Essent Group Ltd. (ESNT) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Tessa and I will be your conference operator today. At this time I would like to welcome everyone to Essent Group Ltd., Fourth Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Chris Curran, Senior Vice President of Investor Relations, you may begin your conference.

Thank you, Tessa. Good morning everyone and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer. Our Press Release which contains Essent's financial results for the fourth quarter and full year 2017 was issued earlier today and is available on our website at essentgroup.com in the Investor section. Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in Exhibit L of our press release. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release. The risk factors included on our Form 10-K filed with the SEC on February 16, 2017, and any other reports and registration statements filed with the SEC, which are also available on our website. Now, let me turn the call over to Mark.

Thanks Chris. Good morning everyone and thank you for joining us. Earlier today we reported our fourth quarter and full year financial results. Overall 2017 was another successful year for Essent as we continue building a high credit quality and profitable mortgage insurance portfolio. During the year we produced high quality and growing earning, while also generating strong returns. We also achieved a significant milestone for the Essent franchise of reaching $100 billion of insurance in force. As we head into our ninth year of writing mortgage insurance, our outlook for 2018 on our business and housing remains positive. Our financial results for the fourth quarter reflect the impact of increased defaults associated with the hurricanes that affected the Texas and Florida regions during the third quarter. However, we continue to believe that the ultimate economic impact on Essent will be minimal. Our results also reflect the impact of tax reform legislation and the reduction in the U.S. corporate tax rate from 35% to 21%. When applying this new rate and re-measuring our differed tax liability at year end, it resulted in a one-time benefit to net income of $85 million. For the fourth quarter we are $163 million compared to $63 million for the fourth quarter a year ago. The primary drivers of this increase were the $85 million tax benefit and a 33% increase in our insurance in force to $110 billion at year end compared to $83 billion at December 31, 2016. As a reminder, insurance in force drives our top line revenue, net premium earned and profitability. Our earnings for the fourth quarter were also impacted by an increase in our loss provision to $17 million compared to $4 million for the fourth quarter of 2016. On a per diluted share basis, we earned $1.65 for the fourth quarter, including $0.86 per diluted share associated with the differed tax benefit compared to $0.68 per diluted share for the fourth quarter of 2016. For the full year we earned $380 million or $3.99 per diluted share. Since our third quarter earnings call in November we have observed more data points relating to our hurricane related defaults. Additionally we also obtained and analyzed default data associated with hurricane Katrina in 2005. Based on our analysis we have updated our loss estimates on the hurricane defaults to reflect the higher cure rate than our estimate on non-hurricane defaults. Larry will discuss defaults in more detail in a few minutes. Our balance sheet remains strong ending the year with $2.7 billion in assets and $1.9 billion of GAAP equity. Also we grew adjusted book value per share 36% to $19.64 at year end 2017 from $14.49 as of December 31, 2016. As a reminder, senior management long term incentive compensation is driven by annual growth rates and book value per share. We believe that book value per share growth is a key metric in demonstrating value to our shareholders. Throughout 2017 our growth exceeded expectations as industry NIW levels were robust. To support our growth during the fourth quarter we contributed $75 million to Essent Guaranty and $25 million to Essent Re. As of year-end we had $104 million of cash in investments at Holdco and have access to $125 million of capacity on our revolving credit facility. As you know the FHFA and GSEs have provided our industry a draft of PMIERs 2.0 to review and comment on. While we are bound by confidentiality in discussing details, our industry is having an ongoing dialog with the GSEs and FHFA in providing feedback. From our standpoint if the final PMIERs were to reflect what has been outlined the draft, we believe that we have adequate resources to support the new standards. In addition, we would also look to further increase our financial flexibility by evaluating capital market solutions such as equity or debt or other options such as reinsurance or CRT transactions. This approach is consistent with Essent’s long term strategy of managing and optimizing capital. While the fourth quarter was certainly eventful, heading into 2018 we remain positive about our prospects as our industry and product is correlated to the macro housing and economic environments. We believe that housing fundamentals remain solid. Some of which is being driven by tailwinds such as the Millennials coming of age and buying homes. We believe that Essent and our industry remain well positioned within a robust and evolving housing finance system. Now, let me turn the call over to Larry.

Thanks Mark and good morning everyone. Mark already spoke about our fourth quarter and full year net income, so I will begin with earned premium. For the fourth quarter our earned premium was $148 million, an increase of 7% over the third quarter of $138 million and an increase of 27% from $117 million for the fourth quarter of 2016. The primary driver of the increases was the growth of our insurance in force to $110 billion at year end, which was up 6% compared to September 30, 2017 and 33% compared to December 31, 2016. The average premium rate for the primary mortgage insurance business for the fourth quarter was 53 basis points, which was consistent with the third quarter and down from 56 basis points for the fourth quarter of 2016. The decrease in the average premium rate compared to the fourth quarter of last year is primarily due to a lower level of singles cancellation income. Credit performance for the fourth quarter was affected by defaults in the areas impacted by hurricanes Harvey and Irma. For the fourth quarter our loss provision was $17.5 million compared to $4.3 million for the quarter of 2017. During the fourth quarter our default portfolio increased by 2,630 to 4,783 compared to September 30, 2017. Of this increase we identified 288 as hurricane related. As Mark noted, our provision for these hurricane defaults does reflect a higher curate assumption than the estimates used on non-hurricane defaults. Of our total provision for losses in the fourth quarter of $17.5 million, $11.1 million pertain to the hurricane defaults. As of December 31, 2017 the reserve recorded for hurricane related defaults of $11.1 million represents our best estimate of the ultimate losses to be incurred for claims associated with these defaults. Looking forward, we will continue to gather information on this segment of the default inventory and updated our reserves if needed. Other underwriting and operating expenses were $36.5 million for the fourth quarter compared to $37 million for the third quarter of 2017 and $34.8 million for the fourth quarter a year ago. Given our increase in earned premium, our expense ratio continued to decline during the fourth quarter to 24.7% compared to 26.8% for the third quarter of 2017 and 29.8% for the fourth quarter a year ago. For the full year 2018 we estimate other underwriting and operating expenses to be in the range of $150 million to $155 million. On December 22, 2017 the Tax Cuts and Jobs Act was passed. The provision of the act include broad tax reforms that are applicable to the company, including a reduction in the U.S. Corporate tax rate from 35% to 21% effective January 1, 2018. This change in tax rates required us to remeasure our differed tax assets and liabilities as of the enactment date resulting in a one time, $85.1 million income tax benefit recorded in our consolidated statement of comprehensive income in the fourth quarter. The effective tax rate for the fourth quarter of 2017, excluding this adjustment of differed taxes was 26.5% compared to 27% for the third quarter of 2017. Going forward Essent will benefit from the reduction in the U.S Federal Corporate rate to 21%. In addition, the act includes a base erosion and anti-abuse tax the (BEAT). The BEAT is an alternative tax which much be paid at the company’s regular tax liability, if it greater than the companies regular tax liability. This alternative base erosion tax, if applicable may limit or eliminate the tax benefit associated with certain base erosion payments. Premium seeded by Essent Guaranty to Essent Re under the quota share reinsurance agreement are considered base erosion payments under the provisions of the act. In 2018 we estimate that Essent will not be subject to the BEAT tax. The company may be subject to this BEAT tax in future periods depending on the earnings of our U.S. insurance companies and the levels of premium seeded to Essent Re. In addition to the impact of the new tax reform legislation, we expect to record a discrete excess tax benefit in the first quarter of 2018 associated with investing of restricted shares granted to management and estimate the benefit to be approximately $0.10 per diluted share. Excluding this excess tax benefit, we estimate that our effective rate for 2018 will be in the range of 16% to 17%. The consolidated balance of cash investment at December 31 was $2.3 billion. The cash and investment balance at the holding company was $104 million compared to $128 million as of September 30, 2017. As Mark noted, we made capital contributions of $75 million to Essent Guaranty and $25 million to Essent Re during the fourth quarter. Additionally at year end we have $125 million of undrawn capacity under the revolving credit component of the facility. The weighted average annualized interest rate on the total amounts borrowed under the credit facility as of year-end was 3.49%. As of December 31, 2017 the combined U.S. mortgage insurance businesses statutory capital was $1.5 billion with a risk to capital ratio of 14.2:1 compared to 14.7:1 as of September 30, 2017. Finally, Essent Re had GAAP equity of $663 million supporting $6.3 billion of net risk in force. Now, let me turn the call back over to Mark.

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

Thank you. [Operator Instructions]. Your first question comes from the line of Philip Stefano from Deutsche Bank. Please go ahead.

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

Yeah, sure Phil and it did change. Like I said, in the third quarter it was really our initial estimate, and we had just probably gotten the default data 10 days before, just for October. So we got November data, we got December and we obviously got January and I think, and we also had access to Triad’s hurricane performance back in 2005. So when we put that together and analyzed it, we really looked and said, we expected to get a higher cure rate on that part of the portfolio. But the simple way to look at it though is there is approximately 2,288 loans in default at the end of the year. Assume it does about a 10% of those defaults will be go to claim and that’s really – we kind of boxed it. Now we think that is our loss going forward. So we really, we took that charge in the fourth quarter and we wouldn’t expect unless there is a change to increase that or lower that over time. So I think that’s the big change. Rather than having it flow through kind of different buckets, we sized it up. Because remember, at the end of the day that’s what we are trying to do. We are trying to give everyone our best estimates, future losses and at the end of the day I think we got there.

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

Well again it’s different because the normal defaults will flow through the buckets. We tried to size ultimate. We took a different approach, so we tried to size the ultimate claim rate just for this discreet bucket.

Got it, got it.

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

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

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

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

Got it, got it. Okay alright, that’s great. I appreciate the guidance and best of luck with the parade hangovers.

Yes, thanks Bill.

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

Good morning guys. Can you speak to you know the cure trend on those 2288 in the month of January. Do you have that information?

Yes, hey Jack. I think 260 of them cured in January.

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

Yeah, again I think it’s just – it’s the business that came in the quarter. I would say again we looked at this. I looked at this a few weeks and we’ve been 80/20 pretty much since we started. So sometimes we’re above, sometimes we’re below, but I wouldn’t read anything into the quarter.

Okay, okay. Just one last one; you know Mark you had always talked about sort of 70 to 80. Persistency obviously better than that this quarter I guess with the move in rate. Is that enough to get you to think that number is maybe a little bit higher on a go forward?

Yes, I think it does you know. It’s hard you know. I’m trying really hard to stick to that 70 to 80, but you know especially with interest rates coming up a little bit, you know it has been trending you know kind of end of the year closer to the mid-80’s. So I think low 80’s is probably better guidance, at least for 2018. You be careful projecting that out to further years though. I think that’s the one, that’s a harder thing to project that, but I think for this year you know I think that’s a pretty good, low 80’s is a pretty good number.

Alright, great. Thanks.

Yep.

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

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

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

Got it, and it sounds like there’s this kind of natural evolution. Are these conversations you’d probably be having even if they kind of moderate the initial proposals?

Absolutely.

Okay, fair enough. Alright, thank you.

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

Thanks, good morning. First question, bigger picture Mark, how you’re seeing the market as we head into 2018 on the purchase and re-fi side and if there’s any thoughts you could give us on what you think NIW could be or at least directionally given how robust the trends were this year?

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

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

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

Great. Thanks Mark.

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

Hey guys, thanks for taking my questions this morning. Look, the tax benefit in some ways could be viewed as sort of a capital windfall for you. I am curious as we start to see sort of the leveling off of NIW over the next year or two, how you think about the capital positions and the potential to eventually start returning some capital?

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

Got it. I mean it is interesting to me then if the plates about $85 million of incremental capital, you know objectively you have grown faster than expectations raised capital, more capital than expected to fund that and so just sort of raising the question of okay, does this objectively fund all potential future growth for the next couple of years given the natural capital formation of business?

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

Yeah, no I would agree. It’s pretty remarkable when you think back over this that you have 11% to 12% of that overall market at this point.

Yeah, we’ve been very fortunate. Thank you.

Thank you, Mark.

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

Okay, more on capital, when you think about capital management and the new tax regime, I guess there is no reason to push more capital then into Essent Re absent some big increase in this sharing. Is that fair?

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

And then just in terms of the seeding, you’ll keep that at the 25% just to maintain the tax rate as the 16% to 17%?

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

Thanks and then actually on the earned premium is your expectation still that you know that goes down a couple of a basis points over time?

Good question, it hasn’t really gone down, so we’re kind of in that 53%, 53 basis point range. Yeah, we still think it’s kind of in the lower end of the 50’s range going forward.

Okay, okay great. Thanks.

You’re welcome.

Your next question comes from the line of Mihir Bhatia from Bank of America/Merrill Lynch. Please go ahead.

Hey, good morning and thank you for taking my questions. Just wanted to start, maybe on your investment portfolio, just any updated thoughts on how you’re thinking about duration and just managing that given your recent move in rates and tax reforms?

Yeah, I mean I can start. I think obviously with rates going up we’re relatively well positioned to ride the curve up a little bit. So as the shorter end maturities come due we’re able to replace them with higher rates; its relatively small movements. Not too much change around tax reform and I would think the duration is in relatively good shape, because remember we matched that with the liabilities and the portfolio which continue to lengthen, but I think we’ve been relatively – I shouldn’t say relatively, very conservative in the fixed income portfolio and we would expect to be.

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

Got it, great. And then on pricing, just a quick question. You know obviously it sounds like there is no desire to you know just reduce pricing to compete with the other private mortgage insurers. But what are your thoughts around maybe you know targeted reduction in prices post tax reform. Like you know say to compete with the FHA, because right now you know when you look at the grid I think it’s you know about 740 clearly, BMI is better and then below 6 – maybe below 680 FHA is better, but like you know in that 720 bucket or something. Do you guys have any thoughts around that, any views?

Yes, that’s a good question. I would say, yeah I don’t think there is really any price competition within the industry. I think the competition in the industry where it’s the most intense is really around calling on clients and customer service. A lot of the data base stuff that isn’t seen my the market. I think pricing has been relatively stable. There is a sense that you could use some of the pricing to help be more competitive with FHA in certain buckets. I would say that it’s a possibility; however, the big mitigate to that is PMIERs. So until I think PMIERs the drafts are settled, it’s really him and find out what the new capital standards are going to be. I think it’s going to be difficult for Essent however I can’t speak for our competitors, but I think it will be difficult to make any price moves until you real know what you capital is on that business going forward.

Okay, that makes sense. Great and then another question, just on – have you guys seen any additional risk clearing or any areas of the market that maybe getting a little ahead, maybe be a little more, a little – I guess credit getting a little looser. Has there been any tightening around the edges or anything with a single premium or…

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

Got it, that makes sense, great. And then just last question, just to clarify, did I hear right the tax reform, not tax reform sorry the tax benefit in Q1 is going to $0.10.

Per share?

Up from $0.03 last year.

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

Okay, great, thank you.

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

Thanks good morning. Just to go back to the tax rate, just so I understand it. Last quarter you were talking about perhaps recapturing the affiliated businesses seeded to Essent Re and so that’s the way I’m hearing it now, that’s off the table until the combined ratio moves north of 35% to 40%.

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

Okay, and this is a point of clarification. I assume there is an excise tax affiliated with the seeding to Bermuda and that runs though the other underwriting and operating expense line?

Yeah Sean, the excise tax in unchanged with the new tax reform, but we show that as a reduction, we showed that in operating expense, so you are correct. But again, that’s sort of unchanged between the old regime and the new regime; that excise tax continues.

Yeah and so when we spoke about it back in November we thought the worst case was we be at 21% and I think the way the final legislation came through with the BEAT that we ended up well below that.

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

Yes Sean, this is Larry, yeah that’s correct. In terms of funding the capital contributions to Essent Guaranty, we used the revolver to find those contributions.

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

I think year-over-year we were quite strong. Quarter-over-quarter I think it varied. So again, as we talked about it before, we don’t read too much in the quarter-over-quarter. I just think you know 33% increase in insurance and 4Q over here is a pretty good metric.

Okay, great. Thanks.

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

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

Yeah sure, we probably can take that offline. It sort of varies from month to month and quarter to quarter.

Okay, that’s all I have thank you.

[Operator Instructions] Your next question comes from the line of Geoffrey Dunn from Dowling & Partners. Please go ahead.

Thank you, good morning guys. I got a few questions here. Just on the first quarter tax benefit, is that something that’s recurring in each first quarter going forward or is it a one-time things?

So Geoff, this is Larry. The first quarter we had, it was the first quarter of 2017. There was a change in the tax rule. We also had that tax benefit, but it previously went directly to equity. So we would expect it to be recurring in the first quarter of each year because we have a number of our restricted shares that invested in the first quarter. We would expect however the benefit going forward to be smaller than the benefit this year. We have a little higher vesting of restricted shares because of some shares that were granted in connecting with the IPO that invested in the first quarter of this year. But it is recovering, albeit we would expect it to be at lower levels in future periods.

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

Yeah Geoff, I don’t think that’s unreasonable. This is Larry.

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

Good question. No, we have the resources to the in house.

Okay and then the last question is with respect to hurricane notices, I’m not sure I completely follow this kind of discreet treatment. Where are we in terms of the level of notices in January? We backed down the normal, meaning that the first quarter provision is going to be a kind of quarter go “clean provision” or are you expecting more distortion from the hurricanes into Q1 incurred loss for this.

Yes, excellent question. No, they went down by – the total defaults went down by 260, is that it, the number. So that includes cures and new notices, which ones were down dramatically. No, we expect the first quarter now to be clean. Unless there is a change, this is again – that was kind of the purpose was to kind of box it Geoff in the fourth quarter, give our best estimate and then put in behind us and then going forward it would be clean. So if the reserve is that $11 million is somewhat higher or lower than our original estimate. Yeah, that will flow through, that will flow through over six to eight quarters. It will be really hard to even identify. But that was really the purpose of it as we sat down at the fourth quarter and discussed it with our auditors, it was to really give our best estimates, and the future losses and kind of box it.

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

Geoff, this is Larry. That’s correct; we are going to monitor it and we would expect to not have any significant changes in that, unless we get significant new additional information. As Mark said, we would expect it to sort of play out over six to eight quartets.

Okay, great. Thanks guys.

Yep.

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

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

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