Good morning, ladies and gentlemen, my name is Eric, and I'll be your operator today. At this time, I would like to welcome everyone to the Essent Group Ltd. First Quarter 2014 Conference Call. [Operator Instructions] I would like to turn the call over to Mr. Chris Curran, Senior Vice President. Mr. Curran, you may begin. .

Thank you, operator. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; Adolfo Marzol, Executive Vice President; and Larry McAlee, Chief Financial Officer..

Our press release, which contains Essent's financial results for the first quarter of 2014, 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 our press release in Exhibit L..

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, 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 March 10, 2014, 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 today. I am pleased to report Essent's strong financial performance for the first quarter as we earned $15 million or $0.18 per diluted share and grew insurance in force to $34.8 billion.

Our goal at Essent remains simple, to build a high credit quality and profitable mortgage insurance portfolio, which can deliver predictable top line growth and generate strong returns over the cycle..

The Essent franchise is well positioned. During the quarter, we continued stacking NIW on top of our existing in force while maintaining expense levels. In addition, our strong capital levels along with our disciplined risk management approach provides confidence to our counter parties and differentiates Essent in the marketplace..

The strength of our franchise is reflected in our investment grade ratings. We are rated BBB flat by Moody's and Standard & Poor's recently reaffirmed our BBB+ rating. We believe that our financial strength ratings provide the marketplace a strong third party validation of our business and more transparency into the financial strength of Essent..

As noted, our growth in insurance in force drives topline revenues. Earned premium for the quarter was $44.8 million, up 110% from $21.3 million during the first quarter of 2013. Due to the growth of earned premium, our expense ratio for the quarter declined to 52% from 70% in the first quarter of 2013.

Finally, our insurance portfolio continues to demonstrate a strong credit profile, ending the quarter with a default ratio of 12 basis points..

We estimate that mortgage originations and industry NIW were lower during the first quarter of 2014 as compared to the fourth quarter of 2013. This resulted from lower refinance activity but was also impacted by seasonality and weather-related issues.

While mortgage originations and industry NIW were lower during the first quarter, we remain positive about longer-term industry growth..

Our outlook reflects that private mortgage insurance is more efficient for many low down payment borrowers versus FHA. It also reflects the steady increase in purchase mortgage originations, which have much higher penetration rates than refinance originations..

For the first quarter, we generated $3.6 billion of NIW and we estimate our market share was approximately 12.5%. For the 12-month period ended March 31, 2014, the number of active customers generating NIW was 787 as compared to 540 a year ago. We are very pleased with our growing number of active customers and our market share position..

For us, our business focus continues to be on delivering reliable mortgage insurance solutions and great service to our customers while maintaining our credit risk discipline. We do this by staying in front of our customers and listening to them.

This enables us to leverage our operational and mortgage risk expertise so we can tailor solutions to help them prudently grow their business. Success with our customers leads to franchise expansion, insurance in force growth and continued expense leverage, all of which translates into long-term earnings growth..

We continue to believe that our shareholders are best-served by this customer-centric approach. On the Washington front, the focus is on the Senate Banking Committee and its consideration of the Johnson-Crapo bill. While this proposal is positive for our business, the odds of comprehensive reform legislation passing this year remain modest.

As to the updated MI eligibility requirements from FHFA and the GSEs, more information is anticipated sometime this quarter..

We look forward to reviewing the new eligibility requirements and believe that sound standards that are transparent and consistently enforced strengthen our industry. Now I'd like to turn the call over to Larry to discuss our financials. .

Thanks, Mark, and good morning. Pretax income for the first quarter was $23.5 million as compared to $19.4 million in the fourth quarter of 2013 and $7.3 million for the first quarter a year ago. For the first quarter of 2014, we earned net income of $15 million resulting in earnings per diluted share of $0.18.

Our net income for this quarter reflects a tax provision of $8.5 million and an effective tax rate of 36%. This compares to small tax provisions recorded in the fourth and first quarters of 2013..

As noted on our fourth quarter 2013 earnings call, our prior year results include the favorable impact of the reversal of the valuation allowance against our deferred tax assets, including the benefit of our net operating losses, which were used in their entirety during 2013. For 2014, we will be in a full tax paying position..

Earned premium for the first quarter was $44.8 million, up 11% from the fourth quarter of 2013, and as Mark mentioned, up 110% compared to the first quarter a year ago. The increase in earned premium is driven by the increase in our insurance in force.

Our persistency at March 31, 2014, was 87.9% compared to 86.1% at year end and 80.9% at the end of the first quarter a year ago..

The provision for losses and loss adjustment expenses increased from $692,000 in the fourth quarter of 2013 to $902,000 in the first quarter. This is in line with the increase in our default portfolio from 159 at December 31 to 192 at March 31, 2014..

Our expense ratio for the first quarter was 52.4% compared to 55.3% and 70.4%, respectively, for the fourth and first quarters of 2013. Other underwriting and operating expenses for the first quarter were $23.5 million, slightly higher than the $22.3 million in the fourth quarter of 2013..

The balance of our investment portfolio at March 31 was $847 million, which includes $239 million of money market funds. Our investment portfolio increased $515 million from year end, which includes investment of cash proceeds from the IPO.

As a result, net investment income for the quarter increased to $1.9 million from $1.2 million in the fourth quarter..

Additionally, at March 31, the holding company cash and investment balance was $207 million as compared to $246 million at year end 2013..

The combined risk to capital ratio of the U.S. mortgage insurance business was 16.1:1 at March 31. Combined statutory capital of the U.S.

MI business was $528 million and reflects an increase during the first quarter of approximately $59 million resulting from both earnings of the business and a $35 million capital contribution from the holding company..

Finally, total consolidated GAAP equity as of March 31 was $740 million and we have no debt outstanding. Now let me turn the call back over to Mark for his closing comments. .

Thanks, Larry. We are very pleased with our results for the first quarter and our solid position in the marketplace. Our business development team continues to make great progress in expanding our franchise while the remainder of Essent provides a platform to support this expansion and deliver best-in-class service to our customers..

So in closing, our business continues to be leveraged to the improving fundamentals of the U.S. housing market and the increasing demand for private mortgage insurance. As a well-capitalized mortgage insurer with an efficient operating platform, Essent is well positioned to participate in the growing demand for our product.

Also, we believe that Essent can be a reliable and stable long-term provider of private capital in a reformed housing finance system. Because of these trends and our expertise in managing long-term mortgage risk, we remain very excited about Essent's long-term prospects. Now let's turn the call over to your questions.

Operator?.

[Operator Instructions] And your first question comes from the line of Mark DeVries from Barclays. .

It's clear you guys picked up some market share in the quarter.

Is there any color you can give us on whether you're -- that may be attributable to just adding on new customers in the quarter or deepening penetration with existing or a combination of both?.

Hey, Mark, it's Mark. I think we continue to add to our customer base and that's really kind of activation of new clients, there's also utilization of new clients. The result of that is market share. But as we said in the past, we're not real hung up on that.

And I think the real driver of growth at Essent is our continued growth in insurance in force, managing our expenses, maintaining both our credit and pricing discipline. All that leads to long-term earnings growth. So I'll leave it at that. .

Okay. Fair enough.

Was there any change in the share of single premiums as a percentage of your business this quarter?.

It was very modest if there was a change at all. It was still kind of in that 80 -- 80, 20 range for the singles. .

Yes. Mark, we do include that in the supplemental in Exhibit C. .

Okay. Got it. Got it.

And then just finally, any updated thoughts on prospects of issuing debt at the holding company to meet capital needs in the future as you continue to grow your risk in force?.

I would say right now, Mark, we're very comfortable with the amount of capital we have at the company. In the future, should we need to raise additional capital for growth opportunities, we would certainly look at both debt and equity options. .

Your next question comes from the line of Eric Beardsley from Goldman Sachs. .

I was just wondering if there's anything that moved around with the premium rate this quarter.

It looks like it was fly with the fourth quarter and given the pricing changes, I guess, is there pressure that we'd expect to see coming up over the rest of the year?.

Hey, Eric, it's Mark. I would say it remained relatively stable. I would just -- I would add that the pricing, the full pricing change is in completely -- it was reflected in the first quarter, but it's still relatively a small part of our portfolio. So you could see it drift down a little bit through the year.

But that's also -- the mitigant to that is a little bit lower FICO in our book, a little bit higher LTV due to a greater percentage of purchase originations. So you're definitely seeing higher premium there. So all in all, it could drift a little bit, it could be flat. But right in that range. .

Okay. Great. And then just on the persistency rate.

Is this a fair run rate moving forward for the rest of the year?.

This is Larry McAlee. As you'll see, over the last 5 quarters, our persistency rate has been in the low to mid 80s and increased to the upper 80s in the first quarter. So we would expect it to remain in that area for the foreseeable future. .

And your next question comes from the line of Rick Shane from JPMorgan. .

Just one quick question. When you guys have looked at your business and described your business in the past, I think you have not really targeted risk in force per se that you realized that the market is going to sort of deliver that to you over time.

The question is this, when you look at the trajectory of expenses and profitability, and I do think you guys have had a view, when the book gets to a certain size, you'll be able to meet certain profitability thresholds.

Where do you think you are now in relation to profitability versus size? Are you on target?.

One, in terms of profitability, I think we're there. We've shown a profit now for 5 quarters. I think in terms of optimizing the expense of the business, I think we're on our way, but there's still definitely room to grow.

And I think, we continue -- the insurance in force continues to grow at a nice clip and expenses were relatively flat in the quarter. So again, as we continue to grow, we feel like we'll grow into that expense ratio. .

Got it. Hey, Mark, let me ask a question in a slightly different way, it was a little long-winded and I apologize. Basically, the thesis here has been there's a lot of operating leverage to be developed.

Do you feel like right now, you're at the operating leverage that you thought you would be at when you're at this size?.

I guess from an operational standpoint, absolutely. .

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

First, a question just about the competitive landscape. Can you just discuss any changes there? Any pricing pressure at all? Just any updates would be great. .

Hey, Bose, it's Mark. No real change on the pricing front that we've seen. Competitive environment has remained relatively stable from that standpoint. .

Okay. Great. And then, your last quarter, you talked about industry NIW that you'd sort of expected for 2014 and you said, I think, it was $150 billion to $160 billion. And I'm just curious if you’re -- how your thoughts are a few months later. .

Yes, it's a good question. I think a few months later, we're still kind of right in that range. .

Okay. Great. And then one political question. There's been some chatter about FHFA under Mel Watt potentially reducing loan level price adjustments.

Do you guys have any thoughts about the prospect of that happening?.

I'll start and Adolfo is here and he could add. I would say we really don't have a lot of information on the prospects. We read about that likelihood or possibility too, but we -- I have no real insight into it. .

Yes. I would just say we don't have any particular insights. We do know that Director Watt is going to be making some remarks, I think, next week. It may be the 13th next week, and there's a sense that this is going to be potentially significant remarks.

So we'll certainly be, along with a lot of other people, just trying to listen to that and see what he's got to say in terms of the direction of the GSEs. But we look forward to working with him and his team on some important issues, like the MI eligibility standards that Mark mentioned in his prepared remarks. .

And your final question comes from the line of Jason Stewart from Compass Point. .

One follow-up to that question.

Do you expect Watt to address the eligibility standards on the 13th? Or is that something -- a process that's running separately?.

We don't know what he might, in particular, address. There's a fair number of matters on his desk and we have no insight as to which ones he'll cover in his upcoming speech. .

Okay.

And if I listened correctly, I might have missed this, you said in your prepared remarks, you expect that eligibility standard to be released 2Q?.

Yes, second quarter is what we were told. .

And we have no further questions in the queue. I'll turn the call back over to management for closing remarks. .

This is Mark. Thank you, operator, and we'd like to thank everyone for participating in today's call, and enjoy the rest of your week. .

And this concludes today's call. You may now disconnect..