Group -- Analyst

Okay. Just if I could sneak one more real quick one in. Larry, PP&E jumped up pretty meaningfully. Quarter-to-quarter was there was that something tied to EssentEDGE or software or something or what -- curious on that.

Larry McAlee -- Senior Vice President, Chief Financial Officer

Yeah, Jack, good question. We adopted the new lease accounting standard this quarter so that we had a little bit of a balance sheet gross-up associated with that.

John Gregory Micenko -- Susquehanna Financial Group -- Analyst

Okay. And that's the right sort of number to run then going forward ?

Larry McAlee -- Senior Vice President, Chief Financial Officer

Yes, again, the lease accounting has a very minimal impact on us. Again, very much a balance sheet gross-up, but yeah, that would be a reasonable number at least to start with.

John Gregory Micenko -- Susquehanna Financial Group -- Analyst

Okay, thank you.

Operator

Your next question comes from Mark DeVries from Barclays. Your line is open. Please go ahead.

Mark DeVries -- Barclays -- Analyst

Yeah. Thanks, Mark. Could you discuss more kind of the benefits of the side-by-side transaction? Is that more an issue of just getting more discrete tranching or theoretically you can get more efficient bids on different tranches as opposed to just doing one, that one?

Mark Casale -- Chairman, President & CEO

I don't think there was -- I think the pricing was very similar. I don't think there was efficiencies. I would say market was more of again just trying to broaden the kind of the investor group. So you have the capital markets. I think we clearly had enough appetite, we could have done the whole thing with the capital markets. But again I think from a reinsurance perspective, we want to continue to cultivate that investor base too, so to speak, so -- because you don't know when one market's going to dry up. So I think, again, it's more of a test. It actually went really well. We're very pleased with the side-by-side. And Freddie Mac's been doing it for years so it wasn't like we kind of invented that so we just kind of followed-on, and I would say we're pretty pleased with it.

Mark DeVries -- Barclays -- Analyst

Okay, got it. And then a follow-up question on market share. I mean it was a pretty interesting quarter, where there was a lot of volatility. Arch gave up a lot of share. You guys gained a lot and MI gained, Genworth gained and the legacy guys basically lost a little bit of share. And the question is can we see more volatility in share going forward as the use of these (inaudible) I think in the past, if you had kind of a standard rate card, share wouldn't move quite as much. And if so, kind of what are the implications for customer relationships, right? I mean, I think customers don't love it when you -- the large lenders when you pull back on meaningfully on risk and things you're willing to do. How do you think about kind of managing that going forward?

Mark Casale -- Chairman, President & CEO

I think it'll settle out. I think it'll settle out especially when some of the larger lenders move to the engine and there's been a few. There's been a number of hold-outs. Some because of systems. It's taken them a while to -- it will take them a while to kind of get their systems in place. I mean the industry just like came out with it like almost overnight, so to speak, which from a lender perspective, it was, as they get more comfortable with the engines and the fact that every MI has a different price for every loan, I think it'll actually settle out pretty well. I think longer term, I think in the interim, you're going to see some volatility. But I think over the longer term is MIs, everyone settles into their niche and there's really not that much difference in the pricing now.

And I've read a couple of surveys, where lenders said, they don't see a lot of difference in the pricing with MIs. So, longer term, we still have -- we're still going to have strong relationships with lenders, just to get in, from the front end. And we have one relatively large lender where they price every loan everyday best execution, but they only use four MIs. So you still need relationship, so to speak, just to get into the ring. And I think others will use six, some will use three. It's interesting how watching the lenders trying to evolve toward it. But I think they're fine. I think as long as they continue to close loans and you can help them and the pricing's competitive among the MIs I think the lenders will be happy. And I think, again as I said earlier, I think it's better for the borrowers. And I think when it's better for the borrowers, they tend to have more successful homeownership experiences, that leads to better credit performance and that helps put more borrowers in home.

So I think all in all, it's a good thing. It's just like I said earlier, we are in the transition phase and I think it'll take a while to settle it out. And now that you guys can't see the pricing and you can only really see it kind of in our quarterly results, I think there's just going to be a lot less focus on it, which again, I'll remind you, we're still the only MI that doesn't pay a sales commission to their sales force. We've never really targeted share. It's really been about insurance in force and unit economics and I think the industry will start going more toward that. Like, why would you pay a sales commission and pay more money to a sales person if the pricing is being controlled somewhere else. So you're going to see a little bit of that.

And quite frankly, you may see, if the lenders continue to consolidate, which we've seen, you may see consolidation in the MI industry. And I think that's one thing too, you're having, it's more efficient now with engines and the question is, do you really need six mortgage insurers going after each lender. And I think that's going to settle out. But I have a feeling now that there needs to be a catalyst for that, but I think over time that could be a likely result of what's going on now.

Mark DeVries -- Barclays -- Analyst

Okay, got it. And then, any chance you could preview for us the contours of the capital distribution plan you alluded to, that we would find out about when you get to 75% of the book reinsured?

Mark Casale -- Chairman, President & CEO

Yeah and we've kind of alluded to it before. I think we're going to look at both, obviously, in terms of dividends and share buybacks. I think on the buyback, you're going to be very price sensitive around that and set some goal posts up. You don't really want to manage it just to manage EPS. I think as these businesses get bigger that's a harder bar to jump over and in short-term folks like it.

We do think dividends is a good tangible demonstration of kind of this new model that we're transitioning to. And I think it kind of matches kind of cash flows that can come out of a regulated entity. So we'll consider both and we'll probably over time end up using both, but I think dividends is something we're probably a little bit more in favor of over the shorter term.

Mark DeVries -- Barclays -- Analyst

Okay, great. Thank you.

Operator

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

Mihir Bhatia -- BofA Merrill Lynch -- Analyst

Thanks. Thank you for taking my questions. The first question just staying with EssentEDGE, I was curious if you could just help us understand a little bit about some of the operational improvements. I think you mentioned that you were looking at that being the focus. Is it just things to -- is it developing new tools to help lenders plug into lenders systems? Like what are the kinds of things we're talking about there?

Mark Casale -- Chairman, President & CEO

I think operationally it's making sure it goes smoothly with the vendors that you're integrated in with, and then I think a lot of it is response time, how quickly are changes made. Longer term, I think it's going to be improving the type of factors that you price against. And in terms of how do you and I think the question there is how -- you could use more factors, but how do you get them to point of sale very quickly. So that's a pretty big operational if. So I think those are -- there's always, just like anything you put it out the first time, and like I said last year, we spent a lot of time last year kind of testing it. I think we tested the first month with like one lender then we did a focus group with the lender. We really tried to figure out what they liked and what they didn't like. Pricing aside -- forget the pricing for a second. It's really around, did they like using the system, and then we -- given the rate card change last year with -- it went from two to four factors. We felt like we had the time to really put it out in the market and test it. We weren't interested in leading the market and being like the first one out there. That's not really, how we operate it. We are really more focused that once it's out there, that our lenders will be pleased with it. And I think -- and we'll continue to improve it. So I think there's a number of ways that will, like I said, we'll continue to look at ways to make it better for the lender to use the system.

Mihir Bhatia -- BofA Merrill Lynch -- Analyst

Great. Thanks. And then just on EssentEDGE and these pricing engines, are there -- so it's a pretty big change for the industry as a whole. So, I was curious if you'd be willing to share even if it's not precise numbers, just general, how fast are lenders and the industry adapting to it? Are we thinking -- and when I talk about the industry like just in terms of volume of loans coming in, is it like 50% this year or is it 75% this year type, what number are we looking at adapting?

Mark Casale -- Chairman, President & CEO

Yeah, I would say, 95% of our lenders are using it. And again some of them using it, they don't even know they're using it. Just they're getting a price through a third-party vendor. And keep in mind Arch, be it UGI, they've had the system out there for seven or eight years. So the lenders actually understand it better than some of the MIs. So, I think they've adopted to it quick. I think the hold up has been the larger lenders. Even when UGI was in the market early on, the smaller mid-sized guys used the engine right away. The larger guys didn't have the systems to do it and they required rate cards. And now they're all switching. Again, like I said, it's going to take some more time than others, but, again, my view would be, over time, all of them will be on the engine and the rate cards will disappear.

Mihir Bhatia -- BofA Merrill Lynch -- Analyst

Yeah. Got it. Thank you. And just final question. The premium rate guidance I guess, so, 1 basis points to 2 basis points more, that excludes any back book reinsurance, did I get that right?

Mark Casale -- Chairman, President & CEO

Yes, it does. Correct.

Mihir Bhatia -- BofA Merrill Lynch -- Analyst

Thank you.

Operator

Your next question comes from Chris Gamaitoni from Compass Point. Your line is open.

Chris Gamaitoni -- Compass Point -- Analyst

Hey, good morning guys.

Mark Casale -- Chairman, President & CEO

Good morning.

Chris Gamaitoni -- Compass Point -- Analyst

I know it's small, but wanted to see if the bulk NIW does in the quarter was something episodic or if there's a new opportunity that's developing?

Mark Casale -- Chairman, President & CEO

Yeah, I would look at it more like a one-off, Chris. And we've done a few of them in the past. It's obviously bank balance sheet based. We've done about -- can't really talk about it too much but as about 5% of our portfolio is bank balance sheet, normally in the flow, but this was kind of a one-off season.

Chris Gamaitoni -- Compass Point -- Analyst

Okay. Have you -- given the model -- the overall business model and especially it's improving from a risk distribute (inaudible) capital strong, profitability is great, have you had discussions with the rating agencies for a potential upgrade of your credit rating at Essent Guaranty?

Mark Casale -- Chairman, President & CEO

Yeah, I mean, we did have AM Best A rating last year, which I think they kind of quickly understood the new model I would say. Yeah, we've actually had pretty positive discussions with both S&P and Moody's. But again, these are just discussions and I think it takes a while. I do think over time when they look at and run through their models, get back to my earlier example, they're just looking at our balance sheet $2.5 billion against the risk. That's not really the accurate way to look at it. You really have to factor in the off-balance sheet capital of $1.2 billion, I think and then run stresses against that. I would say they're both actively looking at and we'll see. Time will tell. The rating agencies don't -- they're not really incented to move fast, but I believe that these -- Essent in particular is moving more toward a single A. Whether that happens or are they agree with me is a whole different story, but I think we're showing and we're starting to look like from a balance sheet and risk protection like a single A business.

Chris Gamaitoni -- Compass Point -- Analyst

All right, that's helpful. Thank you.

Mark Casale -- Chairman, President & CEO

Yeah.

Operator

And your next question comes from Geoffrey Dunn from Dowling & Partners. Your line is open. Please go ahead.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Thanks, good morning. Larry, what is the full run rate ILN cost coming into the second quarter as we count for the full period of the most recent deal?

Larry McAlee -- Senior Vice President, Chief Financial Officer

Yeah. The dollar cost based on the reinsurance in place as of today would be about $9.5 million in the second quarter.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. And then, Mark, you alluded to the bid card business out there, which we've heard a little bit more about lately. Can you talk about how that business compares with the engine business, pros and cons? And I think one notable difference is, is it still like a six-month type of agreement where you maybe can lock in that extra business before it goes out to RFP again?

Mark Casale -- Chairman, President & CEO

I'm not privy to all of them. I think they run in different sectors. I mean, different three, six month, nine month. I don't know them all. There's not that many out there. I think from an EssentEDGE perspective, it depends on the credit quality to kind of look at it. I do think they are lower than where the engine is and I also think they don't really give the MI to the flexibility to kind of move up and down on the pricing. So again, it's not as granular kind of as the engine is. And I think over time, I think they'll start to migrate toward -- my view is that they'll start to migrate toward the engine.

I think that will be the best answer for the borrower longer term. But again, sometimes it's systems, habits, feeling like they get better execution this way, but over time, I think it'll all kind of morph into the engine. I mean we see one large lender, as I mentioned earlier, that does -- it does use kind of best execution on a loan-by-loan basis and I think they get great execution and also they have more sustainability.

I mean you live by the bid and you can die by the bid. So when things go the other way the bids clearly disappear. And we've seen lenders go out with bids and gets zero bids. So they quickly go back to the engine. We had someone go through a large bid process and then decided to go through the engine. I think our view is the engine is a better way to go because obviously if there is a bid card, you MIs compete on it, but wouldn't you rather have ever MI bid on every loan every day, I think it's better for the borrower, it's better for the lender and clearly it's better for the MI because it gives us a chance to bid up or bid down on the loan-by-loan basis and shape our portfolio. And then you -- again, you get different lenders or different MIs that have different credit appetites in different parts of the credit structure. I think that's a win-win for everyone. I think the cards are old and I think over time they'll go away.

Geoffrey Dunn -- Dowling & Partners -- Analyst

From the typically non-bank lender perspective, is there an efficiency or control issue that thinks -- you think maybe limits their desire to move purely to the engine?

Mark Casale -- Chairman, President & CEO

I don't know, I can't. I mean, I think some of its control. I think most of the conversations we've had is that they were very open to it. So, again, whether they do and where the timing is, lot of it comes down to pricing and then incentives and also their ability to move their systems.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. And then can you elaborate on your comment before that PMIERs is an asset measure, it's not a capital measure. So how do we think about the cushion in terms of capital or what should we be looking at to try to measure true excess capital (multiple speakers) ?

Mark Casale -- Chairman, President & CEO

Yeah. That's a great question. I think what we look at is kind of a unassigned surplus in our regulated entity. And you take that and you add in kind of whatever the HoldCo cash is and then we have similar excess -- kind of an excess at Essent Re. So, we kind of calculate the kind of total liquidity around that is a little over $0.5 billion, which is different than the $800 million. And obviously we have the undrawn line too, that's just more from a liquidity perspective. But I think we really have been focused in on kind of the unassigned surplus because that's something we can go -- we can just notify the state. They can obviously not allow it but we don't have to ask special permission for excess dividend. So we feel like that's a very liquid amount that we could use.

Geoffrey Dunn -- Dowling & Partners -- Analyst

And this is maybe more for Larry. In terms of growth of unassigned surplus should that match the pace of growth excluding dividends of your surplus number or is there other math involved that affects that line?

Douglas Harter -- Credit Suisse -- Analyst

Geoff, a little bit of math because of contingency reserves. So we put $0.50 of every dollar of earned premium into contingency reserve. The other 50% net of losses and expenses flows into unassigned surplus. So, and we really won't be in position for a few more years to be releasing any contingency reserves because we have to hold them for 10 years and it really wasn't until 2013 that we wrote any significant amount of earned premium. So have to kind of go through the math, build into your model $0.50 of every dollar of earned premium goes to CR and the balance of our net income on a statutory basis will go to unassigned surplus.

Mark Casale -- Chairman, President & CEO

The good news, Geoff, is this is pretty much money, good. So the PMIERs -- I mean the issue with the PMIERs is it's also -- remember this is its term, so it amortizes down and you're almost -- you have to continue to do the deals in order to kind of continue to generate excess. It's fine and it's a nice measure. I think the thing that we've talked about today is a much more, I would say practical way to look at it.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay, thank you.

Mark Casale -- Chairman, President & CEO

Yep.

Operator

Your next question comes from Mackenzie Aron from Zelman & Associates. Your line is open. Please go ahead.

Mackenzie Aron -- Zelman & Associates -- Analyst

Thanks, good morning. Just a question on the GSE credit risk transfer programs and are you seeing more or less opportunity to deploy capital from Bermuda in those opportunities and could that change under the new leadership at FHFA ?

Mark Casale -- Chairman, President & CEO

It's hard to -- we're not seeing much. We kind of have our normal routine and share that we have with both Fannie and Freddie. It's worked like clockwork. It's been fantastic since we started it. So I don't see any change unless there is a change in the appetite for the reinsurers. And like I said earlier, Mackenzie, we've heard some of the reinsurer started to look back at their core business so that could cause them maybe to back away from some of the GSE (inaudible). We have not seen that so maybe that will come over time. But right now I think it's business as usual. And I think with the new leadership at the GSEs, I think they're just kind of getting started. There's new leadership at FHFA. I think it'll take them a while to kind of settle in and going any real direction.

Mackenzie Aron -- Zelman & Associates -- Analyst

Okay, helpful. Thank you.

Operator

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

Christopher G. Curran -- Senior Vice President of Investor Relations

Thank you, operator. Before ending the call, we'd like to thank everyone for their participation today and enjoy your weekend.

Operator

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

Duration: 51 minutes

Call participants:

Christopher G. Curran -- Senior Vice President of Investor Relations

Mark Casale -- Chairman, President & CEO

Larry McAlee -- Senior Vice President, Chief Financial Officer

Douglas Harter -- Credit Suisse -- Analyst

Philip Michael Stefano -- Deutsche Bank AG -- Analyst

Bose Thomas George -- Keefe, Bruyette, & Woods, Inc -- Analyst

Richard Barry Shane -- JP Morgan Chase & Co -- Analyst

John Gregory Micenko -- Susquehanna Financial Group -- Analyst

Mark DeVries -- Barclays -- Analyst

Mihir Bhatia -- BofA Merrill Lynch -- Analyst

Chris Gamaitoni -- Compass Point -- Analyst

Geoffrey Dunn -- Dowling & Partners -- Analyst

Mackenzie Aron -- Zelman & Associates -- Analyst

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