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Essent Group Ltd (ESNT 0.42%)
Q4Â 2019 Earnings Call
Feb 14, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Essent Group Limited Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to your speaker for today, Mr. Chris Curran, Senior Vice President of Investor Relations. Please go ahead.
Christopher G. Curran -- Senior Vice President of Investor Relations
Thank you, Amy. 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 full-year and fourth quarter of 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 19th, 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 A. Casale -- Chairman, President and Chief Executive Officer
Thanks, Chris. Good morning, everyone, and thank you for joining us. I am pleased to report that Essent produced another strong quarter of financial results, as the operating environment remains favorable and credit continues to perform well. Also during the quarter, we were very pleased with Moody's upgrade of our financial strength rating to A3. We believe that this upgrade is a validation of our transition to a stronger operating model.
Specifically during the year, we continued reinsuring our portfolio and evolving our pricing engine. The utilization of these tools makes Essent a more sustainable franchise and is a long-term positive for policyholders, shareholders and employees. Our performance for the fourth quarter and full-year 2019 continue to benefit from strong secular and cyclical tailwinds. Affordable mortgage rates, low unemployment and first-time home buying by millennials continue to drive strong credit performance and elevated housing demand. As a franchise that is lever to U.S. housing, the economy and purchase mortgages. Our outlook on our business remains positive heading in the 2020.
Now, let me touch on our results. For the fourth quarter, we earned $147 million or $1.49 per diluted share, while on a full-year basis, we earned $556 million or $5.66 per diluted share. Also our return on equity for 2019 was 21%, and we grew adjusted book value per share of 22% to $29.66 at year-end 2019. As a reminder, senior management's long-term incentive compensation is driven by growth in book value per share, which we believe best demonstrates value to shareholders.
On the business front, we continue to increase our sophistication around originating and distributing mortgage credit risk. We believe that the use of data analytics will be a key differentiator in selecting and pricing credit. Because of this, we continued to refine EssentEDGE to be more selective in shaping and building a profitable mortgage insurance portfolio. Also EssentEDGE provides more flexibility in changing price, especially during a down cycle.
From a risk distribution perspective, we continue to make solid progress in using reinsurance, which we believe has been transformational for a franchise like ours. Our objective in using reinsurance is to mitigate the cyclical boom and bust nature of the MI operating model. As noted earlier, Moody's upgraded our financial strength rating during the quarter to A3. In connection with this upgrade, Moody's analyzed the benefits of reinsurance under severe CCAR stress scenario. The results convey that the stress reduces profitability without depleting capital. In other words, because of reinsurance, the end result was an earnings event and not a capital event.
In January of this year, we closed another Radnor Re insurance-linked note transaction pertaining to NIW from January through August 2019. For this transaction, we obtained $496 million of reinsurance on approximately $38 billion of NIW. To-date, we have successfully closed four ILN transactions, along with two excessive loss transactions with third-party reinsurers. In total, these transactions provide access to $1.8 billion or protection. Including the quota share transaction that became effective in September of 2019, we have over 90% of our mortgage portfolio reinsured as of January 31st, 2020.
At year-end 2019, our balance sheet remains strong with $3.9 billion in assets and $3 billion of GAAP capital. Also our PMIERs excess available assets was $840 million. Based on our balance sheet and strong earnings along with increased confidence in our operating cash flows, our Board has declared a quarterly dividend of $0.16 per share to be paid on March 20th, 2020. We believe that a dividend is a tangible demonstration of the benefits of our buy, manage and distribute operating model. Also, a dividend of this size affords us the opportunity to continue investing in the business and take advantage of other potential growth opportunities.
Now let me turn the call over to Larry.
Lawrence E. 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. Net earned premium for the fourth quarter was $208 million, an increase of 2% over the third quarter of $203 million and an increase of 20% from $173 million in the fourth quarter of 2018. The increase in earned premium over the third quarter was due primarily to a 3% increase in average insurance in force. Persistency declined during the quarter to 77.5% from 82.1% at September 30th, 2019. The average net premium rate for the U.S. mortgage insurance business in the fourth quarter was 49 basis points, which was consistent with the third quarter of 2019. Note that this rate excludes premiums earned by Essent Re on our GSE risk share transactions. Single premium policy cancellation income continues to contribute favorably to the average net premium rate.
Cancellation income was $14.8 million in the fourth quarter of 2019, compared to $14.6 million in the third quarter and $3.7 million in the fourth quarter of 2018. Investment income, excluding realized gains, was $22 million in the fourth quarter of 2019, compared to $21.1 million in the third quarter and $18.6 million in the fourth quarter a year ago. The increase in investment income over the fourth quarter of 2018 is due to an increase in the balance of our investments.
The yield on the investment portfolio in the fourth quarter of 2019 of 2.8% is consistent with the yield in the fourth quarter of 2018. Net realized gains on the sale of investments for $833,000 in the fourth quarter of 2019. We recorded a loss of $3.6 million in the fourth quarter, compared to a loss of $760,000 in the third quarter. For the change in fair value of embedded derivatives, associated with the insurance linked note transactions. This loss is included in other income, and our consolidated statements of comprehensive income.
The provision for losses and loss adjustment expenses was $10.9 million in the fourth quarter, compared to $10 million in the third quarter of 2019 and a benefit of $1 million in the fourth quarter a year ago. The benefit reflected in the provision for losses in the fourth quarter of 2018, included the release of $9.9 million of reserves, associated with hurricanes Harvey and Irma that had previously been recorded in 2017.
The default rate on the U.S. mortgage insurance portfolio increased 10 basis points from September 30th, 2019 to 85 basis points as of December 31st. Other underwriting and operating expenses were $41.2 million for the fourth quarter of 2019, compared to $41.6 million in the third quarter and $39.4 million in the 4th quarter a year ago. Our expense ratio declined to 19.9% in the quarter, compared to 20.4% in the third quarter and 22.8% in the fourth quarter a year ago.
For the full year 2020, we estimate other underwriting and operating expenses to be in the range of $165-170 million. Our effective tax rate for the full-year 2019 was 16%. The full-year income tax expense is also reduced by $2 million of excess tax benefits associated with the vesting of restricted share and share units issued to employees. We estimate that our effective tax rate for 2020 will be consistent with our rate experienced in 2019 at approximately 16%. The consolidated balance of cash and investments at December 31st 2019 was $3.5 billion.
The cash investment balance at the holding company was $98.4 million. In December, Essent Re repaid a $15 million dividend to our holding company, Essent Group Limited Essent Group Limited. Essent Group Limited paid a second quarterly dividend of $14.7 million to shareholders in December. As of December 31st, 2019, the combined U.S. mortgage insurance business statutory capital was $2.3 billion, with a risk-to-capital ratio of 12.6:1. The risk-to-capital ratio reflects a reduction in risk in force associated with the affiliate quota share with Essent Re and $2.5 billion reduction for reinsurance provided by third parties.
Also Essent Guaranty's available assets exceeded its minimum required assets as computed under PMIERs by $840 million. Finally, at the end of the fourth quarter, Essent Re had GAAP equity of $939 million, supporting $10.3 billion of net risk in force.
Now let me turn the call back over to Mark.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Thanks, Larry. In closing, Essent had another strong quarter, as the operating and credit environments were favorable, and we remain pleased with progress in transitioning our operating model. The combination of EssentEDGE on the front end and reinsurance in the back-end is a key component in building a more sustainable franchise. Looking forward, we will continue to take advantage of positive secular trends, while also mitigating against the cyclical nature of our business with the use of reinsurance. Heading into 2020, Essent is well positioned, and we remain positive about our business and prospects.
Now let's get to your questions, operator?
Questions and Answers:
Operator
[Operator Instructions] Your first question today comes from the line of Soham Bhonsle of SIG. Your line is open.
Soham Bhonsle -- SIG -- Analyst
Hey, good morning, guys. Mark, just wanted to start off, I guess -- I wanted to get your high level thoughts on, how do you guys think about the trade off between the continued use of reinsurance, and maybe what the impact that has on premium yield going forward? Because I think there is a good understanding about the benefit on loss ratios long term here, but at what point do the economics maybe not make sense for you guys?
Mark A. Casale -- Chairman, President and Chief Executive Officer
It's a good question. I think I would take a step back, Soham, and say in terms of a risk-reward, we think it's a pretty one sided on the use of reinsurance. Protecting the tail risk, especially in times of uncertainty is critical. Remember, and I've said this in the past, credit kills these businesses, and it hurt the businesses back in the 80s, destroyed them back in the Great Recession, and to me that's the Number 1, Number 2 and Number 3 risk we have in this Company.
So to me, the program and the progress around the reinsurance is really been transformation on the business. I think it has been validated by Moody's in regards to our upgrade to A3, but it is dilutive, right. I mean, we've said this in the past. If we say our insurance in force is $200 billion, and it's going to cost us 4 basis points to 5 basis points of the reinsurance. That's right off the top line, and that's going to "Stunt growth." But it hasn't really impacted returns. So we have to really look at that.
The unit economic returns of the business are strong. There is much more confidence around those returns when you can hedge the risk out. I mean if you look at a forecast of Essent that you did two years ago versus today, yeah, maybe the growth isn't as it was a few years ago. One, we've gotten a lot bigger, but the confidence and the volatility around those returns is much less. And again, I think that's the key message around us, and it's one of the reasons why we were able to declare the dividend. So I would look at it that way. I mean we really continue to have a lot more sustainability around the cash flows.
Why they continue to grow? So, insurance in force grew close to 20% year-over-year, and again the return on equity was 20%. So again, I think it from that standpoint, you have to run it through your models. But At the end result is I would say a lot more confidence around the sustainability of your estimates.
Soham Bhonsle -- SIG -- Analyst
Fair enough. And then just on NIW, the growth rate year-over-year was a little below the peers. Was that a function of you guys maybe just stepping away from the business with your price engine and others stepping in? Any color there would be really helpful. Thanks.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Yeah, I mean, again I think I've said this before, market share ebbs and flows quarter-over-quarter, I would never read too much into one quarter. And as I said in the last few quarters, we've been testing a lot with the other pricing engines, pricing elasticity. And the reason we're able to do that is, again, I've said we're kind of year three now into a five-year transition around both the front end and the back end. We had a market last year, Soham. That was so large. I mean, you're talking $385 billion close to -- of NIW. We posted $63 billion of NIW. That's three times the amount that we did back in 2014; almost three times.
The market -- the NIW market, our first year of writing in 2010, was $70 billion. We wrote almost that this year. So when you try to parcel through market share, it's a little misleading. Another thing to factor in is our market share for the year, Soham, was 16%. Our market share for 2018 was 16%. By the way, our market share for 2017 was 16%. So we said, we're comfortable with the mid-teens. And again, I think you just have to take a step back and just look at the absolute level of NIW that's coming into the business. Clearly it ran off a little bit with the persistency. But we couldn't be more pleased, I think, where we are in the market and I think in terms of the insurance in force, the size of it is -- I would say, it was above our expectations over the past few years.
Soham Bhonsle -- SIG -- Analyst
Anything on the competitive side that you're seeing at all or everything seems pretty straightforward?
Mark A. Casale -- Chairman, President and Chief Executive Officer
It's the same story that has been for the last 10 years. Everyone tries to pick their spots. For years, it was LPMI singles was your way into it. A few are now trying the BPMI singles, that's kind of the new play. We've seen some use the pricing engines to grab some share. And remember, you never -- you always rent market share, you never have market share. So we've seen that, but that's par for the course. I mean the engines are relatively new. It's like a new toy for the industry.
And -- but I would look at the engines longer term, Soham, from an Essent point of view, as the risk management tools. Our view is, we have been almost every lender. The ability of the engine now to do a few things. One, just today, our ability to change price both operationally and from a regulatory standpoint is much greater. We don't have to file rates in all 50 states. We don't have to have conversations with lenders about new rate cards. We can change it pretty much every day if we wanted to. Not that you would, credit doesn't change that quickly. We can now target geographies. And again, it's very important when there's a down cycle.
Second, we now have the ability to bring on more factors and introduce new factors to estimate the borrower characteristics of the estimate of the fall. Before we were only able to bring a couple of those factors to the point of sale. Now with technology, there is the ability to bring more factors and continue to test new factors. And as I've said in the past, I think credit selection will be a key differentiator for MIs, not dissimilar to the Geicos and the Progressives. It's going to take a while.
Credit is very good right now. It's a little bit of a pricing game. I mean credit is so good that it's hard to see that. But credit is not always going to be good. The economy is not always going to be strong. And as we look at how we manage the business for the longer term, we think the engine will be a huge advantage for Essent going forward. And I won't expect the rest of the industry to look at it in a very similar way.
Soham Bhonsle -- SIG -- Analyst
Yeah. Makes sense. Thanks guys.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Sure. Your next question comes from the line of Douglas Harter of Credit Suisse. Your line is open.
Douglas Harter -- Credit Suisse -- Analyst
Thanks. Just sort of following up there on competition. What is your outlook for the premium yield in 2020? And I guess how do you see -- how much of a differential is there, kind of, between the business you're writing and the business that's rolling off?
Mark A. Casale -- Chairman, President and Chief Executive Officer
Yeah, Doug. I mean, I think, we are 49 basis points for the fourth quarter, and that's a net of the cost of reinsurance. And as I said before, as we reinsure more of the book, you're going to see the ceded number continue to grow. You're starting to see the impact of the rate reduction back in 2018 work its way through the portfolio, and that was kind of post-tax reform. So 49 -- I would say for 2020, I would expect it to come down, probably in the mid-40s would be a good a good estimate. I mean, there's a little bit of give and take with singles premium cancellation. But all else being equal, kind of, mid-40s is a good estimate for us in 2020.
Douglas Harter -- Credit Suisse -- Analyst
Great. And how do you think that persists, kind of, give where rates are today, what's kind of the path for persistency over the next couple of quarters?
Mark A. Casale -- Chairman, President and Chief Executive Officer
Yeah, I mean, I think, for 2020, in general, it's a little hard to predict given where rates are. But, normally, I would, forecast out and say 80% as a longer-term guide, which is bringing people down when they were in the high-80s or the mid-80s. I think for us, I think, high-70s for this year is a pretty good estimate and then we'll kind of see where rates kind of fall out. I would expect rates to remain low, at least through first half of the year. I mean, as we enter into the election season, all bets are off, I think, in terms of what's going to happen. But I think for the first half of the year, I would expect rates to remain low, and persistency in the high-70s is a pretty good estimate for you.
Douglas Harter -- Credit Suisse -- Analyst
Great. Thank you.
Operator
Your next question comes from the line of Bose George of KBW. Your line is open.
Bose George -- KBW -- Analyst
Hey, good morning. Actually, I wanted to go back to, Larry, the guidance you gave on operating expenses for next year, was that $165 million to $170 million?
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Yes. That's correct, Bose. The -- so that level of increase obviously is very modest, and the -- like when we think about sort of going further out in 2021 etc., I mean, can you kind of sustain that, whatever, a couple of percent increase given the -- there's obviously a lot of insurance in force growth going on?
Mark A. Casale -- Chairman, President and Chief Executive Officer
Hey, Bose. It's Mark. I just wanted to -- I'll take that just because I want to add some color. The $165 million to $170 million incorporate some of the benefit of the quota share. So we're able to see some of that expense. All else being equal, it's everything else. So we don't -- we're not breaking our contract underwriting expenses. To us this is all really expenses to run the enterprise, and you can -- we don't want to cut too fine of a line on it. I do think though, as we get into a market where it becomes best execution around the borrowers and the lenders picking the best price costs and capital management are key, I think we pride ourselves on the absolute level of managing our cost. I would say our nominal level of cost is right up there with the best in the industry. I think our expense ratio was right up there with the best in the industry. I'm not sure anyone can say both. They can say nominal. They can say expense ratio. They can't say both. And I think there is some -- and I would urge the analysts to look at the cost, the expense differential among the different MIs, because again, as -- it's really around cost to originate, and all of our origination volume is relatively similar. So I think cost is going to become another differentiator as you start to think about MIs in the future, because that's a big part. That's why I get back to, kind of, scale matters as the industry continues to mature.
Bose George -- KBW -- Analyst
Okay. Great. Thanks. That's helpful. And then actually, just the -- Mark, the fair value mark you have on the embedded derivatives in the ILN, can you just remind us what that is, and should we think of that as kind of a core number? Or -- just some color on that would be great.
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Yeah, Bose, it's Larry. When I probably would not considered a core number, it is mark-to-market non-cash adjustment. You will see some volatility quarter-to-quarter. And at the close of each transaction, the fair value that will be zero, but it does create a little bit of volatility quarter-to-quarter. But it relates to our insurance linked note transactions. And the premium stream on that is tied to interest rates. And under the accounting rules, we have to account for a portion of the premium stream as an embedded interest rate derivative and record the change in that derivatives value in earnings quarter-to-quarter.
The premium rate we pay is based on LIBOR. But we're able to offset a portion of the premium cost with earnings that are held in the offshore assets in the trust, which is invested in U.S. treasury money market fund. And the value of the embedded derivative is driven by the expected future cash flows based on the difference between the forward LIBOR curve and the forward treasury curve. And during the fourth quarter, the spread between the forward LIBOR and treasury curves widened. So that's what created the larger loss in the fourth quarter.
Bose George -- KBW -- Analyst
Okay. Great. That's helpful. Thank you. Your next question comes from the line of Mark DeVries of Barclays. Your line is open.
Mark DeVries -- Barclays -- Analyst
Yeah. Thank you. Just a follow-up question on the expenses. Mark, as you pointed out, you guys are already kind of sub-20% expense ratio here, which is kind of where some legacy players have kind of bottomed out. And when they reach that point, they've kind of failed to find any more operating leverage in the business model yet. I think the guidance here for 0% to 3% opex growth, but you're still growing insurance in force, suggests you've got a lot more operating leverage. Could you just discuss that dynamic and kind of where you think you might actually be able to get to on an expense ratio?
Mark A. Casale -- Chairman, President and Chief Executive Officer
Yeah, I wouldn't say we have a lot more room, Mark, just because as the premiums -- remember when we're calculating this net premiums after ceded reinsurance, I think 20% is kind of -- can we get to the teen? Yeah. But if you look at just -- and I do simple math, Mark. If you look at the our operating and underwriting expenses and I divide it by net premium earned, and again I would urge folks to do that for the rest of the industry versus just looking at the printed expense ratio. There's really probably most of the legacy guides are not in the teens, they're above that, if you look at just raw numbers.
So I wouldn't look at a lot more leverage, but again with the loss ratio of 5 -- again taking a step back, Mark, you have a business that has operating margins of 75%. Longer term, as losses start to season, we've always kind of give -- we gave guidance kind of into that 30% to 35% combined ratio. We're not much different today with that guidance. I think I would add with reinsurance, there's a lot less volatility around that guidance, which I think should give investors comfort.
Mark DeVries -- Barclays -- Analyst
Okay. That's helpful. And then are there any benefits worth calling out from tangible benefits, your business from the Moody's upgrade?
Mark A. Casale -- Chairman, President and Chief Executive Officer
Yeah, I think the biggest -- there's some benefits a little bit around. Our cost of funds will come down on our line. I do think it makes us split investment grade at the HoldCo, which allows us opens access to the debt markets at a better execution. I think is good. It clearly helps us with the GSEs, I think from a counterparty perspective. They've been very -- they were very pleased, I think, with the upgrade. I mean, it really does set you apart. That A is -- and we said -- I said this a few quarters ago, we felt like the rating agencies would get there around that. And I think it helps us in DC. I think it helps the whole industry, as the industry continues to improve ratings.
You can say what you want about ratings, but they really are clear indication and its third-party validation, Mark. So I think when we first were investment grade back in early 2013, I really believed that helped us when we went public, because it was another set of eyes, kind of, taking a looking into the P&L and the forecast and the business and the balance sheet and opining on it. And I think from an investor standpoint that Moody's A rating should give them very similar comfort. But I do think in DC, it might be the most tangible benefit that we'll see.
Mark DeVries -- Barclays -- Analyst
Okay. Do you think the rating agencies will ever get back to AA on monoline? If not, does it even really matter?
Mark A. Casale -- Chairman, President and Chief Executive Officer
I don't think it matters, per se. I don't see it as a AA industry to be honest. I felt from the beginning that this is a well managed from a capital and expense and business standpoint. In addition to the reinsurance that this is a solid A industry. And I think we're very comfortable with that. I think given the monoline nature of the business -- I think AA is a reach. I thought it was in past. And so I think A is a solid rating and will allow us to execute the business plan, tap the equity and debt market should we need them and also be a strong counterparty to both the GSEs, and I would say some of the larger depositories that like to keep loans on balance sheet.
Mark DeVries -- Barclays -- Analyst
Okay. Thank you.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Sure.
Operator
Your next question comes from the line of Mackenzie Aron, the Zelman & Associates. Your line is open.
Mackenzie Aron -- Zelman & Associates -- Analystq
Thanks. Good morning. Just one question around the dividend. Can you just provide a little more color around the rationale to increase it just only two quarters after it was implemented? And also kind of on a go-forward basis, what is the Board looking for further increase in capital return?
Mark A. Casale -- Chairman, President and Chief Executive Officer
Yeah. Really good question on the dividend. I think our view is, we're growing cash flows as excess capital continues to build. We've said before, MacKenzie, that dividends is a good tangible way to distribute cash to our shareholders. And just given the growth we felt like the dividend should grow along with it, kind of, a quasi payout ratio concept. So our expectation at least for 2020 is to continue to grow the dividend, and we think that's a strong signal to the market in terms of sustainability of cash flows. And it still gives us the flexibility, and we've talked about this in the past.
When we think about our capital position, PMIERs is one thing, but you really have to kind of look at statutory capital along with some excess we have at Essent Re and obviously HoldCo cash, and clearly we have more -- we have liquidity with our line of credit. So when I think about that capital, MacKenzie, I look at a number of ways. First, we feel like we have the opportunity to continue to invest in the business given our growth rates.
Two, we'll continue to look for opportunities outside of the business, and we've talked about this on the last call. We have a pretty disciplined process around how we view new opportunities. We've made a number of investments in both, I would say, venture funds and a few private equity funds that give us kind of an outsourced corporate development look at early stage companies both on the tech side and in financial services, the tech more. Is there a company out there that can help us around cyber, can it help us price risk better. It's really kind of utilizing that to make the core business better. I think on the private equity side, is there a business there that we could help grow or participate in their growth in the future. It's right on our balance sheet, it's close to $75 million, $80 million of other investable assets. So it's a small bit relative to the size of our investment portfolio. But it's a disciplined process, I mean, it's hard for us to sit and say, we're going to wait for a banker to come and give us a book. I mean the banker serve a purpose. But you really need to have a process around development and growth and how you invest that. And I think we have a pretty good one.
Third is really just -- you got to protect your downside, right. I mean, we don't know as CCF comes into view and gets released, we believe there will be a link to PMIERs and there could be -- there will be -- it might at some point. It's hard to predict when a PMIERs 3.0. So if you think about and we have to think about potential capital needs there. We're factoring in the ratings, right. I mean, now that you are A. You can't just distribute capital to shareholders. I mean, I think the rating agencies look at our capital strength and that went into their evaluation.
And then you have to look at the economy. Again it's a strong economy, housing strong, but it hasn't always been that way. I mean when we start Essent, it was probably the worst time to start a company, and now it's -- there is no clouds in the sky. And just based on experience, that's not always going to be the case. So our view, if there is a potential downturn, when is it? Not sure. That's why we have reinsurance and that's why we have capital.
And then finally, you've heard me say before capital begets opportunities. So from a shareholder standpoint, we still think the best use of excess capital today is via consolidation of the industry. And I'm a strong -- I've been saying this for a while. And the reason is, I believe it. I think as you go to best execution models as we mentioned earlier, scale is going to be important. And the best way to get scale is through combining -- is combining enterprises. So again there needs to be a catalyst. I can't predict when a catalyst would come or if it comes, I'm just stating based on my experience and looking at other industries -- mature industries, such as this you've seen that as a result. So I think it would be accretive clearly to shareholders, and it's something just to look at. So again, we can't create those opportunities, MacKenzie, but we can be darn sure that we're well prepared for.
Mackenzie Aron -- Zelman & Associates -- Analystq
That's great, very helpful. Thanks, Mark.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Yeah.
Operator
Your next question comes from the line of Mihir Bhatia of Bank of America. Your line is open.
Mihir Bhatia -- Bank of America -- Analyst
Hi. Thank you for taking my questions. I just wanted to start with just premium rates, in general. I was curious -- could you just comment on how MI pricing today compares with last year? And I understand that there's maybe a little bit more variability with the price engines there. But I'm thinking more just post tax law changes. Are the returns and even the absolute premium levels pretty similar or have you seen a little bit more competition or variability in there?
Mark A. Casale -- Chairman, President and Chief Executive Officer
I would say on this -- in general, they're relatively the same. I would say, relatively flat to where they were kind of post-tax reform. We've seen a little bit more competition in the higher FICOs, and you've seen that in some of the portfolios as some people price that up a little bit to get that part of the market. But again, all -- it's relatively -- it's not a big move.
So, I think all in, the premium levels have been -- remained pretty constant. And I expect them to remain that way. Again, whenever credit's this good, Mihir, you always -- folks probably can get a little too close to the fire sometimes. But I wouldn't expect that in a -- to a high degree. I think the unit economics of the business continue to be solid, right. And we look at this -- we look at the unit economics of the business, kind of, unlevered, meaning full tax rate and really no benefit of reinsurance. And it's a pure way to look at the business.
And we still like the returns, I would say, kind of solidly in that mid-teens. And when I say mid-teens, call it, 12% to 15%, 13% to 16%. The thing to be careful about and for people to watch out again is new capital requirements. So if capital requirements come higher, those returns could come lower. So I think the industry needs to be -- Essent, in particular, needs to be careful around pricing to make sure we're getting an adequate return on that capital. And that's why we've always said PMIERs is a clear and transparent capital standard. It's a pretty good pricing guardrail.
And I would expect that to kind of reemerge as the PMIERs talk starts to pick up over the next 12 months to 18 months, but it's a reminder for us. So as we look at pricing and we look at share, again a market this size, our view is if we can be in that mid-teens return and still get in not only the unit economics, but absolute premium levels are important too in this market. I think we're pretty focused just on absolute premium levels. And I think when you put it all together; I think we feel pretty good about it.
Mihir Bhatia -- Bank of America -- Analyst
Let me -- I guess just following up really quickly, not -- I mean maybe not exactly a follow-up. But on just market share, I understand and completely appreciate your point that it's been 16% for three years. If you look at it over a year or so, it's pretty stable in that range. But I was curious, can you give us maybe a little bit of color, what drives the quarter-to-quarter volatility? Like is it just pricing actions and competition in general or is there something else that's going on, actions that either you are doing? What's happening quarter-to-quarter that's making it move around? Because I think we saw like, if you look at it this year, it's 400 basis points between the high and the low. And I was just curious, what is driving that?
Mark A. Casale -- Chairman, President and Chief Executive Officer
I think the simple answer is, yes. It's a lot of different factors. As you move, you have a few things going on, right. You have the pricing engines and you have the ability of all the MIs to change the pricing engines. And like I said, it's like a new toy for some in terms of how they can price. You have the bid cards, right. And then there's three large lenders that do bid cards, and that can really swing share back and forth.
And then you also have what we call custom cards. And those are the lenders that don't -- they're not only engines yet, they expect to get on the engines. But they kind of put out like a card for people to -- and they try to get every -- and they take cards, and then people can kind of just give them custom cards. And we've seen that move share kind of quarter-to-quarter. And it just -- it kind of all equals out at the end. That's why I don't lend a lot of credence to it, and that's why I would recommend everyone take a step back and look at this on an insurance in force basis and look at share over a time period.
I mean for the quarterly share, Mihir, just to give you a sense of it, we didn't even know it until Tuesday night. It's not like we get daily market share reports and we're adjusting, and we don't target market share. And the result -- not that we're surprised by the result, but we never -- you never know. We're always within 1 or 2 basis -- 1% or 2% guesses, to be quite honest. So it's not like we focus on it day in and day out. I don't think the other MIs do either. I think everyone has their business plan.
I think for us, it's really about getting to our production levels and making sure we get to the production levels at a certain premium and making sure the unit economics are correct. We're not -- it's not all about get as much as you can. And I think that's a -- that's how Essent's always been. I would remind you and the investors, we're the only mortgage insurer that doesn't pay a sales commission to our sales force. And we think they get paid base bonus and they get equity just like me. So, they're all -- everyone in the Company is a shareholder, obviously, including the sales force. And we look at longer-term growth, not just quarter-to-quarter market share, because there could be swings in a lot of those things. So, I think it's really about how do you grow book value per share and all those things. And it's not kind of a quarter-to-quarter kind of thing that we move the dial up and down on.
Mihir Bhatia -- Bank of America -- Analyst
Understood. And last question, just turning to regulation. Maybe just any early thoughts on the GSE increase that's been proposed? And just in general, just a regulatory update, if you don't mind? And that would be all. Thank you.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Sure. I mean I think the GSE, I wouldn't read too much into it. It's kind of a draft budget. So I would wait on that. So it's hard to comment on it until it gets in, but we don't -- it's too early to tell. I think I did not have any prepared remarks in Washington just because we don't think there's been a lot of change I would echo. What others may have said is that, it's a pretty positive dialogue in Washington. And we've seen that with the new administration really increasing over the last couple of years.
Discussions with FHA, CFPB, FHFA, what we sense and can tell is there is a great deal of coordination among those. And the common goal is to make sure we have a better and more stable housing finance system, and I think that's a key takeaway for investors. And I think when you think about GSE reform and what FHFA is doing, I think they've done a very good job of kind of being very clear. I mean the path forward is difficult, obviously. I mean there's a lot that goes into it. But I think the intent around strengthening housing finance, I think, it's good for lenders. It's good for GSEs, and I think it's clearly good for the MI. So I think we've been very pleased with just the overall focus on Washington on what's best for housing finance and the borrower.
Mihir Bhatia -- Bank of America -- Analyst
Got it. Thank you. Thanks for taking my questions.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Sure.
Operator
Your next question comes from the line of Chris Gamaitoni of Compass Point. Your line is open.
Chris Gamaitoni -- Compass Point -- Analyst
Hey everyone. I don't know if this is for Mark or Larry, but it looks like the reserve or the provision for new default declined a little bit quarter-over-quarter. I think seasonally, you typically see an increase in the fourth quarter. Just wondering if you changed your default-to-claim ratio on new notices? Or if it's just kind of one-month, two-month, three-month mix differences?
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Yeah. Chris, it's Larry. Our reserve model considers actual cure and claim activity over a historical multi-quarter period. And what we have seen is we've continued to see favorable cure and claim results versus our estimates, and we've been adjusting our reserve factors down accordingly. So I think it's that and a little bit of mix as well.
Analyst
Okay. Thank you. That's all I have.
Operator
Your next question comes from the line of Phil Stefano of Deutsche Bank. Your line is open.
Phil Stefano -- Deutsche Bank -- Analyst
Yeah. Thanks and good morning.
So, I wanted to talk a little more about the testing that you're doing in the risk-based pricing engine. And I'm guessing it's, is it one of two things or may be a mixture of the both? Is the testing more around the elasticity of the live pricing metrics that you're using? Or are you testing new metrics that you might be able to accurately price, more accurately price in the future?
Mark A. Casale -- Chairman, President and Chief Executive Officer
Excellent question. I would say it's the former. So, we're really looking at price elasticity across FICOs, obviously LTVs, and more specifically geographies. A little bit of lender testing in there, but basically it's around kind of at the borrower level. We have not introduced new factors yet around borrower characteristics. I would say that's something that continues to be under development. I think we may continue to make good progress on there, but it's relatively early. And that's why Phil, when I say, kind of, year three now of a five-year transition. I know, it sounds long, but Rome wasn't built in a day. So, we do think spending time on that. We have a good sense of the models. And now it's a matter of how you implement it, and part of that's just going to be also the success, that's going to be what the competitive level is. But we do think getting better at selecting credit will be a differentiator, maybe not in this market, where all the credit is good, but it's not always going to be this market. And I think that's -- again the message is we managed this business for the long term. I make decisions and our plan in 2020 is how to continue to create a good environment for us in the next three years to five years, not quarter-to-quarter.
So, Ed -- some of the price testing may not have gone as well as we thought. And we lost some volume, so be it. We did $63 billions of NIW last year and what a great market to test these things. And again, we have an incentive structure. Remember, folks do what their incentive to do across every company. And whatever the incentives are, my incentives along without the team is growth in book value per share over a three-year period. And I think we have a very supportive Board in that and it gives us the chance to make these types of decisions and judgments that we think will play out well over the long term. It don't always play out well great quarter-to-quarter. But, I think our view is we clearly have our eye on a much bigger price down the road. And our view is as long as we can do the fundamental things today, that will definitely breed results years three and four. A lot of our results that we have today were some of the things we implemented a few years ago. So, these are long businesses. So, anything in the front-end doesn't pay off or you don't see the payback in terms of bad things for a while, you just have to continue to have kind of a long view on it. And that's why I get back to what I said earlier around just reinsurance and how transformational It is. I mean, we could go through all the questions that you guys have today, which has been very good, but if you didn't have reinsurance, the forecast isn't really worth much, just because of the volatility around credit losses. And again, it's hard to see today. But, there is going to be a time, next quarter, two quarters, three years from now, where the economy is going to slow, unemployment is going to rise, and people won't come here to pay their mortgages, our claim rate is going to go up and the market is going to be like uh, then they're going to turn their attention to losses and we're going to be covered.
And I think that's what I -- as we think about our strategies, we try to think through multiple paths, not just one path. And I think our view is the ability of the reinsurance, and now combined with the engine, and the ability to change price. Right now, it's been a one-way street in terms of price, pretty much since we started the company. Again, that's not always going to be the case. And I think having that leverage and that ability to pass on price or increase price in times of stress will pay back for us in spades.
Phil Stefano -- Deutsche Bank -- Analyst
Got it. Are you collecting more metrics on the risk-based engine than you're using? I guess, part of the question is when I think about the expense to maybe build this out or make it a more robust pricing engine versus the outlook for expense growth, it feels like maybe there isn't too much investing that needs to be done on the engine. It's in pretty good shape.
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Yeah. I think it's a good question. The investment is and we think about investments. Earlier, we talked about expenses. And when you manage expenses, you also make sure there is a trade-off between investment and making sure you have a sound and solid infrastructure. So, we certainly don't. We've made a number of investments in the past year in cyber. I mean, cyber is a day to day kind of event that you have to manage. We've continued to invest in moving the platform to the cloud and that's something we're committed to.
When I think around kind of the pricing engines, two things to think about. So, one is just the modeling, right. And there, you don't really have to reinvent the wheel. I mean, there's other industries, and credit card is one that comes to mind, where that modeling has been in place for years, years and years. And it's really just taking some of those patterns and things that folks have done in all other industries and applying them to ours. The second thing is you have to bring that to the point of sale. And so, whether you have two factors or four factors or a thousand factors, getting them to the point of sale within two seconds, right, because you have to do it very quickly, that's another work stream. And I would say there, five years ago, that would have been close to impossible. And now, with the advent of APIs and so forth, the ability to bring that to point of sale has really improved and the cost of it isn't as great as it would have been years ago. So, I think that's what we continue to working at. We are collecting obviously more factors, but you need to test those factors, backtest them. And again, we're not in a hurry to get to the market with it. I think, our view is you want to make sure you get there, that it's a good process, and it's relatively seamless for our customers, right. It has to be a good user experience with our lenders. And obviously, you want to make sure it works in that aspect. So again, our view is it continues to be -- get back to my five-year transition and you want to continue to work at it every day. And we think this is a good market to do that. And I'd rather spend --- have our folks spending time on that versus going out and trying to get that extra loan from a quote on market share perspective.
Phil Stefano -- Deutsche Bank -- Analyst
I'm going to play devil's advocate for a minute here. Credit is fantastic and you're doing this testing in the risk-based pricing engine and you're learning how things move and whatnot. If and when credit turns, do these lessons mean anything? Are you actually going to be able to use them, when it's a completely different credit world?
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
I think the answer is absolutely yes. We could use them. And I think that's when they will be the most useful. And I think the rest of the industry is going to be very similar to this, Phil. I do think this idea that the industry, it doesn't have discipline and all those sort of things is a little bit -- is really not true, when you walk-through with the lenders, who have a tremendous amount of power from a card standpoint. So, as things move through the engine and the ability to change things, I would see the industry moving in lockstep.
Another thing to keep -- because again, you can have the best model. And I think your question would be can you pass that on to the point of sale? And we feel confident we can. You don't really know that because you don't know the competitive dynamic. But the other metric that you have is our reinsurance. So, if you think about the capital markets that we work with and the reinsurers, you now have another set of eyes, looking at credit and opining on it, right. So, if we get into a stressful period, I would fully expect the cost of reinsurance to rise. And there, you also have the ability. That's again a third party telling you that baked-in credit costs are going to rise. You can choose to accept lower returns or you can now, with the engine, pass that on to lenders. Day-to-day lenders don't think about mortgage insurance or the cost of mortgage insurance. They only care about mortgage insurance, if they think someone else has a lower mortgage insurance, Trust me. A few lenders, they don't spend more than five minutes a day thinking about MI. So, we can't get too caught up in that. And just make sure we continue to invest in analytics and make sure we're giving the borrower our best price, based on our estimate of default.
Phil Stefano -- Deutsche Bank -- Analyst
Got it. All right, Thanks guys. Happy Valentine's Day.
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Thanks, Phil.
Operator
Your next question comes from the line of Geoffrey Dunn of Dowling & Partners. Your line is open.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Thanks, good morning. I've got a few for you.
Mark, as companies in the industry continue to pick their spots in the marketplace and play with the pricing engines, are there any areas that Essent has backed away from as a result of that?
Mark A. Casale -- Chairman, President and Chief Executive Officer
I don't think we backed away from anything. I think there's places where we're not being as successful, and I think you can see it, just in how our portfolio, the NIW characteristics match out versus some others in the industry. So, I think you can see where others are kind of picking their spots. Our view is we're pretty focused on premium rate, Jeff, overall premium rate. And I think in an credit environment like this, you've a little bit splitting hairs on the loss rate, where the premium rate is a big deal. So, I think that's something and that might not always be the case, depending on what your view of the economy is. So, our view is we see the market a little bit like it was almost, I would say, '11 and '12, when UGI had their model and they really targeted super-high FICOs. And we felt like they left some money on the table. So, we're seeing some of those patterns again around premium rate. So, our view is we're pricing it the way we think the returns are. Others have different views on returns. And they could be, right. Certainly, and I could be wrong. But I think our view is we feel pretty comfortable around where we are kind of pricing in the market.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Okay. And then, with respect to the PMIERs, obviously the the two-year review was thrown off schedule right from the start. Have 3.0 discussions -- formal discussions started at all at this point? And do you have an expectation on actual time line of?
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
It all depends on CCF. So, that needs to be finalized first and it's not even out for comment. Once it's out for comment, and then, it gets approved, I wouldn't expect PMIERs discussions to pick up until that's even done. But I do think it's something for investors to think about because that's -- when we think about kind of our capital situation. I think that's something you want to keep in your back pocket, because you just don't know what the answer is going to be. I'm not certain It's going to be anything that we're particularly worried about. And remember, reinsurance is a good mitigant against that because you could do no capital markets transaction that goes a little higher attachment point to help you manage that stuff. But having real capital on the balance sheet is important too. And I think that's something we want to -- we heard some comments around capital-light type businesses and you can get carried away.
I think we all got a Essent Corporate Finance. So, we know how it works around the efficient frontier. But having core equity capital and using reinsurance as kind of an addition to that is pretty important. You don't want to become too overly reliant on the reinsurance markets. Because again in times of stress, Jeff, you don't know if they're going to be there. So, capitals came[Phonetic] and we like our capital position. As I said, it gives us a lot of optionality around the future and that's why we've chosen dividends. And obviously, in the first quarter, increasing dividends as our expression in our distribution of capital, kind of, going forward for the near term. Longer term, I think once PMIERs, if it comes out, it's settled, we know where the market's going, we would continue to be, I would say, look at other forms of capital distribution.
No one has asked the question around buybacks, but I think our view on buybacks, short term, is we don't see a lot of need from. Longer term, clearly, we're going to look at buybacks as another way to release capital to maintain returns, not necessarily EPS. But I think we want to make sure our view is this businesses in that kind of low- to mid-teens returns. Right now, we're 20. But, as we build capital, we'd also look at other ways to make sure we're providing -- making sure that returns are at elevated levels, and making sure that we think about total return to shareholders. And since I'm a pretty large shareholder. I think about it a lot. And I think, we're always going to look at methods to make sure that we'll make money for our shareholders.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Okay. And so, you kind of front ran my last question there, which is, it sounds to me like you want to see at least the GSE capital rules and maybe even finalization of 3.0, before you would maybe consider taking dividends out of Essent Guaranty? It does look like it's starting
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
[Speech Overlap]
Geoffrey Dunn -- Dowling & Partners -- Analyst
But I just wanted to get an idea what do you think you could do there?
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Absolutely. We could probably do it today. I think the view is, we just have the cash both at Essent Re and at the holdco in order to do that. So, remember with us, Essent, we have a --- there is some tax friction from getting it from Guaranty to the Group. So, our view is we like it within Guaranty for now. But, once we move it, -- we have the ability to move, we just don't need to move it now. given the cash situation we have. Good question, though.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Well, I guess the other way to ask that is how much excess drag is too much drag, when you think about optimizing your returns?
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Well, think about, it's math. So, if we think -- I mean, I'll just pick a number. If we think -- we want returns at 15%, then the math is we'd have to release capital to get -- if the returns are 12%, and our goal is 15%, you can just do the math. So, I think of it that way. And I don't know if we're going to necessarily wait to that. So, I don't think we're going to say wait to PMIERs 3.0 because that's going be three years. So, we're going to always constantly assess the situation and making sure that we're kind of managing to the returns. So, hopefully that gives you some color.
Geoffrey Dunn -- Dowling & Partners -- Analyst
All right. Thanks.
Operator
And your next question comes from the line of Rick Shane of JP Morgan. Your line is open.
Rick Shane -- JP Morgan -- Analyst
Hey guys, thanks for taking my question. And Mark, you spoiled me, you know I'd like to ask about the repurchase question. So, thanks for getting that in before I got on the call,
I did want to ask a little bit, the last two years have been a little bit about an arms race in terms of the shift toward pricing, new pricing mechanisms, new pricing tools. I'm curious if the arms race has sort of carried out on the other side among the mortgage lenders. Are you seeing some of the platforms that they're using enhanced price discovery and is that causing any pricing pressure or any short-term dislocations, in terms of where business is going?
Mark A. Casale -- Chairman, President and Chief Executive Officer
That's a great question. I wouldn't call it an arms race, more as just an investment, as arms race sounds -- it doesn't have the greatest connotation. I think everyone in the industry has done a really good job in terms of embracing this and investing in it. It is really not at the lender level, Rick. And the reason being is the GC doesn't differentiate based on credit risk. And so, if you have a flat fee, it doesn't make sense to price-different FICOs and different LTVs, different. And there's is no incentive like there is, say, on the credit card side. So, I don't -- we don't see it much on the lender. The lender game is a little different. They are more about keeping their cost to originate low and making sure they manage the servicing assets. So, they don't really look at differential from a price perspective that way.
Rick Shane -- JP Morgan -- Analyst
Okay, great, thank you so much.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Sure.
Operator
And ladies and gentlemen, that is all the time we have for questions today. I will now turn the call back to the presenters for their closing remarks.
Mark A. Casale -- Chairman, President and Chief Executive Officer
Thank you, operator. Before ending our call, we'd like to thank you for your participation today and enjoy your holiday weekend. [Operator Closing Remarks]
Duration: 61 minutes
Call participants:
Christopher G. Curran -- Senior Vice President of Investor Relations
Mark A. Casale -- Chairman, President and Chief Executive Officer
Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer
Soham Bhonsle -- SIG -- Analyst
Douglas Harter -- Credit Suisse -- Analyst
Bose George -- KBW -- Analyst
Mark DeVries -- Barclays -- Analyst
Mackenzie Aron -- Zelman & Associates -- Analystq
Mihir Bhatia -- Bank of America -- Analyst
Chris Gamaitoni -- Compass Point -- Analyst
Analyst
Phil Stefano -- Deutsche Bank -- Analyst
Geoffrey Dunn -- Dowling & Partners -- Analyst
Rick Shane -- JP Morgan -- Analyst
