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Essent Group Ltd  (NYSE:ESNT)
Q4 2018 Earnings Conference Call
Feb. 08, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited Fourth Quarter 2018 Earnings 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.

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

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

Thank you, Lindsey. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer. Our press release, which contains Essent's financial results for the fourth quarter and for full-year 2018, 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 their reconciliation to GAAP may be found in Exhibit L of our press release.

Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, the risk factors included in our Form 10-K filed with the SEC on February 20, 2018, 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 and Chief Executive Officer

Thanks, Chris. Good morning, everyone, and thank you for joining us. Earlier today, we released our fourth quarter and full-year results, and I'm pleased to report that 2018 was a very successful year for the Essent franchise. During the year, we continued to grow our high credit quality and profitable mortgage insurance portfolio, while also increasing net income and generating strong returns. In addition, we began to take steps to strengthen Essent's business model by increasing our sophistication around risk origination and risk distribution. Key highlights pertaining to this include the successful pilot of our EssentEDGE risk based pricing engine and executing two reinsurance transactions on our 2017 book of business.

Now, let me touch on our results. Our insurance in force grew 25% to $138 billion at year-end, compared to $110 billion at the end of 2017. For the quarter, we earned $129 million or $1.31 per diluted share. On a full-year basis, we earned $467 million, or $4.77 per diluted share. Our results for both periods reflect a $9.9 million, or $0.08 per diluted share reduction in our loan loss provision. This reduction relates to updated expectations on defaults associated with Hurricanes Harvey and Irma that hit the US in 2017. Larry will discuss reserves in more detail in a few minutes.

Our balance sheet remains strong, ending the year with $3.1 billion in assets and $2.4 billion of GAAP equity. Also, we grew adjusted book value per share 24% to $24.29 at year-end 2018 from $19.64 as of December 31, 2017. As a reminder, senior management's long-term incentive compensation is driven by annual growth rates in book value per share. We believe that book value per share growth is a key metric in demonstrating value to our shareholders.

Our outlook for our business remains positive. As we believe, the demographics such as the millennials coming of age and purchasing homes for the first time continue to drive demand and support housing’s longer-term fundamentals. As a reminder, purchase mortgages are positive for our franchise as the MI penetration rate on these is three to four times that of refi mortgages, with low unemployment rates, affordable 30-year fixed-rate mortgages and builders increasing supply for first-time homebuyers, we remain optimistic heading into 2019.

On the industry front, we continue to see utilization of risk based pricing engines and we recently announced the rollout of our engine EssentEDGE, while EssentEDGE mimics our current pricing, we believe it provides flexibility to increase or decrease rates, allowing us to better shape our portfolio. The engine also provides the capability of pricing more credit attributes at the loan level, unlike the current rate card structure, which is based on broad FICO, LTV and DTI ranges. While not all of our customers are using EssentEDGE, we believe that over time, most lenders will enhance their front-end processes and technologies to access our engine.

As noted in our press release, we successfully executed an excess of loss transaction with a panel reinsurers during the fourth quarter. The reinsurance is on 2017 NIW and attaches above the existing Radnor Re insurance-linked note transaction completed in March of 2018. The ILN transaction was for $424 million of protection on approximately $10 billion of risk and the XOL transaction adds a $165 million layer on top of the ILN. On a combined basis, as of year-end 2018, the ILN and XOL provide $589 million of protection on top of a $225 million first loss layer that we retain. We are very pleased to have completed these transactions and plan on executing additional reinsurance transactions going forward. From Essent's beginning, we have taken a long-term approach to ensuring and managing mortgage credit risk. Given the cyclical and long tail nature of the MI business, we recognize the limitation of a buy-and-hold approach. Accordingly, we continue to evolve into a more sophisticated risk manager by distributing risk and diversifying our sources of capital. This allows us to hedge against adverse stress scenarios and mitigate housing cycle volatility, while making Essent a stronger and more stable counter-party.

In addition, distributing risk to the capital markets and reinsurers is not only a hedge to our cycle dependent franchise, but can also be accretive to returns by freeing up capital at a lower cost without adding financial leverage to the balance sheet. We believe that this strategy along with future earnings should generate excess capital going forward. Our objective in best deploying excess capital will be to strike a balance between return objectives and strong capital levels, while also giving consideration to what is in the best long-term interest of our franchise, policyholders and shareholders.

On the Washington front, we continue to believe that Essent and our industry are well positioned to support a well functioning and robust housing finance system. We also believe that this position will strengthen as we execute upon our buy, manage and distribute strategy. We look forward to working closely with new FHFA leadership, and we will continue to support USMI and engage with policymakers and promoting the benefits of private mortgage insurance and our strengthening business model.

Now, let me turn the call over to Larry.

Lawrence E. McAlee -- Senior Vice President and Chief Financial Officer

Thanks, Mark. Good morning, everyone. I will now discuss our results for the quarter in more detail. Earned premium for the fourth quarter was $173 million, an increase of 4% over the third quarter of $167 million, and an increase of 17% from $148 million in the fourth quarter of 2017. Note that premiums ceded on our reinsurance transactions are reflected as a reduction of earned premium and were $3.7 million in the fourth quarter and $3.2 million in the third quarter of 2018.

The increase in premium ceded in the fourth quarter is due to the placement of our excess of loss reinsurance coverage, which was effective November 1st. We had no reinsurance in place or premiums ceded in 2017. The average net premium rate for the fourth quarter was 49 basis points, which was one basis point lower than the third quarter of 2018 due to the increase in premium ceded under the XOL transaction, a lower level of single cancellation income and the impact of lower BPMI pricing implemented in 2018. We expect our average net premium rate to decrease to approximately 47 basis points by the fourth quarter of 2019. This reduction in the premium rate is anticipated to be driven by the BPMI pricing changes enacted in 2018, and an increase in premiums ceded based on our expectation that we will increase the percentage of our insurance portfolio that is covered by reinsurance.

Investment income excluding realized gains was $19 million in the fourth quarter of 2018, compared to $17 million in the third quarter and $12 million in the fourth quarter a year ago. The increase in investment income of 12% over the third quarter of 2018 and 58% over the fourth quarter of 2017 is due to an increase in the balance of our investments as well as an increase in the yield under our portfolio. The yield increased from 2.2% in the fourth quarter of 2017 to 2.8% in the fourth quarter of 2018, primarily as a result of the impact of the increase in market interest rates for new assets purchased and an increase in the average duration of the portfolio. We remain pleased with the credit performance of our in-force book.

Our provision for losses and loss adjustment expenses was a benefit of $1 million in the fourth quarter of 2018, compared to a provision of $5.5 million in the third quarter and $17.5 million in the fourth quarter a year ago. The provision in the fourth quarters of 2018 and 2017 were both impacted by Hurricanes Harvey and Irma. In the fourth quarter of 2017, we recorded a reserve of $11.1 million associated with the increase of 2,288 defaults in the areas impacted by the hurricanes. Based on favorable cure activity and our expectation of the ultimate losses to be paid, the provision for losses and loss adjustment expense in the fourth quarter of 2018 includes the release of $9.9 million of the reserve previously recorded in 2017. The default rate on the entire portfolio increased 5 basis points from September 30, 2018 to 66 basis points at December 31st.

Other underwriting and operating expenses were $39.4 million for the fourth quarter of 2018, compared to $36.9 million in the third quarter and $36.5 million in the fourth quarter a year ago. We continue to leverage our platform as evidenced by the reduction in our expense ratio from 27.5% in 2017 to 23.2% in 2018. For the full-year 2019, we estimate that other underwriting and operating expenses to be in the range of $160 million to $165 million.

Our estimated annual effective tax rate as of the end of the third quarter was 16.2%. As of year-end, our final effective tax rate for 2018 was 16%. As a result, our effective tax rate for the fourth quarter was 15.5%. We estimate that our effective tax rate for 2019 will be in the range of 16% to 16.5%.

The consolidated balance of cash and investments at December 31, 2018 was $2.9 billion. The cash and investment balance at the holding company was $78 million. No capital contributions or dividends between the holding company and operating businesses were completed during the most recent quarter. At year-end 2018, we have $275 million of undrawn capacity under the revolving component of our credit facility and $225 million of term debt outstanding.

As of December 31, 2018, the combined US mortgage insurance business statutory capital was $1.9 billion, with the risk-to-capital ratio of 13.9 to 1 compared to 14.1 to 1 at the end of the third quarter. The risk-to-capital ratio at year-end 2018 reflects a reduction in risk in force of $589 million for the reinsurance coverage obtained from our insurance-linked note and excess of loss transactions. At the end of the fourth quarter, Essent Re had GAAP equity of $799 million, supporting $8.3 billion of net risk in force. In addition, Essent Guaranty's available assets exceeded its minimum required assets as computed under PMIERs by $362 million.

Now, let me turn the call back over to Mark.

Mark Casale -- Chairman, President and Chief Executive Officer

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 the credit performance and our market presence. Looking forward, our outlook on our business remains positive and we believe that increased utilization of risk-based pricing and reinsurance will make Essent a stronger company.

Now, let's get to your questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Mark DeVries with Barclays. Your line is now open.

Mark DeVries -- Barclays -- Analyst

Thanks. I was just hoping to get your updated thoughts on your abilities/interest in returning capital here?

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, Mark, I think -- I think, as we look at the end of the quarter or the end of the year, we feel like the excess that we have PMIERs $360 million , we have HoldCo cash, we have a little excess at Essent Re. We're probably in the strongest capital position that we've been in since we started the company. That being said, a lot of that excess is being driven by the insurance-linked note transaction that we did earlier this year -- earlier last year, and it really only covers 30% of our insurance in force.

So once we complete a deal on the 2018 book, which we would expect to do in 2019. I think, we'll have more visibility in the kind of the sustainability of that excess, Mark. So once we do that and I think we'll look at all factors. So, first and foremost, we would look to reinvest it in the business and I'll remind you that we grew insurance in force 25% year-over-year. So there is still opportunities to be deployed in the business in the States. Bermuda continues to grow and we really like -- we really like some of the opportunities in Bermuda, like we said, it's another platform for us to grow and take on US mortgage risk, so there's opportunities there. And there is potentially opportunities outside the Company. That being said, we will look to and we'll evaluate capital distribution.

I think, we've been pretty thoughtful life to date in terms of how we -- how efficient we have been around the use of capital both equity and debt. We're going to -- we'll apply that same thoughtfulness to capital distribution. So, I would stay tuned, but it's something that's on our radar screen and we'll be able to update you more in May, assuming we can get a deal done in the first half of the year. Once we get that deal done around the reinsurance, I think we'll be able to give you more visibility around that question.

Mark DeVries -- Barclays -- Analyst

Okay. And given how attractively priced the reinsurance is that you can get through the ILN market, do you think it'll make sense to insure up to 100% of your risk?

Mark Casale -- Chairman, President and Chief Executive Officer

I think at some point, that's the plan, Mark. I think that's the plan. I think we're more concerned, obviously, with future books, the past books are relatively pretty strong, right, especially from a mark-to-market LTV standpoint, but if you look and say, 2017-'18 and say the 2019 book, that's going to be 80% of the insurance in force by the end of this year. So we're more focused on the newer production, but the plan over time and again, we've said this before, we would look to -- at the end of each year reinsure that book. So over the course of the next few years, we would expect to have 100% of the book reinsured.

Mark DeVries -- Barclays -- Analyst

Okay, got it. Thank you.

Operator

Our next question comes from the line of Bose George with KBW. Your line is now open.

Bose George -- KBW -- Analyst

Hi, guys. Good morning. So just following up on that question on capital. I mean, it looks like you guys have a deal in the market in ILN transaction. So I mean to the extent that happens, I mean, could we hear something on capital sooner? Or do you still think there could be -- it's something that you have to assess and maybe a little later in the year?

Mark Casale -- Chairman, President and Chief Executive Officer

Well, again, we can't really comment on the deal. And I think once -- again, our plan is to reinsure the '18 book during the first half of 2019 and once that deal gets done, I think we'll have more visibility that we'll be able to share. I'm not saying there is any answers Bose, to be sure, but I do think we are evolving. As we continue to generate excess capital we’re going to look for opportunities to put that to work again in the business or you know, potentially distributed shareholder. So we'll be thoughtful about it. I wouldn't -- I think, once we have that deal, if we are able to complete that transaction, we would be 50% of the book, a little bit over 50% of the book will be insured. So we'll have more visibility. But again, we're going to be thoughtful about it. And I think we've been good stewards of capital. So I think that's the real message for investors to take away. As we're going to be really thoughtful about this and we're going to do what's in the best interest of shareholders. There's no doubt about that. There's just no rush to do it and give answers. I know every quarter folks want to hear answers. But I would say we feel like we're in a good capital position, and remember, capital begets opportunities. We just want to make sure that we get -- we feel better around the insurability of the portfolio and able to execute those transactions and once we do, we'll send a pretty clear signal to the market.

Bose George -- KBW -- Analyst

Okay. It make sense. Thanks. And then, if you -- just on the XOL transaction that you guys did, can you just talk about, is there an incremental capital benefit to adding the XOL on top of the ILN?

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, it's a good question. I mean, it does add incremental capital release both from an economic capital and we believe from a rating agency. There is no PMIERs credit for that. So our thought with the XOL was we wanted to tap into an additional source of capital, which is the reinsurance -- the reinsurers which we hadn't done to date. We also wanted to test higher up in the structure. So we feel we're pretty well covered now from say 2.25 to closer to kind of 9 plus percent. So that's -- we feel in terms of -- people have asked us, what does that mean in a stress scenario? It's a pretty good result, so base case is our 2% to 3% claim rate. If we were to hit a mild recession, mild plus maybe with a 5% claim rate, our returns would still be in the mid-teens, right, because we wouldn't -- 5% claim rate, we’d hit into the reinsurance.

If we were to take that 2017 book and put it through the great recession, we think the claim rate would be right around say 12% , which is a little lower than the great recession, but keep in mind, it's a better -- it's a better credit quality book. That's the case we're probably still low single-digit return set, that's a pretty strong statement, and I think that's the real takeaway with reinsurance is it's removing not only the volatility from some of our earnings, but removing the volatility from the balance sheet. And I think that's the key. So when we talk about rapid [ph] and then the capital distribution. We want to make sure that stuff is set first before we -- the worst scenario would be we do -- we start to talk about capital distribution and we haven't protected the balance sheet. And that's our number one goal. And our credit -- credit kills these businesses and we will go in, not sure when we'll go into the next recession, but I'd much rather go into recession knowing that we have -- we have protection on the book

Bose George -- KBW -- Analyst

Okay. Makes sense. And then, actually, just the run rate cost on the XOL, that's about $1.5 million a quarter, is that right?

Mark Casale -- Chairman, President and Chief Executive Officer

No, not only XOL, I would say, I would look at all in. Bose, a simpler way to look at it is probably approximately 5 basis points on the cost of those transactions. So if you think about that, that will work its way into the portfolio over time, it clearly impacted some of that in 2018. But I think that's a simpler way for you guys to think about it.

Bose George -- KBW -- Analyst

Okay. And the 48 basis point guidance that you gave us for the year, the net number, it incorporates the cost of this transaction as well as the sort of the lower -- lower NIW premium stuff coming in , right?

Lawrence E. McAlee -- Senior Vice President and Chief Financial Officer

Yes, it is. It's a combination of the pricing change that hit us halfway through the year and the reinsurance. I think the number was 47 that we gave in terms of the guidance, so 49 in 2018, trending down to 47 by the end of this year.

Mark Casale -- Chairman, President and Chief Executive Officer

Correct.

Bose George -- KBW -- Analyst

Okay, great. Thanks.

Operator

Our next question comes from the line of Rick Shane with J.P. Morgan. Your line is now open. Rick Shane with J.P. Morgan. Your line is now open.

Rick Shane -- J.P. Morgan -- Analyst

Mark, can you hear me?

Mark Casale -- Chairman, President and Chief Executive Officer

Yes, I can Rick. You haven't called in a while, so it's hard to recognize your voice.

Rick Shane -- J.P. Morgan -- Analyst

Oh, jeez. Hey, I apologize, I got dropped off the line for a second. So if I got queued up and got kicked out, I apologize.

Mark Casale -- Chairman, President and Chief Executive Officer

No, worries.

Rick Shane -- J.P. Morgan -- Analyst

Look, I heard the questions about return of capital and realized that there is -- there are some events that need to occur before you approach that but love to talk philosophically about how you think about the difference between dividend and repurchase. Obviously, repurchase is accretive to earnings with the stock trading at a premium to book, it does dilute book value a bit. Just want to see how you would think about that going forward?

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, it's something -- I think we're going to look at both very carefully and I don't think we have a good answer for you today. I do think dividends is a strong demonstration of kind of the cash flow generation of the businesses and I think it will become more readily apparent as we move forward and continue to generate excess capital. I think in terms of repurchase, I think it's more opportunistic. I don't think you want to get on into a program where you're increasingly buyback shares at an increasingly high share price, that's a dangerous…

I think we -- we lose capital flexibility there. And again, these are balance sheet businesses, strong capital begets opportunities and you don't want to get into that type of game. I don't think that's in the best interest for shareholders' long-term. And short-term, I think, some folks may like it. But again, we're building this business for the long-term. And remember, we're all -- the senior management teams are shareholders. So we're pretty focused on providing shareholder value in addition to building a really good business. So again, it's something where we'll be thoughtful about. And just like we did when we raised equity and we raised -- we built our line of credit. Some of it's going to depend on market conditions and it's something that's -- that will be under evaluation, is under evaluation now and obviously it's going to be an increasingly bigger part of the Essent story going forward.

Rick Shane -- J.P. Morgan -- Analyst

Got it. Yeah. Look, I think, ultimately, these are high-quality questions you get to ask yourself.

Mark Casale -- Chairman, President and Chief Executive Officer

Yes, it's a good problem to have, to be honest.

Rick Shane -- J.P. Morgan -- Analyst

Thank you very much, guys.

Mark Casale -- Chairman, President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from the line of Doug Harter with Credit Suisse. Your line is now open.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. Can you talk about your outlook for expenses and how much lower you think the expense ratio can go ?

Mark Casale -- Chairman, President and Chief Executive Officer

Yes, sure. I mean, again, we're much more focused, Doug, on the nominal expenses, so we gave the guidance of $165 million. In terms of expense ratio, I think it's going to be the math, and don't forget, we're in an environment where the premiums are coming down, right. We have those -- the premium -- the compression in premium that hit last year with the rate card change, which for all intents and purposes was mitigated by the reduction in taxes. So the returns were similar. And then we're obviously ceding premium for the reinsurance, which we think is a great trade off. This is going to impact on the expense ratio. So the old story of premiums being, as they continue to grow and expenses continuing to go down, it's going to be a little bit different. So I don't know if it's going to be as important of a gauge. I still think we're still in that 35 to 40 kind of guidance when you put it all together. However, I don't -- I wouldn't expect a continual decline as you may have in the past. I mean there is a little bit of moving around of some of the factors. The important takeaway those returns are still strong. And I think that's the one. I wouldn't get too caught up in the ratios, but I think the big ratio is where -- what's the return on equity and we still feel like that's firmly in the mid-teens

Douglas Harter -- Credit Suisse -- Analyst

Got it. Thanks, Mark.

Mark Casale -- Chairman, President and Chief Executive Officer

Sure.

Operator

Our next question comes from the line of Phil Stefano with Deutsche Bank. Your line is now open.

Phil Stefano -- Deutsche Bank -- Analyst

Yeah, thanks. So, Mark, as we think about the building of capital and the opportunities coming out of Bermuda, I feel like it's been a while since we've talked about the internal quota share. Are there any updated thoughts around that? Is 25% still the right number? And now that you've had a chance to digest the tax reform, I was hoping to revisit that?

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, I mean, I think we're still in the camp of the 25%, Phil. Remember, we're still subject or could be in around the V Tax in the calculation. We feel like with the 25% quota share, we are -- we have a nice margin of safety with that. And there's really no -- there's no really -- there is no desire or intent to kind of grow that. So, very good question. I think that the real story around Bermuda is to continue growth in the third-party business and again it's relatively small compared to our US business. But that's not to take away from how well it's done and we've done well over 50 GSE risk share deals. We started to build out the MGA and are starting to help larger reinsurance companies deploy capital. It's a real platform for us to take on that risk and some nice optionality in terms of the market. So if the market were to soften, you know, I think there could be more opportunity to write business there in -- in Bermuda, you know, it could be some impact on the reinsurance, but those things are always linked. So we like kind of the optionality that our Bermuda platform works.

Phil Stefano -- Deutsche Bank -- Analyst

Got it. And Mark, earlier and I can't remember if it was you're prepared remarks or response to a question. You said something about additional reinsurance transactions, and maybe I'm parsing the words too much, but is it -- is this going higher in the tower with additional XOL? Or is this just putting ILNs and XOL on additional vintages as we look forward?

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, it's more toward additional vintages where -- yeah, I think we're done on the 2017 book and it's -- our focus now is to reinsure the 2018 book.

Phil Stefano -- Deutsche Bank -- Analyst

Got it. Okay. One more quick one on EssentEdge and I've asked some of your competitors and nobody wants to venture a number on this, but I -- I'm going to keep banging. How many pricing inputs and metrics are you guys currently utilizing in the -- you know, is there right number that you think about being the tipping point of getting pricing, you know, quote unquote, right?

Mark Casale -- Chairman, President and Chief Executive Officer

That's a great question. We'll be pretty upfront. We use approximately 12 to 15 factors around the model. And it's the same factors we've used historically Phil, to assess losses and to assess our economic capital. We just never really had the ability to pass that on the pricing because remember, up until last June, the rate cards were only comprised of two factors and then after June and went all the way up to four factors. So we never really had the ability to kind of be more granular on the pricing. So, we think the 12 to 15 -- and I can't really get into the factors, but we do think it's more meaningful, it will allow us to deliver more granular pricing, initially that will mimic the rate card pricing more or less at least there'll be some, you know, as more granular, there’ll be ups, some places where it'll be higher, some places it will be lower, but the goal right now is to keep it right around, very similar pricing.

The important point around the Edge and this gets lost is the flexibility that it provides to both increase* or decrease pricing. It just didn't have that flexibility of the rate card, you have to go to 50 states, you have to refile and you also have very difficult decisions with lenders. I and -- we've been doing this now for close to 10 years at Essent and I've always found when we lower rate cards to lenders, it's very well received. That's never not well received. It doesn't really go that way the other side. And I think as you go into a potential slowdown and the -- and the, you know, the industry experiences back in ‘08 it's very difficult to pass on price increases. And I think now with the flexibility of the engine and the fact that we're pricing each borrower separately, should we see a slowdown or here's a good example of how it's linked to the reinsurance. If we go and reinsure parts of future books and that cost is higher. Well, that's the markets telling us something around credit that maybe we're not aware of and now we're -- now we have a mechanism to link that back to the front end in a more granular basis. So we don't have to have a hard discussion with the lender, which is very difficult when you're among six competitors. So there's a little bit of gamesmanship there at a lender level that is -- that it's very hard to get across, but if through the engine you may decide there's certain regions you don't like or there's a certain pocket of LTVs or DTIs or whatever FICO ranges that you're not as comfortable with, given where you think HPA is going in this region. You now have the ability to adjust pricing and -- and I think that is -- that's what's the -- that's the real big picture. I think when we talk about getting more sophisticated around risk origination that's what we mean with EssentEdge. This is a risk tool. It's not a market share tool. It's not a pricing tool.

Originally when -- when the engines hit the market back in 2010 and '11 when UGI first had it, it was a way to pass on lower price. And that -- that was the way to do. It is priced well below the card. That's not the case anymore. I think you're going to find engines that have higher prices in certain pockets and other ones have lower. Each MI I think eventually will have their own kind of credit appetite and -- and as you think going forward Phil , it's going to be credit. Credit selection is going to be a key differentiator in terms of the MI business. That's never really been the case before. It's all been the same rates, the same underwriting guidelines. And I think that -- I think we're relatively well equipped to be in this new world and how you work that into new factors and all so forth is – will be seen how successful some guys can be. But I think the flexibility of it is really the important takeaway.

Phil Stefano -- Deutsche Bank -- Analyst

Well, thank you, Mark. Your candor around the Edge and recessionary returns is refreshing and I hope that some of your peers are also so forthcoming with the information and we appreciate it.

Mark Casale -- Chairman, President and Chief Executive Officer

You're welcome.

Phil Stefano -- Deutsche Bank -- Analyst

Do well guys.

Operator

Our next question comes from the line of Mackenzie Aron with Zelman & Associates. Your line is now open.

Mackenzie Aron -- Zelman & Associates -- Analyst

Thanks. Good morning. Mark, I guess just kind of the last question from me. It's just related to your outlook as you look into 2019 on volume, what the opportunity could be this year given what we're seeing on the originations. And then secondly with rates doing what they've done year-to-date can persistently continue to improve, I mean, just what should we be expecting for the year on those two metrics?

Mark Casale -- Chairman, President and Chief Executive Officer

Sure. Hope all is well with you. We are -- in terms of persistency, I think the guidance this year is still in the low 80s, I mean, we -- we're tick higher than that in 2018, but I think that's a -- that's good guidance. Longer-term, it's hard for us to give guidance, you know, anything above 80. I always think 80% is good long-term guidance. In terms of NIW, you know, clearly I think the market was impacted in the fourth quarter. It was a pretty sudden rise in rates, Mackenzie, and I think it took a while for consumers to adjust to that, which I think is natural and then you historically go into the fourth quarter slowdown. I think our view on 2019 NIW right now -- I think -- I think it -- you know, we believe it's still -- it will be similar to 2018. I think once we see where the spring season goes that -- that'll give us some more visibility into that, but right now we're not seeing much to say it's going to be different.

And remember we're -- we are -- we're levered to the first time homebuyer and as you guys know, you cover builders, the builders are still -- in fact, a lot of builders are increasing their supply around the first time homeowners. So, our average loan size is $230,000. And when you look at some of these -- these newer homes that are in that, you know, $200,000 to $225,000 range, so it's -- I think we're actually well positioned from that. And we've always said, we believe because of the demographics that housing will be bigger and it'll continue to grow. We never said it would be in a straight line. So there's always going to be fits and stops and -- and those stops could be quarters, they could be a year. But longer term, we still think the fundamentals around housing and the ability for it to continue to grow are still in place. So I think that's why we say, we remain optimistic for 2019, but I guess we'll -- we'll see when the spring season hits.

Mackenzie Aron -- Zelman & Associates -- Analyst

Okay, good to hear. And we certainly agree with that. Just one -- one quick one on the modeling. Does the tax guidance, does that include the expected tax benefit from stock comp in the first quarter?

Lawrence E. McAlee -- Senior Vice President and Chief Financial Officer

No. And Mackenzie, this is Larry. That's really a good -- great question. That's a discrete event that we would recognize in the first quarter. We expect that to be relatively moderate this year. Last year was a little bit larger because of the vesting of certain shares in the first quarter of the year. But we would estimate the impact of that to be between $0.01 and $0.02 per share in the first quarter.

Mackenzie Aron -- Zelman & Associates -- Analyst

Okay, good. Good to know. Thank you.

Operator

Our next question comes from the line of Jack Micenko with SIG. Your line is now open.

Jack Micenko -- SIG -- Analyst

Hi, good morning. Mark, when you talked about EssentEdge a couple times, both in prepared and Q&A. You mentioned the word mimic. And I'm curious -- I think you're still on pilot. So does mimic mean you're just sort of running it and testing it and seeing what adoption looks like? Or was that meant to say, hey, we're not letting our customers arb us on price in our engine versus the rate card and maybe that has broader implications for what may be the market, what's happening in the marketplace? Just curious.

Mark Casale -- Chairman, President and Chief Executive Officer

Maybe yes, to all -- all the above. We're certainly just testing and we're very -- we said this last year with the pilot -- very focused on adoption by lenders and getting them to use it, ease of use. Yeah, we don't really want to turn it into an arb. So -- and, you know, so it's -- it's very similar to the overall I would say premium rate, I think that's the thing to focus on Jack. We're targeting -- we're targeting earned premium rate. So certain pockets may be lower, sales meaning some may be higher. But there shouldn't be much difference from a lender perspective around the card versus the engine at this point in our life cycle.

And we felt when the rate cards changed last year in June, with the addition of DTI and the multiple borrowers, we felt like that. That captured a lot of, you know, kind of the inherent risks that – or the differences between the cards and the engines. And it's given us a lot of time now, so we can get the engine out there, get it adopted, get lenders using it and again longer term it's -- the more the lenders use it the more you have that flexibility that I spoke about earlier. So again it's -- there's an operational component to this and you know, that -- that we're -- that we're very well aware of and the lender market didn't change overnight. I mean, lenders still have to close loans, you know, and -- and so under -- our underwriting and how well we do that is still part of the business. So the Edge is really just another tool with which we can help lenders grow their businesses, so we're not really in it to gain share with it or change pricing that drastically. We'll continue to test and look at additional factors. So we would -- we would expect the engine to evolve over time. It's kind of like a journey and you think about the credit card business evolved over time too in terms of how they used different factors. So I think it's very, very early in its life cycle. But as I said, you know, earlier, longer term I do think it shifts some of the pricing power from the lenders to the MIs and I think that's -- it's at subtle point, but it's going to be a real valuable point especially in times of stress.

Jack Micenko -- SIG -- Analyst

Okay, yeah. And then you also said as part of the capital conversation earlier in the Q&A, opportunities outside of Essent and can you elaborate more on how you're thinking about, you know what that means?

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, it's -- it's, you know, we always look at things outside of Essent . And I think that's, you know, we're in the capital allocation business, I wouldn't pay that much mind to it to be honest, unless a really good opportunity came up. We're really focused on the two existing businesses. I think that's our -- that's the best place to deploy capital and we're not going to deploy capital outside Essent just for the sake of doing it. We would certainly rather distribute it to shareholders versus do it just to diversify. That's -- we're very focused on return so it's -- this is, you know, we built the business on being focused, so really focused on the two core businesses. If an opportunity for big fat pitch came down the middle of the plate Jack, you know, we're going to do it, but, you know, we're -- that's something you know, they happen -- they don't happen very frequently. So we're more focused on the business that we have and I think capital distribution like I said earlier something that's really under careful evaluation.

Jack Micenko -- SIG -- Analyst

Okay, thanks for that clarification.

Operator

Our next question comes from Mihir Bhatia with Bank of America. Your line is now open.

Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst

Hi, thank you for taking my questions. Just starting real quick, I had a question on your LTV, the 95-plus LTV seems to have stabilized in the last few quarter around 17%, is that a good number going forward?

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, I think it is. I mean, it's really being driven by the GSEs and there's two takeaways there. One, the coverage is less than our 95. So, the coverage is only 25%. So there's actually, you know, there's a risk mitigant there. The other the other mitigant is -- at least makes me feel good is that the FICOs are still at relatively high levels, not quite where the overall portfolio is, but relatively high levels and the performance has been pretty good. So unless -- since the GSEs are really driving that, unless we were at a price up for it, which I know, you know, we have the capability within the engine now to do -- we may look to do it, but right now, I think we feel pretty comfortable -- we feel pretty comfortable with that limit. And, but again, as the Edge gets rolled out into the market there, we may -- we may look to shape that if we see something in originations that we don't like, but right now, we've been pretty comfortable with it.

Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst

Great, thank you. And then just I guess, similar topic but, how much -- can you comment maybe on the state of the non-GSE market? Is that something that you're all seeing a little bit more growth in, is that a market you all are participating in? Or is it still mostly -- it is mostly all GSEs, but I was just curious on how non-agency is evolving as rates go up and maybe there's a little more pressure from the originators to do something -- (multiple speakers)

Mark Casale -- Chairman, President and Chief Executive Officer

Yeah, it's a good question. I actually break it into two parts, you know the -- 5% of our business is non-GSE. But that is a 100% bank balance sheet and that's mainly jumbos or professional loan programs. And that's -- that has gone. I think we're very pleased with that business, depending on what goes out to GSE reform, you know, could that shift a little bit more loans to the bank balance sheet? Again, I think we're relatively well equipped there. In terms of non-QM, clearly a lot of chatter in the market around non-QM, I still think it's relatively small compared to the size of the mortgage market. For all intents and purposes, it's -- it's almost FHA fall out. So this is a borrower now that probably can't get an FHA loan certainly can't get a conventional loan and they're looking kind of at the non-QM market that's not -- again, I think for, you know, advice we give to lenders is it's really about efficiencies and leveraging their cost structure. Once -- once you get into some of those products, it's very difficult, it does soak up some capacity, but it's probably not the best way, I think from a risk stand -- for the lender meaning. And I think from a risk standpoint, it's not something we really have -- we are really focused on. And again it's just such a good conventional business out there and the bank balance sheet, like we said, we're very pleased with our market presence, we don't feel the need to stretch. And you can even see that in our FICOs, I mean very limited -- very limited kind of percentage of our portfolio is below 680 (ph). I think the non-QM for us is not something we're -- really on our radar screen.

Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. Thanks for taking my questions.

Operator

Our next question comes from Bose George with KBW. Your line is now open.

Bose George -- KBW -- Analyst

Hey guys, thanks. Just had a quick follow-up on the comments you made on the tax rate. So does your annual tax rate still end up being around 15%, so if the first quarter is $0.01 or $0.02 impact, so that’s something like 14% and then the others are slightly higher is that how it's going to work ?

 Mark Casale -- Chairman, President and Chief Executive Officer

Bose no, just I'll clarify. So the annual effective tax rate, excluding discrete items, we expect to be in the 16% to 16.5% range. In the first quarter, we'll have a discrete tax accounting benefit associated with the shares of our plan to invest in the first quarter and the excess benefit on that we expect to be $0.01 to $0.02 per share. So in the first quarter we'll have a rate in income tax expense of between 16% to 16.5% of pre-tax income plus or that will be reduced by a benefit of about $0.01 to $0.02 per share. For the remaining three quarters, we expect to -- our rate to be 16% to 16.5%. Does that answer the question?

Lawrence E. McAlee -- Senior Vice President and Chief Financial Officer

On a blended rate though, it would be a little lower.

Bose George -- KBW -- Analyst

Yeah, that makes sense. Yes. Great. Thank you.

Mark Casale -- Chairman, President and Chief Executive Officer

Sure.

Operator

There are no further questions in queue at this time. I will turn the call back over to management for closing comments.

Mark Casale -- Chairman, President and Chief Executive Officer

Okay. Thank you, operator. Before ending our call, we'd like to thank everyone for participating today and enjoy your weekend.

Operator

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

Duration: 42 minutes

Call participants:

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

Mark Casale -- Chairman, President and Chief Executive Officer

Lawrence E. McAlee -- Senior Vice President and Chief Financial Officer

Mark DeVries -- Barclays -- Analyst

Bose George -- KBW -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Douglas Harter -- Credit Suisse -- Analyst

Phil Stefano -- Deutsche Bank -- Analyst

Mackenzie Aron -- Zelman & Associates -- Analyst

Jack Micenko -- SIG -- Analyst

Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst

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