Q1 2021 Essent Group Ltd Earnings Call
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Okay.
Good day and thank you for standing by welcome to the Essent Group Ltd first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session drastic a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your host Chris Curran Senior Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you Katrina good morning, everyone and welcome to our call.
Joining me today are Mark <unk>, Chairman, and CEO, and Larry Mckelvey, Chief Financial Officer.
Our press release, which contains essent financial results for the first quarter of 2021 was issued earlier today and is available on our website at Essent group Dotcom.
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.
For a discussion of these risks and uncertainties. Please review the cautionary language regarding forward looking statements in today's press release for.
Our risk factors included in our form 10-K filed with the SEC on February 26 2021.
And any other reports and registration statements filed with the SEC, which are also available on our website.
Now, let me turn the call over to Mark.
Thanks, Chris and good morning, everyone earlier today, we reported our first quarter results and are pleased with our financial performance and starting out the year. We believe that these results demonstrate a return to pre COVID-19 profitability as default trends continued to normalize as the economy gains momentum coming out of the pandemic combined with an already strong housing.
Environment, our outlook is positive.
Over the last 12 months, our buy manage and distribute operating model has served us well in navigating a stressed economic environment. The deployment of our pricing engine essent edge and use of reinsurance has been transformational as it allows for better risk selection and it removes the historical boom and bust nature of a franchise like ours.
Our performance during COVID-19 demonstrates the strength of our model and deepens our confidence in the economic engine of our business. It is this confidence that was the primary catalyst and initiating a dividend in 2019 and maintaining one through the pandemic environment.
Now let me touch on our results for the first quarter of 2021, we reported net income of $136 million as compared to $124 million in the fourth quarter of 2020.
Our first quarter results were negatively impacted by a $5 7 million discrete tax item associated with state deferred taxes.
On a diluted share basis, we earned $1 21 in the first quarter compared to $1 10 in the fourth quarter of 2020, and our annualized return on average equity was 14%.
During the quarter, we were pleased with our insured portfolio performance at March 31, our insurance in force was $197 billion, a 19% increase compared to $166 billion a year ago, the credit quality of our first quarter and IW was strong with a weighted average FICO of 747 and <unk>.
Our loan to value of 91%.
As mentioned our default trends continue to normalize as our default rate at March 31 was three 7%.
On the business front, we have rolled out the next iteration of Essent edge with success and analyze more data specifically, we are applying sophisticated machine learning techniques across increased amounts of data.
The machine learning algorithms leverage our cloud platform with the resulting models outperforming traditional approaches.
This should give us an edge in managing our portfolio through business cycles.
Looking forward, we will continue blending artificial intelligence with more consumer data, we believe that essent adds to point out will be a key differentiator for us in optimizing our unit economics and risk adjusted returns.
At March 31, our balance sheet and capital are strong with over $3 $9 billion in GAAP equity and access to $2 billion in excess of loss reinsurance and over $800 million of available liquidity at the holding company, we are well positioned.
Also essent guaranty remains the highest rate of mono line in our industry a single day by a M best and Ace III and Triple B, plus by Moodys and S&P, respectively.
Our strong financial position at March 31 is due to the benefits of our buy manage and distribute operating model along with the measures that we had taken last year and bolstering our capital levels.
As the U S economy, reopens unemployment levels improve and defaults begin to normalize we now have more visibility on optimizing capital management.
Our primary focus continues to be deploying excess capital back into the business to support growth in our core EMI and reinsurance businesses.
Secondarily, we continue to pay a dividend today I am pleased to announce that our board has authorized a $250 million stock repurchase plan to be executed by the end of 2022 and approved a <unk> <unk> per share increase in our quarterly dividend to <unk> 17.
Finally to further leverage our Bermuda platform effective January one 2021, we increased the percentage of <unk> that are seeded under our affiliate quota share from 25% to 35%.
Over time. This change is expected to reduce our effective tax rate by 150 to 200 basis points 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.
For the first quarter, we earned $1 21 per diluted share compared to $1 10 last quarter and $1 52 in the first quarter a year ago.
The weighted average diluted shares outstanding for the first quarter of 2021 and fourth quarter of 2020 was 112 million shares up from 98 million shares in the first quarter of 2020 due to the impact of our equity offering in may of 2020.
Income tax expense for the first quarter was calculated using an estimated annualized effective tax rate of 15, 9% before consideration of discrete tax items.
As Mark noted our first quarter results include a $5 7 million discrete charge to income tax expense to provide differed taxes for states, where essent patient income tax in addition to our premium tax.
For the balance of 2021, we currently estimate to record income tax expense using a 15, 9% effective tax rate.
We ended the quarter with insurance in force of 197 billion.
A 1% decrease compared to 199 billion at December 31, and.
And a 19% increase compared to 166 billion.
At March 31 2020.
Yes.
Net earned premiums for the first quarter of 2021 was $219 million and includes $11 $2 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 first quarter was 42 basis points down.
Down from 43 basis points in the fourth quarter of 2020.
This decrease in the premium rate compared to the first quarter was principally due to the 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 first quarter was $32 million compared to $62 million last quarter.
The provision for losses in the first quarter benefited from a decline in new notices of defaults reported and higher level of favorable prior year development compared to the fourth quarter of 2020.
During the first quarter, we received 7422, new default notices which is down 15% compared to 8745 defaults reported in the fourth quarter of 2020.
Prior year favorable development was $16 million in the first quarter of 2021 versus $2 million in the fourth quarter.
At March 31, our default rate decreased to three 7% from 393% at December 31.
Note also.
Net favorable trends continued as our default rate at the end of April was three 4%.
With default trends normalizing, we've decided to discontinue the monthly default reporting that we had initiated post the onset of COVID-19 last year, and we will update the markets as part of our quarterly regular cadence.
Consistent with the fourth quarter of 2020, we have reserve for new defaults reported in the first quarter of 2021, using our pre COVID-19 reserve methodology.
As a reminder for defaults reported in the second and third quarters of 2020, we provided reserves using a 7% claim rate assumption.
This assumption was based on expectations that programs such as the federal stimulus 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 of 2020 as they continue to represent our best estimate of the ultimate losses associated with these defaults.
Other underwriting and operating expenses in the first quarter were $42 million <unk>.
Compared to $37 million in the fourth quarter the.
The increase in expenses over the fourth quarter is primarily due to an increase in the level of payroll taxes associated with divesting of shares and incentive payments, which historically occurred in our first quarter in.
An increase in professional fees and a reduction in deferred policy acquisition cost.
We expect expenses to decline in the second quarter of 2021 compared to the first quarter.
We continue to estimate that other underwriting and operating expenses will be in the range of $170 million to $170 million $170 million to $175 million for the full year 2021.
From a <unk> perspective after applying the <unk> three factor for COVID-19, default Essent Guaranty's Pmiers sufficiency ratio was strong at 161% with $1 1 billion of excess available assets. Excluding the three factor our Pmiers sufficiency ratio remained strong at 149 <unk>.
<unk> with $1 billion of excess available assets now.
Now, let me turn the call back over to Mark Thanks, Larry and closing we were pleased with our performance for the first quarter as we produced strong earnings generated excess capital our buy manage and distribute model is operating on all cylinders and confidence in our economic engine is high.
Combined with the strong housing environment, and an improving economy post COVID-19 our outlook on our business is positive.
Over the last 12 months the strengths strengths of our operating model were on display as we remained profitable raised additional capital and maintain our quarterly dividend through a stressed environment now as we returned to strong profitability. We are pleased to augment our capital strategy with a share buyback program.
Similar to dividends repurchasing shares is a tangible demonstration of the benefits of our model and generating capital. It also provides further balanced in deploying excess capital between the business and redistribution to shareholders. Finally, we are excited about the progress that we're making with essent ads to point out and its potential to be a game changer in evaluating our price and credit risk.
While we are in the early stages of its deployment combining AI with large quantities of data is where the world is moving and we want essent to be at the forefront of this now let's get to your questions operator.
As a reminder.
To ask a question you will need to price star one on your telephone to withdraw your question press the pound or husky.
Yeah.
First question, we have Mark Devries from Barclays. Your line is open.
Yes. Thanks.
Spent a lot of investor focus this quarter just on share shifts Mark and I know you guys don't focus on market share at all but I do think it would be helpful. Just to get your color on what you think might have impacted share this quarter.
Hey, Mark.
Again, we've talked about this in prior quarters, we didn't really know what our share was until the last couple of days.
I would say from an essence standpoint.
We continue to focus on insurance in force and that was relatively flat.
And the FERC quarter, which was relatively flat last year in the first quarter. In fact, we I don't think we grew insurance in force to May of last year. So given what we expect to write with new insurance and I think we wrote close to $20 billion in the first quarter and what we expect the rate for the rest of the year, We think we'll grow insurance in force.
At a healthy clip. So we continue to be focused on that so we're not again the quarterly market share shifts there's a few reasons to get into them, but it ebbs and flows all the time.
We've been longer term our goal is really around that 15% to 16.
Percent share Mark and one of the things around <unk> 2.0.
That we're really excited about it gives us the chance to optimize the premium around around that share right. We're always going to <unk>. If you are getting to be 20, 20% share or more than that or you see large swings. It's price, it's such a price driven business lowest price wins, whether it's the car to the engine and our view is if youre.
To be in that type of environment, you need to be armed with more information and hence that's why we started the development of edge to point out.
A couple of years ago, now and rather than the three or four factors that a rate card or the 12 to 15 factors.
With the first iteration of our engine, we're analyzing over for Hunter factors and we're using machine learning and we're deploying that back to the loan officer in three seconds. We are seeing across the board ways that we're going to be able to again optimize premiums. If it's a if it's a low premium environment or competitive premium environment and we.
It can be better by two or three basis points. That's a big win from a unit economic standpoint. So again, that's how we look at it. So we don't get caught up in and the chatter of the quarter of who's winning share who is losing share.
That's all it is kind of.
It's just not important in the Grand scheme of things and as we look forward, we're spending our time, making sure that we're building the analytics that are really going to separate the winners and losers in the long run credit selection as I said is going to be a key differentiator as the business moves again, it's going to be it's going to move more towards <unk>.
<unk> progressive or credit card providers like capital, one theyre going to be the winners. So yes. They are still cards today and you can lower your price through the engine, but but the strength of the engine longer term Mark is as a risk management tool.
And I think Thats, what we believe in that and that's where we're putting our investment dollars.
Okay. That's helpful.
So for node as you guys highlighted you're in a very strong capital position here could you just talk about opportunities you're seeing to deploy that into the business.
And then kind of what the implications are for <unk>.
For your new repurchase authorization and how you might expect to use that.
Yes, I mean again, it with strong capital position at the Holdco rate with over $500 million of cash.
And of course, we have the line of credit. We also are generating a significant amount of cash a guarantee and in fact, we.
We pulled $100 million dividend out of guarantee.
Over the last couple of weeks, so again that that process will start too.
So I think from a cash standpoint in terms of redistribution, we have the dividend, which we increased and we'll obviously continue to look at that each quarter. The repurchase is really through the end of 2022. So we could obviously increased debt if necessary, but that's really the plan now and it's in it's kind of think about it mark in term.
Longer term given the cash generation in our business dividends and repurchases now which is new for us it's a way for us to maintain Roe.
So when we see business, maybe if we don't like at a certain unit economics, maintaining robust through this distribution is a good use of capital in terms of the business. We feel like the Essent Guaranty is actually pretty good in terms of cash generation in terms of needing new capital Essent re.
It could always use capital if we see opportunities we have.
Written kind of outsized business over the last half of 2020 and in the first quarter of 2021, just given the opportunities we've seen there.
It's around.
Obviously, not as meaningful as guarantee but its certainly a use of capital and as I mentioned on our last call. We'll continue to look and study and analyze ways to leverage the business or leverage some of the things we do well.
Outside of the core MRI, but we're still early in that but I think that the real story is we have a pretty I would say well constructed and diversified capital management plan.
Okay, great. Thanks for the comments.
Next question, we have Doug Harter from Credit Suisse. Your line is open.
Just wanted to follow up on the comment you just made mark about being able to pull $100 million guarantee.
Can you just talk about kind of the approval process.
Okay.
It's about kind of how dividend.
From guarantee it could.
Thank you.
Yes, I mean, the approval processes begin given given some of the haircut for the three multiplier, we require GSE approval, which we received and just remember again from our capital position. We are we're pretty strong with the P. Myers with them without the multiplier and also just reflect on our balance sheet.
We're not that levered, so our leverages below 10%. So we're in a pretty strong capital position, which and again, it's reflective in our ratings, which I think the gse's recognized so in terms of going forward.
We're not going to speak to it being a regular occurrence, but you can do the math and when folks think about.
In terms of just niwa insurance in force we're in a really good position. So we think we will continue to grow insurance in force.
But the day, we don't Doug all of a sudden a required assets flattened out.
And the available assets will keep growing so it actually increases.
Cash available for shareholders. So it's we're in a very good position, we're either going to redistribute it into the businesses to grow and we will have opportunities to increase distributions to shareholders and as again as I noted and increased opportunities to allocate that capital to provide another leg of growth down the road. So we're really.
Please just again with the cash flow generation of the business I believe is $180 million in the first quarter operating cash flow. So I think from that standpoint, I think there's more good things to come.
Great and then just to clarify that $100 million would be that would add to the $5 40 that.
Hold co cash.
And our reported earnings.
It's not at the member who has done in the second quarter, and it's really going to be a matter of whether we upstream it or not remember essent guaranty's a sub of U S holdings. So we may just keep it at U S Holdings.
But Doug we have two holding companies we have the top tier that mark referenced earlier, we reported that and now we also have the U S holding company. So between the two holding companies this will add to cash at the two holding companies.
Understood. Thank you.
Next question, we have Rick Shane from JP Morgan Your line is open.
Hey, guys. Thanks for taking my questions. This morning.
When I look back through our model and Mark I suspect you will chew this number off when I throw it out there, but I see over since 2010 $67 million of claims paid you currently have a $410 million reserve.
The home price appreciation story is really strong and I think that that's a fundamental.
Aylwin both in terms I think that that will fundamentally continue do.
Do you think that there is a divergence now between reserves and a realistic economic outlook and how do you think that that results over time.
Ah.
Again, it's hard to say that there is a divergence we would just say one we feel pretty good about the 400 plus million in reserves because it just adds to our balance sheet strength and it kind of gets to the point, we made last year, which was the reserves, we took where 2020 event and it was really an earnings event, which got reflected in.
The provision looking forward, it's really going to center around the ultimate performance of the second and third quarter cohorts, because remember in the fourth quarter and the first quarter, where we are now back to the normal reserve. So if you just isolate let's just look at the second quarter cohort and we had 37000 defaults in that quarter and a 70% of.
<unk> already however, we assume 93% what's your so let's give it a few more quarters I think it is going to take two three plus quarters and also Rick you got to remember just what's going on with forbearance rate. They extended forbearance back new loans going into default are still are still eligible for.
And so until that kind of cleans up you could see borrowers stay in forbearance for longer period of time, which is going to make it hard for us to remove it from the provision. So I think we're levered to the upside, but again I think it's going to take time for this to play out.
Got it yes look I.
I hear you on that I think that Thats, one of the things that's clearer as debt with forbearance being extended.
When we draw an analog perhaps between what we've seen in auto finance, where collateral values has been so robust.
Assuming that the severity of loss given home price appreciation versus the historical reserves.
Really creates some opportunity as well is that the way you guys are looking at it well I mean, that's what we did when we set the reserve rate. So we assume seven of those.
Basically 7% would go to claim.
Right now 30% of them are still sitting in default. So over time, we expect as they clean up yeah, a lot of them could end up selling the house.
Ever having to be foreclosed upon so yes, again I think we're favorably.
Levered to that Rick.
But again, we get paid to wait so it's sitting on the balance sheet strength, we don't feel the need to kind of aggressively.
Forecast that it's going to be better than we originally thought.
I'm not quite sure we could do it even from an accounting standpoint.
We will let it play out over time.
Your point for a good one just to clarify the 7%.
Our claim rate assumption assumes 100% severity so to the extent that severity is lower than 100% it would give us the capacity to pay more claims.
Yeah.
Got it okay. Thank you guys very much share.
Your next question is from Bose George from K B W. Your line is open.
Hey, guys good morning.
Can you talk about the factors that to the physician to see.
Premiums to Bermuda.
You said for 35% level I think of your peers Thats Bermuda base, 50% debt.
Possibility over time.
Well again it was a first it was something that we had contemplated last year both to be honest, but given COVID-19. We kind of took US took a back seat. So we think it's a good first step it's again, we'd like to do things in increments. So going from 25 to 35 and focusing just on IW I think it helps normalize some of the cash flows.
Throughout the company.
Well, we look at 50 overtime, we possibly could but I would say right now we're very comfortable with 35 and just on <unk> I think if we did anything going forward it would be more looking at the back book and moving in.
But that's down the road I think right now, we're very comfortable and again as we said over time.
It plays into 150 to 200 basis points. It kind of gets back to an earlier point I made those around unit economics, right. We think a lot about unit economics and quite frankly, that's the whole business. So if our new engine or the iteration of it can help us optimize premium that helps unit economics, both in terms of the premium and in managing the credit loss.
<unk>, we're already pretty darn good at managing expenses and Thats. Another again driver of unit economics investment yield, which we spent a lot of time on in some of the things we look at can clearly help.
<unk> yield and tax rate the tax rate is another lever and I think when you put it together so yes, it's a commodity business on the front end there is no doubt about it and it's probably becoming more of a commodity business given.
When you see how how price can move the needle. So you have to be a lot better at the little thing. So once debt loan comes in the door being able to manage up and down Union economics to optimize returns.
Again, I think thats, what differentiates essent.
Okay that makes sense. Thanks, and then actually just one more on the taxes.
You might and tax line that impacts.
Indeed the arrangements.
Insurance structure.
Again <unk> been after that.
That's been going on I mean, this is a newer approach to it but that was a lot during the Obama administration to we've seen a lot of proposed rules, it's a wait and see game. So again, it's tough to comment on a rule thats just kind of got floated out there, but certainly something we'll be watching.
Okay, great. Thanks.
Your next question is from Mihir Bhatia from Bank of America. Your line is open.
Hi, Thanks for taking my questions. The first question I just wanted to ask was just wanted to clarify the comments on premium rate.
Okay.
You talked about a two basis points decline.
Just wanted to see if you could give any more color on the cadence and really what I'm trying to understand is are we talking about the exit being below 40, so like the <unk> for the full year. So the exit will be below or are we think 40 is where you end up in fourth quarter.
40 is where we end up in the fourth quarter. However, I mean, it's going to depend a little bit on the persistency of the book.
And clearly how much we rate in the second half of the year and also the shift between purchase.
In refinance, but I think we're comfortable with that but there are so many moving parts I think we'll leave it at that and here, but there's definitely a difference in the premium yields amongst the different players and I think thats something again, that's why we talked about the engine and looking for ways to optimize that premium level. It is very important for investors.
To understand talent around premiums so it's easy to give away premium to get in IW. However, it's always going to come home to roost in terms of the top line revenue. So that's why we're so focused on making sure we can optimize the premium level and we believe we can do that with our new.
<unk> of the engine.
For an example, right I mean 760 and there are 760 loans out there right now that have been in forbearance for nine months.
And guess what that shows up as a 760, our model can fail that they have payment pattern histories.
But theyre, probably not representative of 760, well, we're not going to give them. The same prices, we'd give we would think of more stable.
Stable.
760, and then on the other end when you go down the credit spectrum can we pick off to 720 that we think is going to perform better than the 720 remember we don't price off Psycho anymore, we price off a custom mortgage score that we've developed very proprietary but again, it's something and we back tested it over the last.
Several years with different sorts of data. So on that 720, we can price a little bit below the market. However, thats going to perform better. So again this is where when we get into the as you think about the next two to three years five years Mihir I remember you and I talking about this out in California, a couple of years ago. This is really where the business is going.
And again, you can give away premium to get yield its been done I mean to get an idea of what's been done in this business since we started.
But it ebbs and flows you can always rent share for a quarter or two quarters, but again, we're focused on the longer term drivers of the business. So again, it's all relative to market levels obviously.
But again, we're trying to be a little bit better just around the edges.
No that makes sense.
I really appreciate those comments up just one other quick one for me I just wanted to check if you had any update I may Miss.
So for the side, but any update on the <unk> I think given like 500 billion ish market.
Last quarter any update to that view given.
Okay.
I think the first quarter was pretty strong so yes, it could it be kind of more in the $5 50 ish, yes, certainly I mean, it's certainly strong market a lot of it is going to be dependent on rates in the second half of the year. If they go up that will push refinancings down, but the purchase market as we all know is incredibly strong. So I think it's a strong very strong in IW market.
Just keeping in perspective, the 20 year averages like 250 billion. So this is this is this is a nice market.
And over the last couple of years, but certainly much higher than it has been previously.
Thank you.
Your next question is from Ryan Gilbert from <unk>. Your line is open.
Hi, Thanks, everyone. Good morning.
First question is on.
The favorable development in losses incurred in the quarter I think it was $16 million stepping up for $2 million in the fourth quarter of 'twenty is that.
Is that at that 60 million a good run rate going forward or was there anything.
One time in nature.
In the quarter that should be thinking about.
Yeah, Ryan it's Larry responding to that question I don't think you can assume a run rate as it relates to prior period and prior year development tends to be a little bit more lumpy, but what we saw in the first quarter that contributed to the $16 million was.
You had favorable cure activity on both the fourth quarter defaults when we move back to the pre COVID-19 reserve methodology and also the defaults that had been reported prior to COVID-19. So the defaults that were recorded in the first quarter of 2020 in prior periods. So we had good care activity on those cohorts.
And then in addition, we are observing some decline in our reserve factors due to the favorable housing environment and strong credit performance. So little bit of reserve factors and also continued strong activity in the fourth quarter, and then pre COVID-19 default cohorts.
Yes.
Okay got it thanks for that.
And then the April default rate dropping to three four for $3 seven I think what we've noticed from peers is theres been a.
A really nice pickup in share.
For your activity in April would you say that that's the case for you or is it being is that dropping into default rate being driven by both lower new defaults and also.
Cheers.
It's really both.
You look back at the 8-K that we released in early April that will be the last month in which we are reporting our default activity on a monthly basis will just be reporting that quarterly going forward, but we saw an uptick in both the cure activity as well as a reduction in the number of new defaults reported so continue to see favorable trends in that area I would point to.
It also though that April tends to be a reasonably good months in terms of kind of cure in default activity, but we did see a nice decline in default and pickup and cure activity in April.
Okay, great. Thank you.
Your next question is from Geoffrey Dunn from Dowling and partners. Your line is open.
Thanks, Good morning, I got a for.
Two questions.
First Larry <unk>.
Last quarter, when you shifted to the.
Pre COVID-19 methodology, you had some adverse current period development I think portion of $18 million.
Because of slower cures versus historical trauma early stage bucket did you have that same adverse development this quarter.
No we did not ingest that adverse development in the fourth quarter was really due principally to the shift from the COVID-19 reserve methodology that sort of fixed 7% claim rate on new defaults versus going back to the model. So that was that was kind of the anomaly of we weren't really to a different reserve methodology in the fourth.
But we didn't see any significant in fact, we saw some favorable <unk>.
Development for the during the current quarter.
Okay.
Then in terms of moving $100 million into the U S. Holdco.
I believe that can help on the debt side, but what other advantages other than avoiding excise tax to Bermuda do you get or what other options do you have keeping it there or is that something where you could do for example acquisitions from or there or are there other opportunities outside of debt and M&A.
Yes.
You got a keeping at holdings gives us a lot of flexibility around investments.
So it's not really about avoiding the excise tax so to speak I mean, we're flush.
With cash at the Holdco, So theres no need to do that.
Pay the tax and then have to kind of downstream and again, so it gives us a lot of flexibility.
Round around are really around the investments and what we're looking to do.
On a go forward basis.
Okay.
Sorry, two more Essent re obviously you can always use capital youre, increasing machine or have increase in the seed is there plan downstream of capital in the next quarter or two.
No, we're actually pretty are actually pretty good with capital there hence.
We didn't do the back book, there, we would've needed to kind of move some capital around and we like the idea of just kind of doing a measured approach where there were pretty good from a capital standpoint, there too.
Okay, and then last question.
Obviously, you were currently tap the ILS market as to your peers, but one of the things that is very clear is that the benefit underpinning those can disappear very quickly.
Has the risk amortizing down and the effective attachment points rise how do you factor in these varying speeds to your capital management and then.
Should we see the peso debt benefit erosion slow as Refis declined.
It's a good question, we certainly we look at we look at the <unk> over kind of a two to four year forecast that we do so we generally look at it and in matching the <unk> on a on a regular basis. So yes. It's certainly something you kind of have to stay in the market on it to Maine.
The benefit, but there's a certain benefit that we expect to get so it's a good point, but I think we are long as you are continuing to issue <unk>.
Should be in good shape. It's when you stop is when we saw that last year were really created.
An issue for for some.
Okay. Thanks.
And also Jeff just to finalize that it's you don't want to become over reliant on Ireland just to your point around the nature of it. So we look a lot at where we are with and without <unk> just in terms of capital management.
Your next question is from Phil Stefano from Deutsche Bank. Your line is open.
Yes, Thanks, and good morning, I guess, Mark I was hoping you could talk to us about the mix of dividends and repurchases and the repurchases. This new so maybe you could talk about your philosophy around valuation base sensitivity and thinking about it.
Is dividends or repurchases the right way to return capital seeing both.
It is a valve to use that excess capital to maintain returns.
It really.
Good good question, Phil around around the pricing, it's certainly I mean, it take a step back. It is a mix rate you want to we think mixing dividends as cash in hand to investors and obviously repurchases is a little different way to get it to get cash back maybe a little bit more kind of tax effective so we like both and given.
In terms of our program it'll be think of it almost as a dollar cost averaging type program. So we will be in the market on a continuous basis, but when the shares are up we'll be buying less and when the shares are down.
We'll be buying more and given the volatility day to day in our stock price, we think will probably it's probably a good plan, we're not going to make bets rate management teams are very poor I think in terms of predicting valuations up and down so it'll be more of a <unk> five plan.
Debt, we will execute off of matrix and we would expect to we'll look at it every 90 days. So we always could accelerated in certain instances and we could add to it in certain instances. So I would again, it's going to be a dynamic use of capital management I don't think well adjusted dividend at around too much. So repurchases is going to be more of the top.
Will.
And then there's obviously the estimate investment opportunities in the core business, which continue to slow rate because because we continue to get the kind of critical mass and then interesting investment opportunities outside the core which again, we've just started with our investments in the fund and Thats something we will continue.
To build and develop over the next several years.
Okay, maybe I'm parsing words too finely but.
The reading of the released from my seat says it's to be executed by the end of 2022 I feel like that's.
In some ways an affirmation that we are going to at least do this I mean is that right. Yes. So we're going to we're going to be in the market probably over the next 30 days. This is not this isn't a signal.
We're actually going to be in the market in 30 days repurchasing shares on a continuous basis through the end of 2022. So if you are building. Your model you can almost figure out how many shares we're going to buy a day and you can work that into our repurchase over the next to the end of next year. That's why we're very specific on it yes, it's not a signal.
It's going to happen, we're not going to stop it if prices get too high per se that would be.
That would be actually a good problem to have so think of it think of it continuous to change will be and we'll update you guys every quarter, we will toggle it like if we say Oh my God. This is.
We have more excess capital.
And we want to increase that and we will announce that for the market, but it's not a signal. So it's actually it's a program that we intend to execute upon again, it's very it's very consistent with our approach we like.
We liked it to kind of slow and steady so the dividends was one.
One aspect of it.
We announced it and then we did it and now we are announcing this we're going to do it.
Yes, okay.
And then switching gears I wanted to dig into Essent edge to point out a little bit more.
You had mentioned that this was a.
Terry platform.
I tend not to think of insurance companies as tech companies. So maybe you could talk to US about it is this is being developed in house are you leveraging <unk>.
An external provider what is what's the real differentiator here that this can't be replicated by the other five.
I mean, it can certainly be replicated it just takes time right. So we started this two years ago, we hired.
And it came out with one of our larger banks started.
I think they had for <unk> and they started to machine deciding which which.
Which <unk> they were going to pick it used to be kind of the old allocation method and as soon as we saw it we're like Wow. This is definitely where the business is going and then in 2019, we were down meeting with the folks at optimal blue and there were big pricing provider to the semi industry and prior to that it alone office.
Or had to decide where they're going to price.
Essent or another <unk>.
And generally in our loan officer would've taken say two or three <unk> rate is not going to run all six it takes a lot of time in all of those are focused on making sure that borrower gets into the right loans.
Optimal will change that their new system, starting I believe at the end of 2019 delivered all of the pricing back to the loan officer with the two best price as highlighted in Green I mean, it would be pretty difficult to pick your favorite emigh wrap wins they are not in green.
That just further solidified.
Our our conviction that we needed to get better at.
Using more information to make a decision. So we're giving every lender our best price not necessarily the lowest price. So the way. The model works is yes. So we hired folks from the credit card industry and we got other data sources and again, we have folks in house that has have.
Have experience in that and developing.
LP had at one of them one of the GSE. So we use raw credit credit data, which again, the only folks who use for all credit or the gse's. So we use that to deliver and then run through I believe it's over 400 factors now and Thats really the development of the model that was done on house. The deployment part of the model is actually interest.
We can now deliver that back to the loan officer.
Right around three <unk>. So again think of that it's all in the AWS cloud. So again. This is this is Ben.
In development and deployment development over the last.
Again year and a half.
Probably year and a half a year and a half two years as we seriously done it and we tested it in the fourth quarter of last year, and we rolled it out to the market in the first quarter. This year, it's going to it's going to take time, it's actually available today through early may so if a loan officers pricing through early may encompass they can they can access this price and we have direct integrations.
With a couple of the larger the larger banks.
And we will continue to kind of roll that into the market. It's a difficult market to do it I mean, when when some folks are just using bid cards theyre not it's hard for them to say, we're going to use an engine right. So we have a so we have about 70% of the industry is using engines and thats really what will it will morph those.
Into.
<unk> two point out.
Probably over the next two.
12 to 15 months, there's a few bigger ones again, if more if more users I think 50% of our production is through early may.
But it's not that simple because some of the some of the loan officers price through early may some use optimal below will eventually work our way into optimal below so we're excited about it so yes, everything's everything can be replicated so when I say proprietary is mean, we build it in house, we didn't go hire a consultant to do it a lot of the skills here, but I do think it is it's a <unk>.
Lou here and I'll give you an example, Phil.
We've made.
<unk> 10 different fund investments over the last three years I think we have for east coast funds, three Midwest funds and three west coast funds in line.
You've heard me say over the years I'm out visiting clients. So I'm also out visiting these funds.
And some of the and some of the companies within the funds. So we came across the company a couple of years ago that was using like a thousand factors and and this was.
I think it had to be in 2018 or 19.
And I walked out of that meeting with that company Goin'. The technology exists a denver existed in this industry before remember were just pricing through rate cards, and one provider had an engine and kudos to them for being first to the market on that.
But we looked at it and saying how can we grow.
Exponentially get better than the kind of a for 10 or 12 factors and there was clear evidence for this company can do it. So we knew the technology existed. So again a lot of it is just spending the time on it.
And continuing.
To develop that it's for proprietary score.
So it's an essent risk score it is not a FICO score FICO was developed back in 1989, Phil It's never been improves and it's just not a great indicator of a person's ability to pay their mortgage so again.
I would expect the industry is probably all working on things like this so again this is something we've gotten and maybe their models already habit for all I know, but I think we're focused on what we can do and we think we think it's leverage level and thats. The thing we're learning stuff now around consumers' ability to pay.
And we're focused right now on deploying it with an S within essent.
You never know if theres opportunities down the road for other things.
Okay, Great look forward to those those things Mark Thank you yes.
So there are no further questions at this time now I will turn the call back over to management.
Well, thanks, everyone for joining us today and I hope you have a great weekend.
This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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