Q4 2019 Earnings Call
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I would now like they had the conference over to your speaker for today Mr., Chris Curran Senior Vice President of Investor Relations. Please go ahead.
Thank you Amy good morning, everyone and welcome to our coal.
Joining me today are more sale, chairman and CEO and Larry Mcalee Chief Financial Officer.
Our press release, which contains essence financial results for the full year and fourth quarter of 2019 was issued earlier today and is available on our website at Essent group Dot com and the Investor section.
Our press release also includes non-GAAP financial measures that maybe discuss during today's call.
The complete description of these measures on the reconciliation to GAAP, maybe found in exhibit and of our press release.
Prior to getting started I would like to remind participants that todays 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 could 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 FCC on February 19 2019.
And any other reports and registration statements filed with the FCC, 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 I'm pleased to report that Aesynt produced another strong quarter financial results at the operating environment remains favorable and credit continues to perform well.
Also during the quarter, we were very pleased with Moody's upgrade of our financial strength rating. The Athree. We believed that this upgrade as a validation of our transition to a stronger operating model.
Specifically during the year, we continued reinsuring, our portfolio and evolving our pricing engine.
The utilization of these tools makes absent a more sustainable franchise and as a long term positive for policy holders shareholders and employees.
Our performance for the fourth quarter and full year 2019 continue to benefit from strong secular and cyclical tailwinds.
Affordable mortgage rates low unemployment and first time home buying by millennials continue to drive strong credit performance, an elevated housing demand.
As a franchise that is lever to U.S. housing the economy and purchase mortgages or outlook on our business remains positive heading into 20 Twond.
Now, let me touch on our results for the fourth quarter, we earned $147 million or $1.49 cents per diluted share.
While on a four year basis, we are in $556 million or $5.66 per diluted share also a return on equity for 2019 was 21% and we grew adjusted book value per share 22% to $29.66 at year end 2019.
As a reminder, senior managements long term incentive compensation is driven by growth in book value per share, which we believe best demonstrates value to shareholders.
On the business front, we continue to increase our sophistication around originating and distributing mortgage credit risk. We believe that the use of data analytics will be a key differentiator in selecting and pricing credit because of this we continue to refine essen ads to be more selective in shaping and building a profitable mortgage insurance.
Folio also SNH provides more flexibility and changing price, especially during this down cycle.
From a risk distribution perspective, we continue to make solid progress and using reinsurance, which we believe has been transformational for franchise like ours.
Our objective and using reinsurance is to maybe mitigate the cyclical boom and bust nature of the M.I. operating model.
As noted earlier, a moody's upgraded our financial strength rating during the quarter to a three in connection with this upgrade Moody's analyze the benefits of reinsurance under severe see CCAR stress scenario.
The results conveyed that the stress reduces profitability without depleting capital in other words because of reinsurance. The end result was an earnings event and not a capital then.
In January of this year, we closed another radnor reinsurance link no transaction pertaining to end I W. from January through August 2019.
This transaction, we obtained $496 million of reinsurance on approximately $38 billion of and I W.
Today, we have successfully close for I'll end transactions, along with two excess of loss transactions with third party reinsurers in total these transactions provide access to $1.8 billion or protection.
Including the quota share transaction that became effective in September of 2019, we have over 90% of our mortgage portfolio reinsured as of January 30, Onest 2020.
At year end 2019, our balance sheet remains strong with $3.9 billion in assets and $3 billion of GAAP capital.
Also our pmires excess available assets was $840 million.
Based on our balance sheet and strong earnings along with increased confidence in our operating cash flows. Our board has declared a quarterly dividend of 16 cents per share to be paid on March 2020 Twond.
We believe that a dividend is a tangible demonstration of the benefits of our by managing distribute operating model.
Also a dividend of this size affords us the opportunity to continue investing in the business and take advantage of other potential growth opportunities now, let me turn the call over to Larry.
Thanks, Mark and good morning, everyone I will now discuss our results for the quarter in more detail.
Net earned premium for the fourth quarter with $208 million, an increase of 2% over the third quarter $203 million and an increase of 20% from $173 million in the fourth quarter 2018.
The increase unearned premium over the third quarter was due primarily to a 3% increase in average insurance in force.
Persistency declined during the quarter to 77.5% from 82.1% at September Thirtyth 2019.
The average net premium rate for the us mortgage insurance business in the fourth quarter was 49 basis points, which was consistent with a third quarter 2019.
Note that this rate excludes premiums earned by hasn't really on our GFC risk share transactions.
Single premium policy cancellation income continues to contribute favorably to the average net premium rate.
Cancellation income was $14.8 million in the fourth quarter of 2019 compared to $14.6 million in the third quarter and $3.7 million in the fourth quarter of 2018.
Investment income excluding realized gains was $22 million in the fourth quarter of 2019.
Compared to $21.1 million in the third quarter and $18.6 million in the fourth quarter a year ago.
The increase in investment income over the fourth quarter of 2018 is due to an increase in the balance of our investments.
The yield on the investment portfolio in the fourth quarter of 2019 of 2.8% is consistent with yield in the fourth quarter of 2018.
Net realized gains on the sale of investments were $833000 in the fourth quarter of 2019.
We recorded a loss of $3.6 million in the fourth quarter compared to a loss of $760000 in the third quarter for the change in fair value of embedded derivatives associated with the insurance linked new transactions.
This loss is included in other income and our consolidated statements of comprehensive income.
The provision for losses and loss adjustment expenses was $10.9 million in the fourth quarter compared to $10 million in the third quarter of 2019, and the benefit of $1 billion in the fourth quarter a year ago.
The benefit reflected in the provision for losses in the fourth quarter of 2018 included the release of $9.9 million of reserves associated with Hurricanes Harvey Neuroma that had previously been recorded in 2017.
The default rate on the us mortgage insurance portfolio increased 10 basis points from September Thirtyth 2019 to 85 basis points as of December 30 Onest.
Other underwriting in operating expenses were $41.2 million for the fourth quarter of 2019 compared to $41.6 million in the third quarter and $39.4 million in the fourth quarter a year ago.
Our expense ratio declined to 19.9% in the quarter compared to 20.4% in the third quarter and 22.8% in the fourth quarter a year ago.
For the full year 2020, we estimate other underwriting in operating expenses to be in the range of $165 million to $170 million.
Our effective tax rate for the full year 2019 was 16%.
The full year income tax expense is also reduced by $2 million of excess tax benefits associated with the vesting of restricted share and share units issued to employees.
We estimate that our effective tax rate for 2020 will be consistent with our rate experienced in 2019 at approximately 16%.
The consolidated balance of cash and investments at December 30, Onest 2019 was $3.5 billion.
The cash investment balance at the holding company was $98.4 million.
In December Essent re paid a $15 million dividend to our holding company Essent Group limited.
Essent Group limited paid its second quarterly dividend of $14.7 million to shareholders in December.
As of December 30, Onest 2019, the combined us mortgage insurance business statutory capital was $2.3 billion with a risk to capital ratio of 12.6 to one.
The risk to capital ratio reflects a reduction in risk in force associated with the affiliate quota share with Essent re end to $2.5 billion reduction for reinsurance provided by third parties.
Also aesynt guarantees available assets exceeded its minimum required assets has completed under pmires by $840 million.
Finally at the end of the fourth quarter Essent re had GAAP equity of $939 million supporting $10.3 billion of net risk in force now let me turn the call back over to Mark. Thanks, Larry in closing Essent had another strong quarter as the operating and credit environments were favorable and we remain pleased with progress and.
Transitioning our operating model the combination of SNH on the front end and reinsurance in the back end as a key component and building a more sustainable franchise.
Looking forward, we will continue to take advantage of positive secular trends, while also mitigating against a cyclical nature of our business for the use of reinsurance heading into 2020, Essent is well positioned and we remain positive about our business and prospects now let's get to your questions operator.
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Your first question today comes from the line of still have bundle of ESI.
Your line is open.
Hey, good morning, guys.
Mark just wanted to start off I guess.
I wanted to get your high level thoughts on how do you guys think about the tradeoff between the continued use of reinsurance.
And maybe what the impact that has on premium yield going forward because I think there's a good understanding about the benefit on loss ratios long term here.
But at what point do economics, maybe not make sense for you guys.
So good question I think I would take a step back so haven't say in terms of the risk reward we think it's pretty one sided on.
On the use of reinsurance.
Protecting the tail risk, especially in times of uncertainty is is critical remember and I've said this in the past credit kills these businesses.
And hurt it hurt the business is back in the eighties.
Destroyed on back in the great recession and to me Thats. The number one number two and number three risk we have in this and this company. So to me that program and the progress around the reinsurance has really been transformational in the business I think it's been validated.
By Moodys in regards to our upgrade to Athree, but it is dilutive right. I mean, we've said this from the past if we say our insurance in force is 200, and it's going to cost us four to five basis points. The reinsurance that's right off the top line and Thats going to quote stunt growth.
But it hasn't really impacted returns so having after really look at that the unit economic or returns of the business are strong.
There is much more confidence around those returns when you can hedge to risk out I mean, if you look at a forecast of vessels that you did two years ago versus today.
Maybe the growth isn't as it was a few years ago, one we've gotten a lot bigger but this the confidence.
The volatility around those returns is much less and again I think thats the key.
Message around around around us and it's one of the reasons why we were able to the declared a dividend. So I would look at it that way I mean, we really continue to have a lot more sustainability around the cash flow is why they continue to grow.
So insurance in force grew.
Close to 20% year over year.
And again the return on equity was was 20%. So again I think it from that standpoint, you have to run it through your models.
At the end result is I would say a lot more confidence around the sustainability of your estimates.
Okay Fair enough and then just on NPW.
The growth rate year over year was a little below peers.
Got a function of you guys, maybe just stepping away from the business with your price engine and other stepping in.
Any color there would be really helpful. Thanks.
Yes, I mean again I think I've said this before.
Market share ebbs and flows quarter over quarter, I would never read too much in until one quarter and as I said in the last few quarters, we've been testing a lot with the pricing engines pricing elasticity.
And the reason we're able to do that is again I've said, we're kind of year three now into a five year transition.
Around both the front end in the back end, we had a market last year. So him that was so large and you're talking 385 billion close to have Eni W. We posted 63 billing of Eni W. That's three times the amount that we did back in 2014 almost three times.
The market, Dan I W. market, our first year of writing in 2010 was 70 billion. We wrote almost that this year. So when you when you try to parcel through market share. It's it's a little misleading.
Another thing if the factor in as our market share for the year. So Ham was 16% our market share for 2018 was 16% Oh by the way our market share for 2017 was 16%. So we said right. We're comfortable with the mid teens and again I think you just have to takes take a step back and just look at the absolute level.
Of Eni, Debbie that's coming into into the business clearly it ran off a little bit with a persistency, but we couldn't be more pleased I think where we are in the market and I think in terms of the insurance in force the size of it as I would say was above our expectations over the past few years.
Anything on the competitive side that you are seeing at all or everything seems pretty straightforward.
It's the same story that has been for the last 10 years, everyone try to stir picked our spots for years. It was LPMI singles was your way into the into it.
You are now trying the BPMI singles Thats kind of the new play.
We've seen some news the pricing engine too.
Grab some share.
I remember you never you always rent market share you never have market share. So we've seen that but that's that's par for the course.
In the engines are relatively new it's like a new toy.
For the industry and but I would look at the engines longer term. So ham from an EPS and point of view as their risk management tools. Our view is we have in almost every lender.
The ability of the engine now to do a few things one just.
Today, our ability to change price both.
Operationally and from a regulatory standpoint as much greater we don't have to file rates and all 50 states. We don't have to have conversations with lenders about new rate cards, we can change it pretty much every day, if we wanted to not that your would credit doesn't change that quickly.
Right, we can now targeted geographies and again, it's very important when the when there is a down cycle second we now have the ability to bring on more factors and introduced new factors to estimate.
A borrower characteristics are the estimate of default.
Before we were only to able to bring a couple of those factors to the point of sale now with technology. There is the ability to bring more factors and continue to test new factors and as I've said in the past I think credit selection will be a key differentiator for amies not dissimilar.
To the Guy goes in the progressive that's going to take a while credit is very good right now, it's a little bit of pricing game I mean credit. So good that it's hard to see that the credit is not always going to become the economy is not always going to be strong and as we look at how we manage the business for the longer term. We think the engine will be huge advantage for us.
Going forward and I Wouldnt expect the rest of the industry to look at a very similar way.
No no makes sense thanks, guys.
Sure.
Your next question comes from the line of Douglas Harter of Credit Suisse. Your line is open.
Thanks, Bob just sort of following up there on competition, what does your outlook for for the prudent.
Tony.
And just how do you see how much of the differential between the business you're writing.
The business that's rolling off.
Yes, Doug I mean, I think our I think we were 49 basis points for the fourth quarter and Thats net of the cost of reinsurance and as I've said before you know as Weve reinsure more of the bulk you're going to see the seat at number.
Continue to grow you're starting to see the impacts of the rate reduction back in 2018 work its way through the portfolio.
And that was kind of post.
Tax reform.
So 49, I would say for 2020, I would expect it to come down.
Probably in the mid Fortys would be a good good estimate I mean, there is a little bit of given take with singles premium cancellation, but.
All else being equal kind of mid Fortys is a good estimate for us in 2020.
Great.
And it's.
Good.
Persist.
Given where rates are today, let's turn to the.
The path for persistency over over the next couple of quarters.
Yes, and I think for 2020 in general, it's a little hard to predict given where rates are but.
Normally I would forecast out and say, 80% has a longer term guide, which was is bringing people down when they were on the high eightys or the mid eighties.
I think for US a high Seventys for this year is a pretty good estimate and then we'll kind of see where rates.
On a fall out I would expect rates to remain low at least through.
First half a year I mean, as we enter into the election season.
All bets are off I think in terms of of what's going to happen, but I think for the first half a year I would expect rates to remain low and persistency in the high Seventys is a pretty good estimate for you.
Great. Thank you.
Your next question comes from the line of those children of KBW. Your line is open.
Hey, good morning, actually wanted to go back to Larry The guidance you gave on operating expenses for next year was that 165 270 million.
Yes, yes, thats correct those.
The so that level of increase obviously is very modest and.
The we'd like when we think about sort of going further at 21 et cetera, I mean can you kind of sustain that.
A couple of percent increase given the this is obviously a lot of.
Insurance in force growth going on.
Hey, Bose its mark I just wanted to.
Take that just because I want to add some color.
The 165 to 170 incorporate some of the benefit of the quota share. So we're able to see some of that expense.
Ill speak well, that's everything else. So we don't we're not breaking out contract underwriting expenses to us. This is all related expenses to run the enterprise and you can we don't want to cut too fine of align on it I do think though as we get into a market where.
[music].
You know it becomes best execution around the borrowers and lenders picking the best price cost and capital management are key.
I think we pride ourselves on the absolute level of managing our cost I would say our nominal level of cost is right up there with the best in the industry I think our expense ratio was right up there with the best of industry I'm not sure anyone can say both.
I can say nominal they can exceed expense ratio they can't say both.
And I think there's some I would I would urge the animals to look at the cost the expense differential amongst the different semis because again.
As in term, it's really around cost to originate and all of our origination volume is all is relatively similar so I think cost is going to become another differentiator.
As you start to think about am eyes in the future because that's a big part Thats why I get back to kind of scale matters as the industry continues to mature.
Okay. Great. Thanks, that's helpful. And then actually just the that Mark the fair value Mark do you have on the embedded derivatives in the island can you just remind us what that is and should we think of that is kind of a core number or just some color on that would be great.
Yes, Bose, it's Larry when I, probably would not consider it a core number it is.
Mark to market noncash adjustment, you will see some volatility quarter to quarter and at the close of each transaction the fair value that will be zero, but but it does create a little bit of volatility quarter to quarter, but it relates to our insurance linked no transactions and the premium stream on that is tied to interest rates.
Under the accounting rules, we have to account for a portion of the premium stream as an embedded interest rate derivatives and record the change in that derivatives value in earnings quarter to quarter.
The premium rate we play we pay is based on LIBOR, but we're able to offset a portion of the premium cost with earnings that are held in the offshore assets in the trust, which is invested in.
US Treasury money market fund and the value of the embedded derivative is driven by the expected future cash flows based on the difference between the forward LIBOR curve in the forward Treasury curve and during the fourth quarter the spread between the forward LIBOR and treasury curves widened so thats what created the larger loss in the fourth quarter.
Okay, Great Thats helpful. Thank you.
Your next question comes from the line of Mark to rise of Barclays. Your line is open.
Yes. Thank you just a follow up question on on the expenses.
Mark as you pointed out you guys are already kind of sub 20%.
Expense ratio here.
Which is kind of where are some legacy players have kind of bottomed out and.
When they reset point that kind of failed to find any more operating leverage in the business model, yet I think the guidance here for zero to 3% Opex growth, while you're still growing insurance in force suggests you've got a lot more operating leverage could you just discussed dynamics and kind of where you think you might actually be able to get to an expense ratio.
Hey, I wouldn't say, we have a lot more room Marxist because as the premiums remember we're calculating this net premiums so after ceded reinsurance so I think 20.
As kind of can we get to the change, but if you look at just and I do simple math, Mark I look at the our operating and underwriting expenses might divided by net premium earned.
And again I would urge folks to do that for the rest of the industry versus just looking at the printed expense ratio, there's really probably most of the legacy guys are not in the teams there they're above that if you look at just raw numbers. So I wouldn't look at a lot more leveraged but again with the loss ratio five.
Again, taking a step back Mark do you have a business that has operating margins of 75% longer term as loss to start to season, we've always kind of give we gave guidance kind of into that 30 to 35 combined ratio.
We're not much different today with that guidance. The only thing I would add with reinsurance there's a lot less volatility around that guidance, which I think should give investors comfort.
Okay. That's helpful. And then are there any benefits worth calling out from tangible benefits for your business from the Moody's upgrade.
Yes, I think I think the biggest and others theres some benefits a little bit around.
Our cost of funds will come down on our line I do think it makes us split investment grade at the Holdco, which allows us okay opens access.
To to the debt markets at a better better execution, while I think as good.
Clearly helps us with the Gses I think from a counterparty perspective, they've been very.
They were very pleased I think with the upgrade I mean, it really does sets you apart on that single a is and we said I said this a few quarters ago, we felt like the rating agencies would get there.
Around that and I think it helps us in DC I think it helps the whole industry as the industry continues to improve ratings.
You can say what you won about ratings, but they really are clear indication and its third party validation Mark. So I think when we first where our investment grade back in early 2013, I really believe that helped us when we went public because it was another set of eyes kind of taken to looking at the PNM on the forecast in the business and the balance sheet.
And pining on it and I think from an investor standpoint that Moody's a rating should should give them very similar comfort, but I do think in DC might be the most tangible benefit that we'll see.
Okay do you think the rating agencies will ever get back to double I on the model lines. It is an opposite isn't really matter.
I don't think it matters per se I don't I don't see it as a doubling industry to be honest I felt funded beginning that this is.
Well managed from a capital on expense and business standpoint. In addition to the reinsurance that this is a solid single a industry and I think we're very comfortable with that I.
I think given them online nature of the business I think double laser reach.
I thought it was in past and so I think single a is a solid rating will allow us to execute the business plan.
Tap the equity and debt market should we need them and also be a strong counterparty to both the gses and I would say some of the larger depositories debt like to keep loans on balance sheet.
Okay. Thank you.
Sure.
Your next question comes from the line of Mckenzie, Iran.
Zelman and associates your line is open.
Thanks, Good morning.
Just one question around the dividend can you just provide a little more color around.
The rationale to increase it only two quarters after it was implemented in.
Also kind of on a go forward basis, what is the board looking for for for further increasing capital occur.
Yeah really good really good question on the dividend.
I think our view is we're growing cash flows as excess capital continues to build we said before Mackenzie that dividends is a good tangible way to distribute cash to our shareholders I guess given the growth we felt like the dividend should grow along with it kind of a clause I'd pay out ratio concept.
So our expectation at least for 2020 is to continue to grow the dividend and we think thats a strong signal to the market in terms of sustainability of cash flows and it's still gives us the flexibility and we've talked about this in the past when we think about our capital position Pmires is one thing, but it really.
We have to kind of look at statutory capital along with some excess we have at Essent re and obviously holdco cash and clearly we have more weve liquidity with our line of credit. So when I think about that capital Mackenzie I look at a number of ways first we feel like we have the opportunity to continue to.
Invest in the business given our growth rates to we'll continue to look for opportunities outside of the business and we've talked about this in the last call. We have a pretty disciplined process around how we view new opportunities. We've made a number investments in both I would say venture funds and.
Few private equity funds that give us kind of an outsource corporate development look at early stage companies both on a tech side.
And in financial services to Tech more as it is there a company out there that can help us around cyber can help us price risk better, it's really kind of utilizing that to make the core business better I think on the private equity side is there or is there there are a business there that we could help grow or participate in their their growth in the future.
It's right on our balance sheet is close to 70 $580 million of other investable assets. So it's a small bet relative to.
The size over our investment portfolio, but it's a disciplined process I mean, it's hard for us to sit and say, we're going away for a banker to calm and give us a bulk I mean, the banker serve a purpose, but you really need to have our process around development in growth and how you invest that and I think we have a pretty good one.
Third is really just you've got to protect your downside right I mean, we don't know.
CCF comes into view and gets released we view, we believe there will be a link.
Two pmires and there could be there will be it might at some point and it's hard to predict when a p. Myers 3.0, so weve to think about it.
We have to think about potential capital needs there.
We're factoring in the ratings right I mean now that your single you can't just distribute capital to shareholders. I mean, I think we there I think the rating agencies look at our capital strengthen that went into.
Their evaluation and then you have to look at the economy again, it's it's a strong economy housing strong, but it hasn't always been that way I mean, when we started vests and it was probably the worst time to start a company.
Now in Alex considered Theres no clouds in the Sky in just based on experience that's not always going to be the case. So our view if there is a potential downturn when is it not sure thats, while we have reinsurance and Thats why you have capital.
And then finally, you know you've heard me say before capital be gets opportunities. So from a from a shareholder standpoint, and we still think the best use of excess capital today is via consolidation of the industry and on the strong I've been I've been saying this for a while and the reason is I believe it I think as you go too.
Our best execution models as we mentioned earlier scale is going to be important and the best way to get scale is through combining is combining enterprises. So again, there needs to be a catalyst I can't predict when a catalyst would come or if it comes I am just stating based on my experience and looking at other industries are mature industry such as this you've seen that as.
Result, so I think it would be accretive clearly to shareholders and it's something just to look at so again, we can create those opportunities Mckenzie, but we can be darn sure that we're well prepared for.
That's great very helpful. Thanks, Mark.
Yep.
Your next question comes from the line of Mihir Bhatia of Bank of America. Your line is open.
Hi, Thank you for taking my questions.
If I just wanted to start with just premium rates in general.
I was curious could you just comment on how am I pricing today, compared with last Steve and I understand that there's a maybe a little bit more variability with the price engines in that but I'm thinking more just post tax law changes, although rebuilds and even the absolute premium levels pretty similar or have you seem a little bit more.
Competition.
The ability in that.
I would say on this.
In general there relatively the same I would say relatively flat to where they were kind of post tax reform, we've seen a little bit more competition.
And the higher Ficos and you've seen that in some of the portfolios as some people price that up a little bit to get.
To to get that part of the market, but again all at all it's relatively.
It's not a big move so I think all in the premium levels of and remain pretty constant and I expect them that to remain that way again whenever credits. Its good to hear you always folks probably and get a little too close to the fire, sometimes but I wouldn't expect that.
You know in up to a high degree I think the unit economics of the business continue to be solid right and we look at this we look at the unit economics of the business kind of Unlevered, meaning.
No no full tax rate on really no benefit of reinsurance and it's a pure way to look at the business.
And we still like the returns I would say kind of solidly in that mid teens, when I say mid teens call. It.
12 to 15 13 to 16 to thing to be careful about and for people to watch out again as new capital requirements. So of capital requirements come higher those returns could come lower so I think the industry needs to be Essen in particular needs to be careful around pricing and make sure we're getting an adequate return.
On that capital and that's what we've always said P. Myers.
Is a clear and transparent capital standards is a pretty good pricing guardrail.
And I would expect that.
Reemerge as the is the P. Myers talk starts to pick up over the next 12 to 18 months, but it's a reminder for us so as we look at pricing.
And we look at share again market. This size. Our view is if we can be in that mid teens return and still get not only the unit economics, but absolute premium levels are important to in this market and we're pretty focused just on absolute premium.
Levels and I think when you put it all together I think we feel pretty good about it.
Let me I guess, just following up really quick look maybe not exactly a follow up but on just market you I understand and complete the appreciate your point that it's being you know 16% for three years. If you look at it over to euro So it's pretty stable in that range.
But I was curious can you give us maybe a little bit of color what drives the quarter to quarter volatility like is it just pricing actions income competition in general or is there something else that's going on actions that youre doing what's happening quarter to quarter Thats, making it moves around because I think we saw like you. If you look at it this it's 400.
Basis points between the high in the low and I was just curious what is driving that.
I think a simple answer is yes, it's a lot of different factors as you move you have you have a few things going on right you have the pricing engines and you have the ability of all the am eyes to change the pricing engines and like I said, it's like a new toy offer some.
In terms of how they can price you have the bid cards right and then there's a theres three large lenders that do bid cards and that can really swing share back and forth and then you also have what we call custom cards and those are the lenders that don't they are not on the engines yet to expect again on the engines by you know they kind of put.
Like a card for people to and they try to get everywhere and they take cards and then people can kind of just give them custom cards and we've seen that move share.
On a quarter to quarter and it just it kind of all equals out at the end Thats why I don't add on.
Don't lend a lot of credence to it and Thats why would I recommend everyone take a step back and look at this and on insurance in force basis and look at share over a time period I mean for the quarterly share me here just to give you a sentiment we didn't even know until Tuesday night, and selling we get daily market share reports and were adjusting and here, we don't target market share.
And the result, not that were surprised by the result, but we never you never know, we're always within one or two basis, one or 2% guesses to be quite honest. So it's not like.
We focus on a day in and day I don't think the other amies do either I think everyone has their business plan I think for US it's really about.
Getting to our production levels and making sure we get to the production levels at a certain premium and making sure that unit economics are correct or not it's not all about get as much as you can and I think that say thats, how essence always been I would remind you and the investors were the only mortgage ensure that doesn't pass.
Sales commission to our Salesforce and we think they get paid base bonus and they get equity just like me. So they're all every running the company as a shareholder obviously, including the Salesforce and we look at longer term growth.
Not just quarter to quarter market share because there could be swings and a lot of those things. So I think it's really about how do you grow book value per share and all those things and it's not it's not kind of a quarter to quarter kind of thing that we move the dial up and down on.
Understood last question just.
Turning to regulation, maybe just any early thoughts on the G fee increase thats being proposed.
And just in general regulatory update if you don't mind.
Thank you.
Sure sure I mean, I think the GP I wouldn't read much too much into it it's kind of a draft budget, so I would wait.
I would wait on that so it's hard to comment on it until until it gets in but we don't it's too early to tell.
I think and I did not have any prepared remarks in Washington, just because we don't think theres been a lot of change I would echo.
Lord Others May have said is that it's it's a pretty positive dialogue in Washington, and we've seen that with the new administration and really increasing over the last couple of years.
Discussions with FHLB CFP be FHLB say, what we sense and can tell is there is a great deal of coordination amongst those and the common goal is to make sure we have a better and more stable housing finance system, and I think thats, a key takeaway for investors and I think when you think about.
I see reform and what FHLB is doing I think I think they've done a very good job of kind of being very clear owning the path forward. It's difficult obviously I mean, there's a lot that goes into it.
But I think the intent.
Around strengthening housing finance I think as it it's good for its good for lenders.
It's good for the Gses and I think it's clearly good for the EMI. So I think we've been very pleased with just the overall focus on Washington on what make what's best for housing finance and the borrower.
Got it. Thank you thanks for taking my question.
Sure.
Your next question comes from the line of Chris.
GABAA Tony at Compass point your line is open.
Hey, everyone.
I don't know because his remark or Larry but it looks like the reserve or the provision for new default declined a little bit quarter over quarter.
I think seasonal you typically see an increase in the fourth quarter. Just wondering if you change your default to claim ratio on a new notices or if it's just kind of one month to month to month mix differences.
Yes, Chris It's Larry our reserve model considers actual.
During claim activity over historical multi quarter period, and what we have seen as we have continued to see favorable cure and clean results universe is our estimates and we've been adjusting our reserve factors down accordingly, So I think it's that and a little bit of mix as well.
Okay. Thank you that's all.
Your next question comes from the line of cells to that Deutsche Bank. Your line is open.
Yes, thanks, and good morning.
Just talk a little more about the testing that you're doing in the risk based pricing engine and I'm guessing it's.
It's one of two things there may be a mixture of the both.
Is the testing more around the elasticity of the life pricing metrics that you're using.
Are you testing.
New metrics that you may be able to accurately price.
More accurately price in the future.
Excellent question I would say, it's the former so we're really looking at price elasticity across.
It goes obviously ltvs and more specifically geographies are a little bit of lender testing in there, but basically it's around kind of at the borrower level. We have not introduced new factors yet around borrower characteristics I would say that's something that continues to be under development.
I think we've made continue to make good progress on there, but it's it's relatively early and that's why Phil when I say economy.
Year, three now for five year transition I know it sounds long bought Rome wasn't built Monday, So we do think.
Spending time on that we have a good sense of the models analysis amount or how you implemented and part of that just going to be also the success is going to be went with what the competitive level is but we do think.
Getting better at selecting credit will be a differentiated or maybe not in this market where all the credits good but it's not always going to be this mark and I think thats. The again the message is we manage this business for the long term I make decisions and our plan and in 2020 is how to how to continue to occur.
We are good environment for us in the next three to five years not not quarter to quarter. So yes, we can some of the price testing may not have gone as well as we thought.
And we lost some volume so be it we did 63 billion on Eni W. last year and what it what a great market to test these things and again, we have an incentive structure.
Remember folks do with their incentive to do across every company or whatever the incentives our mindset of along with up to team is growth in book value per share over a three year period.
I think we have a very supportive board in that and gives us the chance to make these types of.
Out of decisions and judgments that we think will play out well over the long term don't always play out great quarter to quarter, but I think our view is we clearly have our eyes.
On a much bigger price down the road and our view is as long as we can do the fundamental things today.
That will double read results years, three and four a lot of our results that we have today with some of the things we implemented a few years ago. So these are long businesses. So anything in the front end doesn't pay off or you don't see the payback in terms of bad things for a while so just you just have to continue.
To have kind of a long view on it and Thats why I get back to what I've said earlier around just reinsurance in how transformational. It is I mean, we could go through all the questions that you guys pads today, which is in very good but if you didn't have reinsurance the forecast isn't really worth much.
Just because of the volatility around credit losses, and again, it's hard to see today, but there is going to be a time.
Next quarter two quarters three years from now where the economy is going to slow.
Unemployment is going to rise.
And people aren't coming at a pay their mortgages are claim rates going to go up and the market is going to be Lygo, then they're going to turn their attention to losses, and we're going to be covered and I think thats, what we as we think about our strategies, we trying to think through multiple I'll pass not just one path and I think our view is the UBS.
Realty of the reinsurance and now combined.
The engine and the ability to change price right now it's been a one way street in terms of price pretty much since we started the company.
Again, that's not always going to be the case and I think having that leverage in that ability to pass on price or increased price in times of stress, we'll we'll pay back for us in spades.
Got it.
Are you are you collecting.
More metrics on the risk space engine that you're using.
I guess part of the question.
Is when I think about the expense to maybe build this out or make it.
A more robust pricing engine.
Versus the outlook for expense growth. It feels like maybe there is in too much investing that needs to be done on the engine, it's a pretty good shape.
Yes, it's a good question yeah the investment is.
And we think about investments in earlier, we talked about expenses and when you. When you manage expenses you also make sure Theres, a theres a trade off between investment and making sure.
And making sure you have a sound and solid infrastructure. So we certainly don't we've made a number of investments in the past year in cyber Amin cyber is a day to day kind of event that you have to manage.
We continue to invest in moving the platform to the cloud and that's something we're committed to and I think around.
Kind of the pricing engine two things to think about fill one is just the modeling right and there you don't really have to reinvent the wheel I mean, there's other industries and credit card is one that comes to mind where that modeling.
Has been in place for years.
Years and years, and it's really just taking some of those patterns and things that folks have done in other industries in applying them to ours. The second thing is you have to bring that to the point of sale.
So you whether you have two factors are four factors are a thousand factors getting them to the point of sale within two seconds right. Because you have to do it very quickly and Thats, where that's another that's another work stream and I would say there five years ago that would have been closed on possible and now with.
The advent of Npis and so for us the ability to bring that the point of sale has really improved and the cost of it isn't isn't as great. As it would have been years ago. So I think thats, what we continue to work in that we call. It we're collecting obviously more factors, but you need to test those factors back test them.
And again, we're not in a hurry to to get to the market with it I think our view is you want to make sure enough to get you get there that it's a good process has relatively seamless for our customers right. It has to be a good user experience with our lenders.
And obviously you want to make sure. It works it works in that aspect. So again, our view is it's a bit as it continues to be it gets back to my five year transition that you want to continue to work at it everyday and we think this is a good markets to do that and I'd, rather spend have our folks spending time on that versus going out and trying to get that extra.
Loan from a quote marketshare perspective.
Yes, I'm going to play Devil's advocate for a minute here credit is fantastic and you're doing this testing and the risk based pricing engine and you're learning how things move and whatnot isn't when credit turns to the disease lessons mean anything are you actually going to be able to use them when it's completely different credit world.
I think the answer is absolutely, yes, we could use them and I think thats when.
Thats when there will be the most useful and I think I think the rest of the industry is going be very similar to this Phil I do think this idea that the industry doesn't have discipline and all those sort of things is a little bit.
It's really not true when you're walk through with the lenders have a tremendous amount of power from a card standpoint, so as things move to the engine and the ability to change things I would see the industry moving in lockstep another thing to keep it 'cause it because again you can have the best model and I think your question would be can you pass that on.
To the point of sale and we feel confident we can you don't really know that because you don't know the competitive dynamic.
But the other metric that you have is our reinsurance. So if you think about the capital markets that we work with and the reinsurers you now have another set of eyes looking at credit and pining on it right. So if we get into a stressful period I would fully expect the cost of reinsurance to rise and there.
You also have the ability that's that's that's again a third party telling you that facing credit costs are going to rise you can choose to accept lower returns or you can now with the engine.
Pass that on to lenders day to day lenders don't think about mortgage insurance or the cost of mortgage insurance. They only care about mortgage insurance. If they think someone else has a lower mortgage insurance Trust me.
Your lender and then on spend more than five minutes a day thinking about EMI.
So we can't get too caught up in that and just make sure. We continue to invest in analytics and make sure we're giving the borrower our best price based on our estimate of default.
Alright, Thanks, guys happy Valentine's day.
Thanks, Phil.
Your next question comes from the line of Geoffrey Dunn of Dowling and partners. Your line is open.
Thanks, Good morning.
Got a few for you.
Markets as companies in the industry continue to picked our spots in the marketplace and play with the pricing engines are there any areas that Essen has backed away from as a result of that.
I don't think we've backed away from anything I think there's places where we're not being a successful.
And I think you can see it just in our portfolio the nnw characteristic characteristics match up versus some others in the industry. So I think you can see where others are kind of picking.
Theres spots. Our view is we're pretty focused on premium rate, Jeff overall premium rate and I think in a credit environment like this.
You are little bit splitting hairs on the loss rate.
Where the premium rate is of is a big deal. So I think thats something were in that might not always be the case, depending on what your view at a copy of the economy is so our view is we see the market a little bit like it was almost in I would say 11, and 12, where new G. I had their model and they really targeted Super high Ficos and we.
We felt like they left some money on the table. So we're seeing some of those patterns again.
Around premium rate. So our view is we're pricing at the way we think.
The returns are others have different views on returns and they can be right.
Certainly and I can be wrong, but I think our view is we feel pretty comfortable around around where we are kind of pricing in the market.
Okay, and then with respect to Pmiers obviously the.
The two year review was was thrown off schedule right from the start have 3.0 discussions formal discussion started at all at this point.
And do you have an expert on actual Tyler So did I mean, it's it all depends on CCF, so that needs to be finalized first and signing the now for comment wants to tell for comment and then gets approved I would actually I would I wouldn't expect team our discussions.
To pick up.
Until thats, even done, but I do think it's something for investors to.
To think about because that's that's when we think about kind of our capital situation.
I think thats something you want to keeping your back pocket because you just don't know what the answer is going to be I'm not certain it's going to be anything that work, particularly worried about and remember reinsurance.
As a good mitigant again stack as you can you can do.
Capital markets transaction that goes a little higher attachment point.
To help you manage that stuff, but having real capital on the balance sheets important too and I think thats something we want to.
We've heard some comments around capital light type businesses and you can get carried away I think we all got A's and corporate finance. So we know how it works around the efficient frontier, but having core equity capital and using reinsurance as kind of.
In addition to that is pretty important you don't want to become too overly reliant on the reinsurance markets because again in times of stress, Jeff you don't know if they're going to be there. So.
Capitals came and we like our capital position as I said it gives us a lot of Optionality.
Around the future and Thats, why weve chosen dividends and obviously in the first quarter, increasing dividends as our expression and now and our distribution of capital kind of going forward for the near term longer term I think once pmires. If it comes out of settled we know where the market's going we would continue.
New to be.
I would say.
Look at other forms of capital distribution no one's asked the question around buybacks, but I think our view on buybacks short term is we don't see a lot in need form longer term clearly we're going to look at buybacks is another way to release capital to maintain returns I'm not necessarily s., but I think we.
We want to make sure you know our view is this businesses in that kind of low to mid teens returns right now were 20, but as we build capital. We'd also look at other ways to make sure.
We're providing.
Making sure the returns are to elevate will elevated levels and making sure. We we think about total return to shareholders and since I'm, a pretty large shareholder I think about it a lot and I think we're always going to look at methods to make sure that we make money for our shareholders.
Okay, and so you kind of front ran my last question, there which is.
It sounds to me like.
You want to see at least the GRC capital rules and maybe even Finalization of 3.0 before you would maybe consider taking dividends out of Essent guaranty.
I know it looks like it's building some excess down there, but I just wanted to.
Thank you could do that.
We could probably do it today I think the view as we just we have the cash both at Essent re and at the Holdco in order to do that so remember with us and we have attacked or some tax friction from getting it from guarantee to to the group. So our view is we'd like it within guarantee for now, but you know and once we move it we have the UBS.
Building them and we just don't need to move and now given given the cash situation. We have good question, though.
Well I guess, the other way to asset is.
How much excess drag is too much drag when you think about optimizing your returns.
I'll think about just its math. So if we think I mean I'll just pick a number if we think in our cat are we want returns at 15% than the math is we'd have to at least capital to get the but if the returns are 12 and our goals 15. If you can just do the math, so I think of it that way and it I don't know, we're going to necessarily wait to that so I don't think we're going to say.
Wait to Pmires three point, obviously could be three years. So we're going to always constantly assess the situation and making sure that we're kind of managing.
So the returns.
So.
So hopefully that helps gives you some color.
Thanks.
Your next question comes from the line of Rick Shane.
JP Morgan your line is open.
Hey, guys. Thanks for taking my question in Marquis Spoiled me you know I'd like to ask the repurchase question. So thanks for getting that end before I got on the call.
I didnt want to ask a little bit.
The last two years have been a little bit about an arms race in terms of all the the shift towards pricing.
Nothing new pricing mechanisms, new pricing tool I am curious if the arms race it sort of carried out on the other side amongst the mortgage lenders are you seeing some of the platforms that they're using enhanced price discovery and is that causing any pricing pressure or any short term dislocations in terms of.
Where business is going.
That's a great question.
I wouldn't call it an arms race more as Justin investment.
As arms race sounds doesn't have decreased connotation I think everyone in the industry has done a really good job in terms of embracing this and investing in it. It is really not at the lender level, Rick and the reason being as the GC doesn't differentiate based on credit risk and so if you have a flat fee it doesn't make sense to price different ficos and different.
LTV is different than there is no incentive like there is sale in the credit card side.
So I don't we don't see it much on the lender in other lender games, a little different they are more about.
Keeping their costs to originate low and making sure they manage the servicing assets. So they don't really look at differential from a price perspective that way.
Okay, great. Thank you so much.
Sure.
And ladies and gentlemen that is all the time, we have for questions. Today I will now turn the call back to the presenters for closing remarks.
Thank you operator before ending our call we'd like to thank you for your participation today and enjoy your holiday weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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