Q4 2020 Essent Group Ltd Earnings Call
Thank you for standing by and welcome.
Welcome to the ascent Group Ltd fourth quarter 2020 earnings call at the.
This time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
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If you require any further assistance. Please press star zero I would now like to hand, the card facial back to your speaker today, Mr. Chris Curran Senior Vice President of senior relation. Thank you. Please go ahead Sir.
Thank you Justin good morning, everyone and welcome to our call.
Joining me today are market sale, chairman and CEO, and Larry <unk> Chief Financial Officer.
Our press release, which contains the essence financial results for the fourth quarter and full year 2020 was issued earlier today and is available on our website at Essent group Dot com.
Our press release also includes non.
Non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in exhibit M of our press release.
Prior to getting started I would like to remind participants that today's discussions are being recorded and will include the use of forward looking statements.
These statements are based on current expectations estimates projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially.
For a discussion of these risks and uncertainties. Please review the cautionary language regarding forward looking statements in today's press release.
The risk factors included in our form 10-K filed with the SEC on February 18th 2020, as subsequently updated through 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 and good morning, everyone earlier today.
We released our fourth quarter and full year 2020 financial results on.
2020 was a challenging year for our franchise. We are encouraged by our fourth quarter results as defaults related to COVID-19 continued to decrease from the peaks experienced back in June.
For the fourth quarter, we earned $124 million or $1 10 per diluted.
They're all for the full year, we earned $413 million or $3 80 888 per diluted share.
At the outset of the pandemic it was clear that the U S economy, and our business, we're going to be impacted however, we had limited vision is to the extent of this impact now with almost a year ago on bi.
And having more visibility we believe that the impact of the COVID-19 defaults on our insured portfolio has been contained as such for new defaults reported during the fourth quarter, we have reverted to our pre Covid reserve methodology and our view remains that the pandemic is an earnings event and not of capital then for Essent.
Rooted share heading into 2021, our outlook on the economy and our business is increasingly optimistic on.
Unlike the great financial crisis, when housing played a big role on the downturn during the pandemic housing has been a bright spot in the economy.
The low mortgage rates and strong demand for single family homes of in the primary drivers of robust mortgage volumes and.
Is that this strength will continue into 2021.
On the business front, we continue to refine our risk based pricing strategies and managing a profitable mortgage insurance portfolio.
Since deployment, we view, our pricing engine as a risk management tool and not a market share tool.
In fact, the pandemic.
We believe catalysts and demonstrating this as we quickly changed price in response to the weakening economic environment.
Looking forward, we remained focused on enhancing our engine through more granular analytics and sophisticated use of data.
It's our belief that with the evolving intersection of mortgage finance and technology, we have just scratched the surface.
<unk> and our risk based pricing capabilities.
We continue to be pleased with the high credit quality of our <unk>, noting that since the onset of the pandemic our credit profile has been strong this.
This is primarily due to the credit tightening by the Gse's NMS in response to the pandemic along with an increase in the amount of refi mortgages.
Mortgages for.
For the fourth quarter, our niwa maintained an average FICO of 748 compared to 745 million for the fourth quarter of year ago.
At December 31, our balance sheet is strong as we have $3 9 billion of GAAP equity robust liquidity and access to $2 billion of.
Of loss reinsurance.
All of these are the result of our buy manage and distribute operating model and other measures taken in 2020 to bolster our financial strength and flexibility.
During the year, we raised $440 million of equity obtained $950 million of XL reinsurance protection and increase.
Excess credit facility, which provides access to $300 million of Undrawn capacity at December 31.
Combined with $728 million of operating cash flow generated in 2020, we increased and enhanced our capital and liquidity resources by over $2 2 billion.
Sure.
From a.
The <unk> perspective, we remain well positioned at December 31.
After applying the 0.3 factor for COVID-19, defaults Essent Guaranty's Pmiers sufficiency ratio is strong at 173% with $1 $2 billion on excess assets.
<unk> the point of three factor, our Pmiers sufficiency ratio.
Ratio remained strong at 159% with $1 1 billion in excess assets note that the pmiers excess does not include the $563 million in cash and investments at the holding company.
Essent Guaranty remains the highest rate of mono line in our industry at single a by a M best and <unk>.
The <unk> III and Triple B, plus by Moodys and S&P, respectively.
Looking forward, our buy manage and distribute operating model will continue to enhance our financial strength and flexibility and generating and deploying capital.
We have always felt that strong capital levels, we get opportunities given our long term focus we will continue to.
To evaluate ways to optimize capital deployment of <unk>.
Mediate options include taking advantage of growth opportunities in our core primary of MRI and reinsurance business is stemming from a favorable housing environment.
Furthermore, we will also evaluate opportunities outside of our core for example, we closely monitor.
One of her the ongoing intersection of the housing finance real estate insurance and technology sectors. We believe that there will be opportunities to take advantage of this changing landscape by leveraging our mortgage technology and operational expertise. Finally, we will continue to evaluate capital distributions through increased dividends and buybacks.
On the Washington front, there has been a recent focus on possible FHA price changes, we believe that of potential 25 basis point reduction in FHA premiums would have a small impact on our industry share of the mortgage insurance market.
We also believe that any impacts could be offset by the recent increase in the GSE conforming loan limits.
Ask for is taken by the new administration to increase credit access.
In summary, 2020 was a good test for our buy manage and distribute operating model and we remain pleased with the strength and confidence that provides of managing the business during stressful cycles in connection with this confidence along with our strong capital and liquidity positions our board.
And measure actors has approved a quarterly dividend of <unk> 16 per share to be paid on March 19.
Now, let me turn the call over to Larry.
Thanks, Mark Good morning, everyone I will now discuss the results for the quarter in more detail.
For the fourth quarter, we earned $1 10 per diluted share compared to $1 11 last.
<unk> and $1 49 in the fourth quarter of year ago.
Our weighted average diluted shares outstanding for the third and fourth quarters of 2020 was 112 million shares up from 98 million shares in the fourth quarter of 2019 due to the impact of our equity offering in may.
We ended.
Ended the year with insurance in force of $199 billion of <unk>.
4% increase compared to 191 billion at September 30.
And of 21% increase compared to $164 billion.
At December 31, 2019.
The growth in insurance in force during the fourth quarter.
Or was the result of $30 billion of.
Of new insurance written partially offset by runoff as our persistency was 60%.
Net earned premiums for the fourth quarter of 2020 was $222 million and includes $13 $6 million of premiums earned by Essent re on our third party business.
The average net premium rate for just the U S mortgage insurance business in the fourth quarter was 43 basis points down from 46 basis points in the third quarter of 2020.
Contributing to this decrease was the two basis point increase in ceded premiums due to a radnor re 2022 transaction and the ongoing.
Share reinsurance transaction and the one basis point decline in single premium cancellation income.
For the full year 2021, we are estimating that our net earned premium rate will be in the 40 basis points range.
The provision for losses and loss adjustment expenses in the fourth quarter was $62 million compare.
The <unk> 5 million last quarter and $176 million in the second quarter of 2020.
During the fourth quarter, we received 8745, new default notices which is down 31% compared to 12614 defaults reported in the third quarter.
And down 77%.
Compared to <unk> 37357, defaults reported in the second quarter.
At year end, our default rate decreased to 393% from for 54% at September 30, and $5 one 9% at June 30.
As Mark mentioned, we have reserve for new defaults reported in.
<unk> quarter, using our pre COVID-19 reserve methodology, which incorporates an average 9% claim rate estimate for early stage defaults.
As a reminder, for new defaults reported in the second and third quarters of 2020, we provided of reserve using of 7% claim rate assumption.
This assumption was.
Based on expectation the programs such as the federal stimulus for.
For closure moratoriums and mortgage forbearance may extend traditional default to claim timelines and resulting claim rates lower than our historical experience.
We have not adjusted these reserves previously recorded in the second and third quarters as they continue to represent our best.
<unk> estimate of the ultimate losses associated with these defaults.
Other underwriting and operating expenses in the fourth quarter remained consistent with the third quarter at $37 million.
The expense ratio was 16, 6% in the fourth quarter compared to 16, 7% in the third quarter of 2020 and $19.
9% in the fourth quarter a year ago.
We estimate that other underwriting and operating expenses will be in the range of $170 million to $175 million for the full year 2021.
The effective tax rate for 2020 was 15, 7% and our guidance for 2021 is that our effective.
So it will be approximately 16%.
The consolidated balance of cash and investments at December 31, 2020 was $4 $8 billion.
Essent Group Ltd paid a quarterly cash dividend totaling $17 $9 million to shareholders in December and maintains $563 million of cash and investments.
The tax at the holding company at year end now.
Now, let me turn the call back over to Mark Thanks, Larry with the strong housing backdrop and robust levels of high credit quality and IW on 2020, our business ended the year operating on all cylinders given the measures that we took in strengthening our financial and liquidity positions during the year along with having.
<unk>, 6% of our portfolio of reinsured, the economic engine of our business is firmly in place as we enter 2021, we are increasingly optimistic about our company's prospects. The COVID-19 vaccine is key in getting our country's economy back on track while housing continues to be a bright spot, we believe that affordability demographic.
The <unk> 90, and the ongoing supply demand imbalances should continue to fuel housing as you know our franchise is levered to the macroeconomic and housing environments now, let's get to your questions operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone.
Half of keypads.
Again its star one on your telephone keypad low cost for just a moment to compile the Q&A roster.
Your first question comes from the line of feels the panel from Deutsche Bank. Your line is open. Please ask your question.
Yes, thanks, and good morning.
So I get the impression that the.
If one day assumption was 9% for fourth quarter and there was no adjustment made to the 7% use the mid 2020 I guess.
When I tried to do the math to back into yours incidence assumption. It feels like there was maybe another accrual or or loss of impact in the fourth quarter.
Do you have any comments around that.
The claims all of its Mark no not at all I mean.
Reading too much into it I think it's 7% was for the second and third quarter and again, we've kind of isolated dose cohorts. So to speak and we did not make any changes for the seven the nine for the fourth quarter is really just reverting to our normal methodology in.
The <unk> really as you get you have to have the October November and December and a seasoned a little bit that's kind of how you get to the 12 that you see in the stat supplement I think.
The key the key point, though Phil and we mentioned it in the script and I think it's important for investors as a takeaway is we believe the defaults are contained so we feel like we're well.
The think of an adequately reserved at the end of the year and going into 2021, we don't expect any material changes to the provision based on new defaults rate I mean defaults really came down I think Larry you said, 31% in the fourth quarter, So I wouldnt get and we can obviously take offline.
In terms of some of the details.
But I think the key messages I think we're looking for we feel really good about where losses are coming out.
Got it okay, and I guess just to push back on that a bit I mean, as we think about the.
The foreclosure moratoriums, continuing forbearance being extended.
You know what.
What would be the the rationale.
Reserve, how would you help me understand the.
Yeah.
Assuming that the 9% comes back into play and maybe it wouldn't be better than that at least in the short run.
Well again I think at some point you have to get back to your normal reserving methodology and I think the with the kind of the tsunami of defaults that we had in the second and third.
Third quarter very similar to the Hurricanes right in terms of like an isolated event. We thought it was prudent to kind of the quarantine them so to speak and really look at it that way I think in the fourth quarter I think the message again, it's back to kind of business as usual rate, we're back to a normal reserve methodology, where the 9%.
<unk> and money good for years and that will just play out Phil So with the forbearance extension and home price appreciation actually helps lower that that will come through the model, but you don't really want to run the company longer term.
Of on how we how we did.
Of those isolated reserve adjustments the model has.
Actual early.
Correct and factual for 10 years and to me that this is a strong message that we're going back to the model. So again I wouldn't get too caught up in.
Whether it's too high or too low it's adequate and the fact that we're back on the model I think is a really good thing and.
Phil It's Larry.
Also we view the second and third quarters as the exception.
Our expense and that was the tsunami those were the exception we felt it was the appropriate methodology for those two quarters, but now as Mark said, we're back to business as usual.
Okay.
One quick one on reinsurance coverage.
Adding back the business as usual.
Didn't see anything thats of the quota share was going to be renewed or extended for 2020.
Forward of the external quota share.
It feels like the the premium yield guidance has that embedded in it.
Comment on that or is the quota share still in a work in progress well remember the quota share is still it's still in place because the new business stopped getting ceded last year.
But we will still have.
A significant kind of ceded premiums for 2021, which is kind of all baked in the premium guidance.
And also is a little bit reason why the expenses are lower too. So I mean, there is a lot of moving parts. There I think for 2021, Phil I think it remains to be seen.
If you think about where the <unk> market has really kind of come.
Roaring back in terms of pricing for us really it's going to be best execution. So as we look at 2021, we will compare kind of Io and pricing to quota share and quite frankly last time, we checked the quota share pricing was a little wide hasnt really come in the reinsurers kind of pushing more of a hard market.
That's not really where.
It is in the capital market. So we'll again, we'll look at it so stay tuned.
I wouldn't in terms of just the ceding commission and premium that's already kind of embedded in 2021 guidance.
Got it okay. Thank you.
Sure.
Your next question comes from the line of Mark Devries from Barclays. Your line is open.
I ask the question.
Thanks, Mark or are you able to elaborate at all on some of those opportunities outside the core the that you alluded to as being opportunities for investment.
Sure.
Keep in mind that we're just thinking in terms of.
These day, Mark what we do right I mean, everyone kind of abuse us just as the semi company right and we're out just hand, it out on its to lenders in getting loans, but it's way more complicated than that I mean, we're integrated with all of the vendors. So whether it's the Ellie Mae optimal blue other loan origination systems Blue Sage.
Every day of name it we're integrated and we work with them pretty much on the day to day basis, especially as we're evolving essent edge rate. We're now on our second version of Essent edge, we're connected to all of the Servicers. So we understand that part of the business well and also as I mentioned.
On previous calls we've invested in.
Sage approximately 10.
Venture Fintech funds over the last I want to say.
24 to 30 months and with our investments in those funds, we have looked through and I want to say 250 to 300 type companies. So so.
So we own via the funds a lot of the name.
You see that are getting spec today are of going public and we've known them for.
For years, so that's all the way from kind of the high buyer market all the way down to servicing so we feel like we're in a really good position and we understand.
Lot of these companies' strengths.
The weaknesses and I think we bring.
<unk> is doing a few things to the table, we clearly bring kind of capital and liquidity.
Which I think helps especially provide growth capital to these firms. We also bring operational expertise around how the startup business early and grow it I think we've done a pretty good job with that I think our view on it is and it's why we have of longer term view.
On the <unk>.
Valuations in some of those areas are a bit frothy right now so I think as we continue to look at it.
The investor's greatest strength is uptime and our view is we owned this business for the long term and we believe we will we will have the ability to put that capital to work to continue.
<unk> to expand the <unk> franchise, we're not going to do it's small we're going to do things that we think really kind of move the needle, but again, it's something as an investor We will continue to look at and we'll continue to update.
Updating update the market as we see things.
Okay got it.
And I think.
On your comment.
Earlier, you also alluded to.
Just scratching the surface on some of the risk based pricing capabilities that you've developed can you talk more about where you see opportunity there and kind of the implications for the business going forward.
Yes, I mean again I think its two fold right I think in terms of the business, where we've tested in the fourth quarter and we will roll out.
Out through this year kind of version two point.
All of <unk> edge, which is incorporating.
Additional factors.
Net and machine learning is now incorporated into that development. So it gets really down to the loan level price that you gave each borrower and I mean were telling lenders.
<unk> that we're going to give each borrower or best price may not be the lowest price rate and other Ams may have a different view, but it's our best price and as we've talked about recently as you get into these engines and to get down to the borrower. It really is best price wins. So you don't want to go you don't want to go to of gun fight with a nice.
We really have to invest in analytics and in your better really understand what youre doing when you price of that loan that takes time to develop and to deploy but over time I think 75% of the market is kind of in the engine and we were close to 70% of of production in the engine.
Through 'twenty and 2020.
So there is some of the card lenders will eventually get to the engine in my view because I do think the engine is going to be the best way to give each individual borrower of the best price, which I think is good for lenders. It's good for borrowers and also then that helps us as we deal with these vendors in that front end of development of Essent Mark.
That gives us ideas from the investment front. So again as you think about the convergence of finance housing and real estate and you think theres something there essence of good way to play that I mean, when it's a nice call option to have I mean, when we first went public we hadn't launched essent re and our positioning of Essent.
It was it was a call option and we felt like we could eventually kind of exercise that option and we did essent re has been I would say very successful it's allowed us to reinsure, a 25% of the core business.
I had a very good year in 2020, and writing third party business and also has an MGA, which is a little.
And in return underappreciated, which I think five five different insurers, where we we have.
We kind of have the pen and they leverage our models to write that risk. So again as you think about all the stuff as we learn this every day and this is Phil SME, one time going back to Phil's Stefan on like what is what is Mark do day to day, what we.
Out of time on this and kind of looking at opportunities and again, if it's something we've always said if you like housing back when we went public we thought housing would be stronger than people think because of the demographics, we got a ton of pushback.
From the analysts and investors of life back in 2014.
We spent a lot of probably a trillion dollars of originations we felt like it would be a lot bigger again, given the demographics that we studied and again, we've got pushed back. So I would look at it here. If you really think as an investor or an analyst of you think theres opportunity I know you guys cover other parts of the space. If you think there is an opportunity again.
Again, Essent is probably a nice call option around kind of fulfilling those opportunities over the next several years.
Okay, great. Thank you.
Your next question comes from the line of Doug Harter from Credit Suisse. Your line is open. Please ask your question.
Yeah.
Thanks, Mark as you talk about.
And getting back to normal with the reserving.
In return.
The more normal I guess, just how do you think about capital generation and therefore kind of the love of the right level of capital to be holding for the business.
Yes, I mean again.
I think.
In terms of the right level of capital. It's based on two things Doug one is kind of your pmiers excess, but that's not really the binding constraint the binding constraint around capital is the dividend capacity out of the insurance units and obviously Essent re also.
So our view is given where we are with the cushion.
And we always look at the Cushing kind of without the three factor.
And it's right there at 159%, we think thats a good level.
Is it too high we think it's a strong level, we're going to continue to see how the.
We're optimistic about where COVID-19 defaults are going.
And I think we will come out if we're going to Cushing kind of it of 125 ish overtime.
That's not a bad level, but also when you think about capital it's back to my earlier comments around looking at excess capital as a way to deploy it to continue to grow assets. So I think we will look at.
And as we mentioned in the script.
We clearly give back capital every quarter to investors in the form of the dividends, which I think again as when we first did it it's really a testament to our.
Our confidence in the sustainability of our cash flows and could we extend that the buybacks to some.
That of course and <unk>.
I think that will be again of a sign if we were to do buybacks.
Its certainly something thats on the table it will be much more mechanical right, we're not going to look at it and say, we're going to buy chunks of stock back at extra why I think it would be more on the normal flow of kind of like of dividends. So if you think about it.
For my level, Doug we have the capital we have and we're in a good capital position, we're generating a lot of cash flow of 720 plus million in 2020, we now accumulate that capital and we reinvested in the core business, we look for opportunities to invest of outside of the business the core.
On to grow and then obviously you look the distributed via dividends and buybacks, it's probably going to be a little bit of all so I think I think we're on a very good position from that and I think.
Our ability to raise capital.
Last may and.
And we said it could be up for offensive reasons, our defensive reasons.
<unk> turns out it's going to be probably more offensive.
We think we're in a good position.
Alright, thank you.
Your next question comes from the line of Jack <unk> from ISI. Your line is open. Please ask your question.
Hey, good morning, everybody Mark one of them.
The.
And as the prior question on on some of the other outside.
The potential opportunities.
Yes.
It seems like a pretty big message to the marketplace I mean, we're talking about doing more.
When the D C side, and just planting more seats there were.
Would you contemplate something that's maybe more transformative.
When the changes the revenue complexion of the company and perhaps the multiple as well just thinking you're trying to understand the context of the message that you're putting out per day.
It's an important message and we want to we conveyed on purpose Jack So I do think it's a little bit of each rate we started with the funds.
And I would expect us to the next.
The phase of it would be to make.
Smaller investments directly into the companies.
And then the third for the kind of a third evolution of it would be owning some of the companies and kind of changing.
Or diversifying outside of MRI to change the revenue profile a lot of that depends on price Jack So I mean, it's.
The next and we understand the businesses and it depends on kind of where you want to play on that and we could end up not doing anything right. I mean, we're not we're very good we understand price value of very well.
And then we traded on a revenue basis, perhaps some group be able to do more from a stock standpoint.
And in terms of our currency, but I do I do think.
It's not an important message and we read a lot of your research and other research we know a lot of these companies well.
I do think there is a nice opportunity for us kind of over the next several years.
Okay. Thanks for that and then the call it we kind of call it essent to point out.
Okay.
And then on the pricing side.
It is.
For the industry increased price after the pandemic I think of it.
The past you've been pretty helpful and speaking to some of those changes, whereas pricing gone in the last quarter or so hasnt held it does look like you're on IW of mix.
One of them skewed a little bit less risk tolerant higher FICO.
LTV over the past couple of quarters, just if you could kind of help us understand those moving parts.
I think pricing is relatively kind of consistent rate, it's it's backing off a little bit from the pricing.
Increase in the pandemic. So I do think it will it's normalizing.
The lower that through 2021, the IOM markets normalizing I would expect it to rate I mean, if the claim rate assumption is coming down.
Because of where the economy is and <unk> has obviously been strong I would expect the pricing of normalize I think we've seen a lot of that so our view is our share was heightened in the second and third quarter.
I think of lot of it was a few of the Ams backed up and we are open for business.
We added you can probably quantify the excess share we got in second and third quarter on what that addition was to insurance in force, but I would expect our share to normalize in 2021 of few of the <unk> the kind of backed away.
Quarter have come back.
But if you look at the results jacket was successful for US right. I mean, we increased insurance and force, 21%, which was I believe is higher than any any of the other <unk> in the industry by a pretty wide margin.
And we did that with higher pricing and a lot of it was just because of we're able to leverage the strength.
For balance sheet now that the other <unk> are kind of back in the game.
Competitive so we would expect to go back to our normal one out of 615% 16% share.
It always ebbs and flows quarter to quarter, but.
And then the market is so big Jack Youre talking about ever 600 billion.
Frankly of our maybe last year and our estimate this year is probably in the $500 billion range.
Certainly plenty to go around and the unit economics of the business remain strong and I think that's another important message for investors to understand.
Yes.
In terms of course, the trajectory in the last couple of months of the year.
For <unk>.
Seems to align with that.
Statements of alright, thanks, guys.
Your next question comes from the line of Bose George from <unk>. Your line is open. Please ask your question.
Good morning.
The follow up on the pricing question.
Have you seen any.
Changes.
And the bulk of warranty just in terms of growth in the market relative to the rest of just given the historically low.
For more competition there.
No again, both of its kind of the engine part of the market, which is 75% and I Wouldnt call bulk I would call. It just still folks and lenders that are still on on.
The rate card some of them they bid out but it's of forward bids. So it's not it's.
It's not so much in bulk and then there is other guys thats still do negotiate of cards and our view is again, we think the engine.
We'll eventually get to more closer to 100% it may never get quite there I mean on some of the lenders believe they get.
Get better execution through the cards other lenders. They just haven't been able to make the changes to their systems as the analytics continue to get better.
At the borrower level with Essent and others I am sure of the other <unk> are evolving their engines to which I think is fantastic.
It will get to that.
Net geico progressive part.
Kind of analogy that I alluded to and the lenders that are on cards.
My view of if they're going to be the disadvantage over time, so right now they think theyre getting better execution of its simpler.
It's that's how they think about it but over time as we get.
You've.
Really dig into the borrower level and youre able to kind of pick off the best credits the execution of will be better than the cards on the lenders at some point, we'll pick up on this.
Okay, no that makes sense. Thanks, and then just wanted to go back to the question on credit again the.
The the reserve for loan in the four to 11 months.
It was.
Pretty meaningfully what was that.
The seasoning of that debt book, just can you help us kind of thinking about the.
Yeah. That's just the seasoning remember just we set of at the second of third quarter of at seven and we're still holding to that but they are running through the buckets. So right I mean, if anything a lot of these borrowers of they are 12 months, they're going to use it so I wouldn't read it.
On the Internet.
It's a regular reserve methodology with to Larry's point of exception methodology for two quarters. So it's all kind of together, but eventually that will flush through.
Okay, Great makes sense. Thanks.
Your next question comes from the line of Rick Shane from Jpmorgan.
Again all of your line is open please ask your question.
Hey, good morning, everybody and thanks for taking my question Mark.
Mark I appreciate the comment about this not being a capital event, but really in earnings and then I think it puts it in context.
When we think about that context going forward one of the thing one of the outcomes.
Morgan of what you've experienced over the last year is that youre entering 'twenty, one with a vintage SKU that is very very different than you would have anticipated, but for the events of the last year.
And look.
I get vintages of the kind of light gauge your loved him all of the same but.
It comes on.
And.
I'm curious when you think about this along dimensions of credit premium rate persistency, what the changes in the book will be and how you think about the impact on sort of net profitability five years down the road.
Uh huh.
That's the big one kind of unpack that one Rick.
Actually I hear you I think we think about 2020 of such a large.
It's almost like half of our book was originated in the past 12 months it's the.
Originated at three.
Three and a quarter rate is so it's.
It could stick around for longer than people think, especially if you start thinking rates are going to go up maybe in the second half of the year. There is a little bit of an inflation scare.
So it could turn out to be very well right, we've kind of locked in something for longer and our view is even on a persistency basis, we should.
It should start to think about we should start to see persistency be right around 70 by the end of the year.
So we think we're pretty well positioned I don't think we planned it rate.
The COVID-19, but I think from an industry standpoint, looking back and again given the credit the credit quality is actually better in 'twenty than it's ever been.
And Youre right. This could turn out to be a very kind of premium.
No pun intended vintage and it's something that could really bolster.
Bolster the profitability down for the next three to five years.
Got it yeah. Thanks for taking the again I realize it was sort of.
Long.
Long winded question, but I think it's important just in terms of the transformation of the book It was of Great question No I agree.
Thanks, guys have a great debt you do too thanks.
Your next question comes from the line of Ryan Gilbert from <unk>.
Line is open please ask.
I wanted to go back Mark to a comment you made a little earlier about <unk>.
Total market size of this year.
<unk> been in the $500 billion range versus 600 billion of 2020, I think that would kind of imply of mid teens decline in the overall market.
And I am wondering if thats.
Something that youre already seen so far on <unk>.
January and February or if that's just your expectation around interest rates going up in the second half of the year, yes, it's more and more of a forecast actually on January was higher than previous January.
And just some perspective, Ryan largest niwa market before last year was like 400 billion in 2003.
So I mean for it to even be save the words, so $500 billion is actually I wouldn't I wouldn't look at it as of 15% decrease I would look at it and say the average NSW over the last 25 years is probably.
200 ish billion. So this is we're in the obviously.
Thats.
Higher home prices and a larger market and more people on houses.
I actually think it's a pretty good number.
Okay.
And second question on.
The loss reserving of defaults on.
Going back to kind of of pre Covid normal.
On.
I hear you.
But at the same time.
Fault rate down 30% sequentially, but it's still up 130% year over year.
Should we think about this kind of level of new defaults.
The new normal or do you think that new defaults can continue to improve from here.
Our view is they will continue to improve I mean again look at the trend from the second third or fourth quarter. So.
I wouldn't be surprised that they normalize over the next few quarters. So yes, I think were 3500 plus defaults in the fourth quarter last year. So for us to end this year kind of in that same neighborhood wouldn't surprise me at all.
Okay, great. Thanks, very much Youre welcome.
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