Q4 2021 Essent Group Ltd Earnings Call

Good morning, My name is Julian and I will be your conference operator today at this time I would like to welcome everyone to Essent Group limited fourth quarter and full year 2021 results conference call.

Speaker 1: Good morning, my name is Julianne and I will be your conference operator today at this time. I would like to welcome everyone to groups limited 4th quarter and full year 2021 results conference call.

Speaker 1: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.

If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question. Please press star one again.

Speaker 1: I would now like to turn the call over to Phil Stefano, Vice President of Investor Relations. You may now begin your conference.

I'd now like to turn the call over to Phil Staccato, Vice President of Investor Relations. You May now begin your conference.

Speaker 2: Thank you, Julianne. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO , and Larry McAlee, Chief Financial Officer.

Thank you Julien good morning, everyone and welcome to our call. Joining me today are Mark <unk>, Chairman and CEO , and Larry <unk> Chief Financial Officer.

Speaker 2: Also on hand for the Q&A portion of the call is Chris Curran, President of Essent Guarantee. Our press release, which contains Essent's financial results for the fourth quarter and full year 2021, was issued earlier today and is available on our website at EssentGroup.com.

Also on hand for the Q&A portion of the call is Chris Curran President of Essent Guaranty, Our press release, which contains essence financial results for the fourth quarter and full year 2021 was issued earlier today and is available on our website at Essent group Dotcom prior.

Speaker 2: 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.

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.

Speaker 2: 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.

Speaker 2: For discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release.

Speaker 2: The 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.

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.

Speaker 3: Thanks, Phil, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2021 financial results, which reflect the strength of our buy, manage, and distribute operating model. Our focus remains on optimizing our unit of economics and generating high-quality earnings and strong returns while continuing to fortify our balance sheet, reduce through-the-cycle earnings volatility, and take a measured approach to capital management.

Thanks, Bill and good morning, everyone earlier today, we released our fourth quarter and full year 2021 financial results, which reflect the strength of our buy manage and distribute operating model. Our focus remains on optimizing our unit economics and generating high quality earnings and strong returns, while continuing to fortify our balance sheet reduced through.

The cycle earnings volatility and take a measured approach to capital management.

Speaker 3: Our outlook for our business remains positive as several trends continue to support housing's resilience.

Our outlook for our business remains positive as several trends continue to support Housing's resiliency demand outweighing supply should continue to support home price appreciation, albeit at a more moderate pace, while low unemployment with rising income should continue to benefit credit and.

Speaker 3: Demand outweighing supply should continue to support home price appreciation, albeit at a more moderate pace, while low unemployment with rising income should continue to benefit credit. In addition, purchase demand remains elevated as a result of demographic trends, which is positive for our franchise since we are levered to first-time homebuyers.

In addition purchase demand remains elevated as a result of demographic trends, which is positive for our franchise. Since we are levered to first time homebuyers.

And now for our results for the fourth quarter, we reported net income of $181 million as compared to $124 million a year ago.

Speaker 3: And now for our results. For the fourth quarter, we reported a net income of $181 million, as compared to $124 million a year ago. On a diluted per share basis, we earned $1.64 the fourth quarter, compared to $1.10 a year ago. For the full year, we earned $682 million, or $6.11 per diluted share, while our return on average equity was 17%.

On a diluted per share basis, we earned $1 64 for the fourth quarter compared to $1 10, a year ago for the full.

Full year, we earned $682 million or $6 11 per diluted share while our return on average equity was 17%.

At December 31, our insurance in force was $207 billion, a 4% increase compared to $199 billion at the end of 2020.

Speaker 3: At December 31st, our insurance in force was $207 billion, a 4% increase compared to $199 billion at the end of 2020. The credit quality of our insurance in force remains strong, with an average weighted FICO of 745 and an average LTV of 92%. Following our November ILN transaction, we have reinsurance coverage on 90% of the portfolio as of December 31st.

The credit quality of our insurance in force remained strong with an average weighted FICO of 745, and an average LTV of 92%.

Following our November island transaction, we have reinsurance coverage on 90% of the portfolio as of December 31.

During the quarter, we successfully rolled out the next generation of our risk based pricing engine <unk> edge.

Speaker 3: During the quarter, we successfully rolled out the next generation of our risk-based pricing engine, S&Ed.

Speaker 3: We believe Edge has a competitive advantage given the number of data points that we analyze when pricing credit risk through machine learning and cloud-based technology.

We believe edge has a competitive advantage given the number of data points that we analyzed when pricing credit risk through machine learning and cloud based technology.

Speaker 3: Given these advantages, our team will continue to strive for broader adoption of edge technology away from static rate cards. We believe this continued evolution of pricing is mutually beneficial, delivering our best price to borrowers while optimizing our unit economics.

Given these advantages our team will continue to strive for broader adoption of edge technology away from static rate cards. We believe this continued evolution of pricing is mutually beneficial delivering our best price to borrowers we're optimizing our unit economics.

Speaker 3: A Bermuda-based reinsurance company, S&RE, had a strong year in running high-quality and profitable GSE risk share business and continuing to provide fee-based MGA services to our reinsurer clients.

Our Bermuda based reinsurance company <unk> had a strong year in writing high quality and profitable GSE risk share business and continuing to provide fee based MGA services to a reinsurer clients SME.

Speaker 3: S&RE ended the year with $1.8 billion of risk and force compared to $1.4 billion at the end of 2020. We believe there is a continued opportunity for S&RE to capitalize on the growth in the GSE risk share market.

<unk> ended the year with $1 $8 billion of risk in force compared to $1 4 billion at the end of 2020, we.

We believe there is a continued opportunity for essent re to capitalize on the growth in GSE risk share market.

Our Essent ventures unit was formed to make investments, which are intended to give us access to information to improve our core business enhanced financial returns and increased our book value per share. We closely monitor the ongoing intersection of the housing finance real estate insurance and technology sectors and believe they will.

Speaker 3: Our S and Ventures Unit was formed to make investments which are intended to give us access to information to improve our core business, enhance financial returns, and increase our book value per share. We closely monitor the ongoing intersection of the housing finance, real estate, insurance, and technology sectors and believe there will continue to be opportunities to take advantage of this changing landscape by leveraging our mortgage technology, credit, and operational expertise.

Continue to be opportunities to take advantage of this changing landscape by leveraging our mortgage technology credit and operational expertise.

Speaker 3: As of December 31st, we are in a position of strength with $4.2 billion in gap equity, access to $2.7 billion in excess of loss reinsurance, and over $1 billion of available liquidity.

As of December 31, we are in a position of strength with $4 $2 billion in GAAP equity access to $2 7 billion in excess of loss reinsurance and over $1 billion of available liquidity with.

Speaker 3: With a full year 2021 operating margin of 80% and operating cash flow of $709 million, our franchise remains well-positioned from an earnings

For the full year 2021, operating margin of 80% and operating cash flow of $709 million. Our franchise remains well positioned from an earnings cash flow and balance sheet perspective as evidence of this essent guaranty remains the highest rate of mono line in our industry at single a by a M best and.

Speaker 3: cash flow and balance sheet perspective. As evidence of this, S&P Guarantee remains the highest rated monoline in our industry at single A by AMBEST and A3 and BBB plus by Moody's and S&P respectively.

<unk>, III and Triple B, plus by Moodys and S&P, respectively.

The strength of our model also enables a measured approach to capital distributions in 2021, we returned over one third of our earnings to shareholders in the form of dividends and share repurchases, we remain committed to managing capital for the long term exhibiting patients in our capital planning to main strength to maintain strengthen our balance sheet.

Speaker 3: The strength of our model also enables a measured approach to capital distribution. In 2021, we returned over one-third of our earnings to shareholders in the form of dividends and share repurchases.

Speaker 3: We remain committed to managing capital for the long term, exhibiting patience in our capital planning to maintain strength in our balance sheet.

Speaker 3: As of December 31st, our book value per share was $38.73. Since going public in 2013, our annualized growth rate in book value per share is 21%, and we continue to believe that success in our business is measured by growth in book value per share.

As of December 31, our book value per share was $38 73.

Since going public in 2013, our annualized growth rate and book value per share is 21% and we continue to believe that success in our business as measured by growth in book value per share.

Finally, given our financial performance during the fourth quarter I am pleased to announce that our board has approved a <unk> <unk> per share increase in our dividend of <unk> 20.

Speaker 3: Finally, given our financial performance during the fourth quarter, I am pleased to announce that our Board has approved a one-cent-per-share increase in our dividend of 20 cents. This is the fourth consecutive quarterly increase and represents a 25 percent increase from a year ago, which we believe is a meaningful demonstration of stability in our earnings and cash flow. Now, let me turn the call over to Larry.

This is the fourth consecutive quarterly increase and represents a 25% increase from a year ago, which we believe is a meaningful demonstration of stability in our earnings and cash flow now, let me turn the call over to Larry.

Speaker 4: Thanks, Mark, and good morning, everyone. I will now discuss our results for the quarter in more detail.

Thanks, Mark and good morning, everyone I will now discuss our results for the quarter in more detail.

Speaker 4: For the fourth quarter, we earned $1.64 per diluted share compared to $1.84 last quarter and $1.10 in the fourth quarter a year ago.

For the fourth quarter, we earned $1 64 per diluted share compared to $1 84, since last quarter and $1 10 in the fourth quarter a year ago.

We ended 2021 with insurance in force of 207 billion a.

Speaker 4: We ended 2021 with insurance in force of $207 billion, a decrease of $1 billion from September 30th, and an increase of $8 billion, or 4%, compared to $199 billion at December 31st, 2020.

A decrease of $1 billion from September 30.

And an increase of $8 billion were 4% compared to $199 billion.

At December 31, 2020.

Persistency at December 31, 2021 increased to 65, 4%.

Speaker 4: Persistency at December 31st, 2021 increased to 65.4% compared to 62.2% at the end of the third quarter and 58.3% at June 30th, 2021.

Compared to 62, 2% at the end of the third quarter and 58, 3% at June 32021.

Net earned premium for the fourth quarter of 2021 was $217 million and included $11 $4 million of premiums earned by Essent re on our third party business.

Speaker 4: Net earned premium for the fourth quarter of 2021 was $217 million and included $11.4 million of premiums earned by Essentree on our third party business.

Speaker 4: The average net premium rate for the U.S. mortgage insurance business in the fourth quarter was unchanged from the third quarter at 40 basis points.

The average net premium rate for the U S mortgage insurance business in the fourth quarter was unchanged from the third quarter at 40 basis points.

Speaker 4: For the full year 2021, our net earned premium rate was 41 basis points.

For the full year 2021, our net earned premium rate was 41 basis points.

Yes.

Speaker 4: Income from other invested assets in the fourth quarter was $15 million, including $12 million of net unrealized gain.

Income from other invested assets in the fourth quarter was $15 million, including $12 million of net unrealized gains.

Speaker 4: compared to $41 million, including $39.5 million of unrealized gains recorded in the third quarter of 2021.

Compared to $41 million, including $39 5 million of unrealized gains recorded in the third quarter of 2021.

Other invested assets are principally comprised of limited partnership interest in venture capital private equity and real estate funds, which are carried at fair value.

Speaker 4: Other invested assets are principally comprised of limited partnership interest in venture capital, private equity, and real estate funds, which are carried at fair value.

Speaker 4: The provision for losses and loss adjustment expenses was a benefit of $3.4 million in the fourth quarter of 2021, compared to a benefit of $7.5 million in the third quarter.

The provision for losses and loss adjustment expenses was a benefit of $3 4 million in the fourth quarter of 2021 compared to a benefit of $7 5 million in the third quarter.

Speaker 4: The benefit for losses recorded in both the third and fourth quarters was impacted by the continued cure activity in our default portfolio.

The benefit for losses recorded in both the third and fourth quarters was impacted by the continued cure activity in our default portfolio.

At December 31, the default rate is two 6% down from 247% at September 32021, and down from 393% at year end 2020.

Speaker 4: At December 31st, the default rate is 2.16%, down from 2.47% at September 30th, 2021, and down from 3.93% at year-end 2020.

Since the fourth quarter of 2020, we reserve for defaults reported using our pre COVID-19 reserve methodology.

Speaker 4: Since the fourth quarter of 2020, we have reserved for defaults reported using our pre-COVID-19 reserve methodology.

Speaker 4: As a reminder, for new defaults reported in the second and third quarters of 2020, we provided reserves using a 7% claim rate assumption.

As a reminder, for new defaults reported in the second and third quarters of 2020, we provided reserves using a 7% claim rate assumption.

Speaker 4: This assumption was based on the expectation that programs such as the Federal Stimulus for Closure Moratoriums and Mortgage Forbearance may extend traditional default to claim timelines and result in claim rates lower than our historical experience.

This assumption was based on the expectation that programs such as the federal stimulus foreclosure moratoriums and mortgage forbearance may extend traditional default to claim timelines and resulting claimed Larry it's lower than our historical experience.

Speaker 4: We have not adjusted these reserves previously recorded in the second and third quarters of 2020, which total $243 million as they continue to represent our best estimate of the ultimate losses associated with these defaults.

We have not adjusted these reserves previously recorded in the second and third quarters of 2020.

Which were which totaled $243 million as they continue to represent our best estimate of the ultimate losses associated with these defaults.

Other underwriting and operating expenses were $41 million in the fourth quarter down $1 million from the third quarter.

Speaker 4: Other underwriting and operating expenses were $41 million in the fourth quarter, down $1 million from the third quarter.

Speaker 4: The expense ratio is 19% for the full year 2021, which we believe is the lowest in the industry and compares to 18% in 2020.

The expense ratio was 19% for the full year 2021, which we believe is the lowest in the industry and compares to 18% in 2020.

We estimate that other underwriting and operating expenses will be in the range of $175 million to $180 million for the full year 2022.

Speaker 4: We estimate that other underwriting and operating expenses will be in the range of $175 million to $180 million for the full year 2022.

The effective tax rate for the full year 2021, including discrete income tax items was 17%.

Speaker 4: The effective tax rate for the full year 2021, including discrete income tax items, was 17 percent.

Speaker 4: For 2022, we estimate that the annual effective tax rate will be 16%, excluding the impact of any discreet item.

For 2022, we estimate that the annual effective tax rate will be 16%, excluding the impact of any discrete items.

Speaker 4: During the fourth quarter, Essend Group Limited paid a cash dividend totaling $20.8 million to shareholders and repurchased $68.6 million of stock.

During the fourth quarter Essent group limited paid a cash dividend totaling $20 $8 million to shareholders and repurchased $68 $6 million of stock.

Speaker 4: Through December 31st, 2021, we have repurchased approximately 3.5 million shares for a total of $158 million.

Through December 31, 2021, we have repurchased approximately $3 5 million shares for a total of $158 million.

Speaker 4: During the fourth quarter, ESSEN Guarantee paid a dividend of $100 million to its U.S. holding company.

During the fourth quarter, Essent guaranty paid a dividend of $100 million to its U S holding company.

Speaker 4: On November 10th, we closed the Radnor Ree 2021-2 insurance link no transaction, which provides $439 million of fully collateralized excessive loss reinsurance protection on approximately $12.4 billion of risk and force.

On November 10th we closed the Radnor re 2021 dash to insurance linked note transaction, which provides $439 million of fully collateralized excess of loss reinsurance protection on approximately $12 $4 billion of risk in force.

Speaker 4: on mortgage insurance policies written from April 2021 through September 2021.

On mortgage insurance policies written from April 2021 through September 2021.

Additionally in December the company completed an amendment to our credit facility, which included the issuance of an additional $100 million.

Speaker 4: Additionally, in December , the company completed an amendment to our credit facility, which included the issuance of an additional $100 million term loan and an increase in the revolving component of the facility to $400 million.

Term loan and an increase in the revolving component of the facility to $400 million.

As of December 31, 2021, no amounts have been drawn under the revolver.

Speaker 4: As of December 31st, 2021, no amounts have been drawn under the revolver.

Speaker 4: The amended credit facility matures in December of 2026.

The amended credit facility matures in December 2026.

After applying the 0.3 factor to the Pmiers required asset amount for COVID-19 defaults.

Speaker 4: After applying the 0.3 factor to the PMIRS required asset amount for COVID-19 defaults, ESSEN guarantees PMIRS sufficiency ratio is 177%, with $1.4 billion in excess available assets.

Essent Guaranty's Pmiers sufficiency ratio is 177% with $1 $4 billion in excess available assets.

Speaker 4: Excluding the 0.3 factor, the PMR sufficiency ratio remains strong at 165% with $1.2 billion in excess available assets. Now, let me

Excluding the three factor the TMR sufficiency ratio remained strong at 165% with $1 2 billion in excess available assets.

Now, let me turn the call back over to Mark.

Speaker 3: Thanks, Larry. In closing, we are pleased with our fourth quarter and full year 2021 financial results, which reflect our continued focus on optimizing our unit economics and generating high-quality earnings and strong returns.

Thanks, Larry and closing we are pleased with our fourth quarter and full year 2021 financial results, which reflect our continued focus on optimizing our unit economics and generating high quality earnings and strong returns our solid operating performance in 2021 also generated excess capital, which we continue to deploy in a balanced manner between re.

Speaker 3: Our solid operating performance in 2021 also generated excess capital, which we continue to deploy in a balanced manner between reinvestment in our franchise and distribution to shareholders.

Investment in our franchise and distribution to shareholders looking forward, we will continue to manage our franchise to grow book value per share and believe that our approach is in the best long term interest of our employees policyholders and shareholders now lets get to your questions operator.

Speaker 3: Looking forward, we will continue to manage our franchise to grow book value per share and believe that our approach is in the best long-term interest of our employees, policyholders, and shareholders. Now, let's get to your questions.

Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.

Speaker 1: Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster.

Your question. Please press Star one again, we'll pause for just a moment to compile the Q&A roster.

And our first question comes from Mark Devries from Barclays. Please go ahead. Your line is open.

Speaker 1: And our first question comes from Mark DeVries from Barclays. Please go ahead, your line is open.

Speaker 5: Yeah, thanks. Mark was hoping you could just comment on what you're seeing in a competitive environment around pricing.

Yes. Thanks.

Mark I was hoping you could just comment on what Youre seeing.

The competitive environment around pricing.

Yes, Martin nothing really different than we've seen in less than last quarters again.

Speaker 3: Yeah, Martin, nothing really different than we've seen in last in last quarters again.

Speaker 3: With the engines, it's a little bit more opaque in terms of what you see. Our pricing was very consistent in the fourth quarter. So in terms of share, which we always say ebbs and flows, we may have lost a little bit in the quarter, but again, I think we've remained relatively consistent.

With the engines, it's a little bit more opaque in terms of what you see.

Our pricing was very consistent in the fourth quarter.

So in terms of share, which we always says ebbs and flows we may have lost a little bit.

In the quarter.

But again I think we've remained relatively consistent and that's primarily driven by the engine now Mark I mean, it's agnostic to market share, we're really looking at kind of almost the intrinsic value.

Speaker 3: primarily driven by the engine now, Mark. I mean, it's agnostic to market share. We're really looking at kind of the, almost the intrinsic value of each loan. So there's gonna be, you know, higher FICOs that we shy away from, or price better, or lower FICOs that we price a little bit better, so.

Each loan so theres going to be.

Higher FICO is that we shy away from.

Or price better or lower FICO is that we price a little bit better so.

Speaker 3: Remember, we just rolled it out in the fourth quarter, so we're doing a lot of different testing around price elasticity, which we'll continue to do throughout this year. So again, long-term, it's around where we'll grow or where the market grows. But in terms of competitiveness, you can see some guys reaching in a little bit and some guys pulling back.

And we're really and remember we just rolled it out in the fourth quarter. So we're doing a lot of different testing around price elasticity, which will continue to do.

Throughout this year, so again long term.

It's around we'll grow or where the market grows but in terms of competitiveness, yes, you've seen as you can see you can see some guys reach in and a little bit and some guys pulling back but that's that's been the story every quarter. So again I think from a from a longer term standpoint.

Speaker 3: That's been the story every quarter. So again, I think from a from a longer term standpoint, you know, this is really going to be about credit selection. And I think that's where we have the advantage in terms of pricing. So we feel like we're getting our fair share. But we're getting it at the unit economics that we're comfortable with.

This is really going to be about credit selection and I think thats, where we have the advantage in terms of pricing. So we feel like we're getting our fair share, but we're getting it at the unit economics that we're comfortable with.

Okay, Great and then.

Speaker 5: Okay, great. And then we'd be interested in hearing your latest thoughts on potential for consolidation in the industry.

Would be it shouldnt hearing your latest thoughts on potential for consolidation in the industry.

Speaker 3: Yeah, I don't think much has changed. I still believe there needs to be a catalyst. I don't really believe the GSEs are a hurdle to it, in my view, whether they say more or less. This kind of points to less, though, Mark, in terms of scale, right? I mean, you really need six sales forces running around and talking to lenders, which we believe will continue to consolidate.

Yes, I mean, there I don't think much has changed I still believe there needs to be a catalyst I don't really believe the gse's or a hurdle to it and.

In my view.

Whether they say more or less a kind of this kind of points to less though mark in terms of scale right. I mean, indeed really need six salesforce is running around and talking to lenders, which we believe will continue to consolidate.

And in terms of kind of our revenues since its all price driven this idea of lost market share is really kind of an old adage to be quite honest and you would say when you have combined companies scale is actually going to matter to deliver better pricing.

Speaker 3: And in terms of, you know, kind of the revenue, since it's all price-driven, this idea of lost market share is really kind of an old adage, to be quite honest. And you would say when you combine companies, scale is actually going to matter to deliver better pricing to borrowers, especially with technology. So longer term, you know, I still think it makes sense, but there needs to be a catalyst. And you know, I can't really speak to that. I haven't seen any catalyst. I think the catalyst, my gut is, is there's going to be credit.

So borrowers, especially with technology, so longer term I see.

Still think it makes sense, but it needs to be a catalyst and I can't really speak to that I haven't seen any catalyst I think the catalyst my gut is there's going to be credits. So if there is an event where.

Speaker 3: So, if there's an event where, you know, the companies kind of differ in terms of capitalization, leverage, expense management, and there's a credit event, you know, that probably could trigger consolidation more so than the environment we're in today, where, you know, credit's relatively benign, and all of the companies are doing, I think, very well.

The company's kind of differ in terms of capitalization and leverage.

Spence management and Theres a credit event.

That probably could trigger consolidation more so than the environment. We're in today, where credit's relatively benign and all of the companies are doing I think very well.

Okay, Great I appreciate it.

Speaker 1: Our next question comes from Rick Shane from J.P. Morgan. Please go ahead, your line is open.

Our next question comes from Rick Shane from JP Morgan. Please go ahead. Your line is open.

Hey, good morning, everybody and thanks for taking my question.

Speaker 4: Hey, good morning, everybody, and thanks for taking my question. So we're entering or we're in the midst of a really interesting competitive environment for originators with the market shrinking.

So we're entering or we are in the midst of a really interesting competitive environment for originators with the market shrinking.

Speaker 4: And as we've seen in the past, there are a lot of behaviors that occur in terms of pricing, in terms of potentially starting to weaken credit standards a little bit. The final factor that we're going to be facing is that there has been so much home price appreciation, and so a lot of the refi activity that we would expect in the near term will be cash-out refi.

And as we've seen in the past there are a lot of behaviors.

That occur in terms of pricing in terms of.

Potentially.

Starting to choose we can credit standards a little bit.

The final factor that we're going to be facing is that there has been so much home price appreciation and so a lot of the refi activity that we would expect in the near term will be cash out refi.

Speaker 4: All of these potentially change the credit profile for you. I'm curious how you think about managing credit risk in an environment where there's probably a little bit more aggressive behavior on behalf of the original.

All of these potentially change the credit profile.

For you I'm curious, how you think about managing credit risk in an environment, where there is probably a little bit more aggressive behavior on behalf of the originators.

Speaker 3: Hey, Rick, it's Mark. Excellent question. And we've given some thought to it, to be quite honest, and we've talked a lot about it, you know, over the past few weeks. Think of it two ways. You know, big picture, we do have the hedging around the reinsurance, right? So we're kind of, I don't want to say we're capped out, but we have laid off a lot of the mezzanine risk. So if there's a credit kind of hiccup.

Hey, Rick it's Mark excellent question.

And we've given some thought to it to be quite honest and we've talked a lot about it.

Over the past past few weeks I think of it two ways.

Big picture.

We do have the hedging around the reinsurance right. So we're kind of I don't say were capped out but we have laid off a lot of the mezzanine risk. So if theres a credit kind of hiccup and I do think we've taken a lot of the volatility out of the model and Thats again things investors, having quite real.

Speaker 3: I do think we've taken a lot of the volatility out of the model.

Speaker 3: things investors haven't quite realized. We're not gonna probably realize it.

So we're not going to probably realize it until there is an event.

Speaker 3: until there's an event. The second thing, which is probably more answering your question in a better manner, is again the engine that we have on the front end. It's kind of built for this, Rick, right? I mean, think about rate cards that are out there today.

The second thing, which is probably more.

Answering your question in a better manner as again the engine that we have on the front end, it's kind of built for this Rick right. I mean think about rate cards that are out there today.

Speaker 3: And some in the industry still, whether it's lenders or mortgage insurers, still like the rate cards.

And some of the industry still whether its lenders or mortgage insurers still like the rate cards, because it's it's a simpler way to get share, but our engines not a market share tool. It's a risk management tool. So again, let's play out your scenario credit gets a little looser right cash out Refis I can argue your lenders are always going to.

Speaker 3: It's a simpler way to get share, but our engine's not a market share tool, it's a risk management tool. So again, let's play out your scenario. Credit gets a little looser, right? Cash out refis, I can't argue. Lenders are always going to reach. That's what they try to do.

<unk>, that's that's what they try to do do we really want to be pricing every $760 90 LTV across the country the same.

Speaker 3: Do we really want to be pricing every 7, 60, 90 LTV across the country the same?

Speaker 3: I don't think so, and that's what rate cards do. I think with the engine, and again, we're not really relying on FICA because we're relying on the raw credit bureau information, which has mortgage payments and all those other factors besides.

I don't think so and Thats what rate cards do.

I think with the engine and again, how we are we're not really relying on CECO, because we're relying on the raw credit Bureau, information, which has mortgage payments and all those other factors. Besides a FICO, which is really looking more at an unsecured type performance.

Speaker 3: you know, a FICA, which is really looking more at an unsecured type performance.

Speaker 3: And we're also building out, we haven't done this, you know, yet, we're in the process of building out a better severity portion.

And we're also building out we haven't done this yet we're in the process of building out a better.

Severity portion set a model. We can then picking shoes that we liked loans that we like and I think that's going to become more important win.

Speaker 3: to the model, we can then pick and choose loans that we like. And I think that's going to become more important when the environment gets a little rougher in terms of credit.

And the environment gets a little rougher in terms of credit.

And.

Speaker 3: And also there could be some differentiation amongst MSAs in terms of HPA, right? We're seeing certain MSAs where the HPA has really spiked, I think spiked a little bit more than you would think from a supply and demand standpoint. I don't think you want to price those borrowers as well if you want to do it in an environment where the HPA has been a little bit more moderate. So again, this is going to play out over time.

And also there could be some differentiation amongst msas in terms of HPA growth rate, we're seeing certain phase where the HPA has really spiked I think spiked a little bit more than you would think from a supply and demand standpoint, I don't think you want to price those borrowers as well as you want to do it in an environment, where the HPA is.

I mean, a little bit more moderate so again this is going to play out over time.

Speaker 3: But we feel like we really have the tool and the information to make better decisions going forward. It doesn't matter in a market like this where everything is good and you can lower price or reduce price across the board, which is actually not a bad strategy when credit's benign, but it's probably not a great strategy when things get a little rougher.

But we feel like we really have the tool and the information to make better decisions going forward doesn't matter in a market like this where everything is good and you can in a lower price or a reduced price across the board, which is actually not a bad strategy when credit is benign, but it's probably not a great strategy win.

Things get a little rougher.

Okay. That's great. Thank you so much.

Sure.

Speaker 1: Our next question comes from Tommy McJoint from KBW. Please go ahead, your line is open.

Our next question comes from Tony Ms Joint from <unk>. Please go ahead. Your line is open.

Hey, guys. Good morning, Thanks for taking my question.

Speaker 6: Hey guys, good morning. Thanks for taking my question. So, first one I want to ask about is the expenses. So, they came in a little bit below the full year guide of $170 million to $175 million this year. So, I wanted to see if there are any drivers of that. And then, when you think about next year, it looks like you're modeling about 5% to 8% growth in operating expenses. Can you talk about some of the puts and takes there in terms of what you guys are investing in and kind of what you think can drive that, you know, slight increase?

First one I wanted to ask about is the expenses they came in a little bit.

Below the full year guide of 100 gig into hiring from the $5 million this year.

Any drivers of that and then when you think about next year. It looks like you're modeling about 5% to 8% growth on operating expenses can you talk about some of the puts and takes there in terms of what you guys are investing in and kind of what you think can drive that slight increase.

Speaker 7: You know, we'll continue to invest. I think in Mark's comments, we talked about investment in technology and people. People are really the primary driver of our expense base. It's about two-thirds of our expense costs. So that really would be the driver for next year. In terms of this year, we were, you know, just slightly below our range, and I think it's probably just good expense management.

We will continue to invest I think in marks comments, we talked about investments in technology and people people are really the primary driver of our expense base. It's about two thirds of our expense cost.

So that's really would be the driver for next year in terms of this year. We were just slightly below our range and I think it's probably just good expense management.

Speaker 8: Okay, great. And then on a different topic, so the dividend has now been raised for consecutive quarters now. Could you remind us how you think about the dividend versus buyback analysis? And are you targeting a certain yield or combined payout ratio with that?

Okay, Great and then.

And different topic. So the dividend has now been raised four consecutive quarters now.

Can you remind us how you think about the dividend versus buyback analysis and are you targeting a certain yield or combined payout ratio with that.

Speaker 3: That's a good question, Tommy. I would say, you know, we returned a third of the capital in 2021. I wouldn't say that's a good rule of thumb going forward, but it's something to keep in mind.

Yes, it's a good that's a good question Tommy I would say we returned a third of the capital in 2021, I wouldn't say that's a good rule of thumb going forward, but its something to keep in mind, we generally favor.

Speaker 3: We generally favor, you know, we take a measured approach to it. So we're, we like both. And I think when we take a look at it, it's not just kind of what the payout ratio is, it's really a matter of managing ROEs, right? So as the business continues to grow, ROEs are important. You're generating excess capital.

We take a measured approach to it so we like both and I think when we take a look at it it's not just kind of what the payout ratio is it's really a matter of managing row right. So as the business continues to grow ROE are important and youre generating excess capital, we kind of break it out so <expletive> .

Speaker 3: we kind of break it out. So, you know, dividends and repurchases both reduce the denominator in that calculation. And as we think about new investments

Dividends and repurchases dose reduce the denominator in that calculation and as we think about new investments outside of the core right outside of the core I would bet. The ventures unit that we have also essent re you can kind of lumped into that those are ways to increase the numerator. So.

Speaker 3: outside of the core, right? You know, outside of the core, I would, you know, the ventures unit that we have. Also S&RE, you can kind of lump into that. Those are ways to increase the numerator. So I think we're about, we have a balanced approach to it because over time, that's really your goal. So we don't want to get too far ahead of ourselves in.

Where are we.

A balanced approach to it because over time, that's that's really our goal. So we don't want to get too far ahead of ourselves and kind of increasing the payout and then we're a little short when we think there is an interesting opportunity to grow the business or if there's a credit event right. So again, that's kind of how we think about it all in we favor dividends that was our first.

Speaker 3: kind of increasing the payout, and then we're a little short when, you know, we think there's an interesting opportunity to grow the business, or there's a credit event, right? So, again, that's kind of how we think about it. All in, we favor dividends. That was our first approach to it. We think putting cash back in investors' hands.

Roche to it we think putting cash back and investors' hands is a very tangible demonstration of kind of.

Speaker 3: is a very tangible demonstration and our confidence.

And our confidence in the sustainability of our cash flows and I think we feather that we layer in repurchases around that so I think it's pretty balanced approach to it and I would expect that.

Speaker 3: and the sustainability of our cash flows. And I think we feather that, you know, we layer in repurchases around that. So I think it's a pretty balanced approach to it. And I would expect that to continue going forward.

To continue going forward.

Presenting thoughts Marc.

Youre welcome.

Speaker 1: As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Mahir Bhatia from Bank of America. Please go ahead. Your line is open.

As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.

Our next question comes from Mihir Bhatia from Bank of America. Please go ahead. Your line is open.

Hi, Thank you for taking my questions.

Speaker 9: Hi, thank you for taking my questions. Maybe I want to start with just with the NIW. And I understand the pricing and the, and you don't worry about market share and the pricing. That's fine. So I just wanted to make sure I'm understanding this correctly. Was it really just a function of the business that was coming through the market? You know, the mix of the business coming through the market.

Maybe.

Wanted to start with just with the <unk> and I understand the pricing and the and you don't worry about market share and the pricing was fine. So I just wanted to make sure Im understanding. This correctly was it really just a function of the business that was coming through the market you know the mix of the business coming through the market.

Speaker 9: was such that it was maybe weighted a little bit more this quarter towards pockets that are not as exciting for you from a return profile standpoint and that's really what drives the drove the quarter over quarter or was there some change you made as you adjusted your models to

Was such that it was maybe weighted a little bit more this quarter towards buckets that are not as exciting for you from a return profile standpoint, and that's really what drives us, though drove the quarter over quarter or was there. Some change you made as you adjust your models to where you may be pulling back in certain buckets, so certain geographies or something like that.

Speaker 9: where you maybe put it back in certain pockets or certain geographies or something like that.

Yes, I mean, it is a little bit of both in there again again the model is new and it has it's not based on FICO. So that it was fully implemented I think in a 91% of the model is now kind of credit based theres still some.

Speaker 3: Yeah, I mean, there's a little bit of both in there. Again, again, we're the model is new, and it has, it's not based on FICO. So that it was fully implemented, I think.

Speaker 3: you know, 91% of the model is now kind of credit-based. There's still some, you know, some of the lenders, you know, still rely on kind of the first version of it because we're not getting those additional data pieces. So again, we're in that testing period, but I would say.

And are some of the lenders still rely on kind of the first version of it because we're not getting those additional data pieces. So again, we're in that testing period, but I would say just to take a step back here. So we didn't really our average premium rate didn't really change.

Speaker 3: Just to take a step back, we didn't really, our average premium rate didn't really change.

Speaker 3: So, you can read into that what you want, but our average premium rate on NIW didn't change. We didn't really adjust overall pricing up or down. There might have been pockets.

You can read into that what you want but our average premium rate on IW didn't change, we didn't really adjust overall pricing up or down there might have been pockets of.

Speaker 3: of up or down, but overall, so you can kind of read into it that, you know, others probably are leaning in, right? I mean, it's clear that when you can see how the numbers have come out just with the four MIs, you know, some NIW declined and some didn't.

Up or down, but overall, so you can kind of read into with that.

Others, probably are leaning in right I mean, it's cleared and when you can see how the numbers have come out just with a four <unk>.

<unk> declined and some didn't.

Speaker 3: And, you know, I'm like a broken record here, but, you know, if your share's up a lot...

And I'm like a broken record here, but.

If your shares up a lot it's not because you did anything better it's because you had lower price I mean, that's that's.

Speaker 3: It's not because you did anything better, it's because you had a lower price. That's what it is. And again, sometimes they lean in and sometimes they back out.

What it is and and again, sometimes they lean in and sometimes they back out that's that's the difference I think between us.

Speaker 3: That's the difference, I think, between us. You know, we really look at the engine more as a risk management tool.

We really look at the engine more as a risk management tool and I think it can be used has a market share tool because it's harder.

Speaker 3: And I think, you know, it can be used as a market share tool because it's harder to, you know, you can go in and change the price.

You can go in and change the pricing and rent share for a period of time, but.

Speaker 3: in rent share for a period of time, but I think, again, our average premium rate changed or stayed the same, and we believe the share dropped. So, again, you can read into that what you want.

I think again, our average premium rate changed or stayed the same and we believe the share dropped. So again you can read into that what you are.

Sure No no that's that's.

Speaker 9: Sure, no, no, that's helpful. And then just, I wanted to ask maybe a big picture question. On slide 10, you highlighted some of the key milestones in essence evolution. So when we look at this slide next here.

Helpful. And then just I wanted to ask maybe a big picture question on Slide 10, you highlighted some of the key milestone in essence evolution. So when we look at this slide next year.

Speaker 9: What are we going to see for 2022? What is the big thing you're working on this year that, you know, that we should be thinking about from a strategic standpoint that maybe gets added?

What are we going to see is for 2022, what is the big thing you are working on this year that.

That we should be thinking about from a strategic standpoint that maybe gets added mixed U S.

Speaker 3: That's a good question. I wouldn't say we have something up our sleeve every year. I mean, it's a long-term business. I don't want to hold out hope that we're going to innovate something new. I would say longer term, right? I mean, longer term here, take a step back. And this is kind of how we think about it. The core business...

Good question I wouldn't say, we have something up our sleeve every year I mean still long term business I don't want to hold out hope that we're going to innovate something new I would say longer term and the longer term here and take a step back and this this is kind of how we think about it the core business. We believe continues to drive really good returns and if we can.

Speaker 3: we believe continues to drive really good returns. And we can get caught up in the unit economics. Are they as good as they were a few years ago? No, they're not. The pricing's come down significantly. So it's not, they're not as good as they were. They're still pretty good. And you have to balance that with the market's been a lot bigger. So the general cash flow that's coming out of our business now is quite large.

Get caught up in the unit economics are they as good as they were a few years ago. No. They are not the pricing has come down significantly. So it's not they're not as good as they were but still pretty good and you have to and you have to and you have to balance that with the market has been a lot bigger so the general cash flow that's coming out of our business now is quite large.

It's quite large and you are talking about really.

Speaker 3: It's quite large and you're talking about really, you know, 80% operating margin, $700 million of operating cash flow.

80% operating margins $700 million.

Free cash flow.

Speaker 3: That's pretty good. So you can you can talk about it in basis points, but or you could talk about it in cash And we so we like the business. We also think

It's pretty good. So you can you can talk about it in basis points, but or you could talk about it in cash and so we like the business. We also sink.

Speaker 3: You know, again, we do believe housing is still relatively strong, again, in the longer term. Let's take three to five years.

And again, we do believe housing is still relatively strong again in the longer term, let's take three to five years. The core demand around millennials is still there I mean, you've done the work before you've seen it you have $4 million to $5 million, new kind of potential homeowners coming online over the next.

Speaker 3: kind of potential homeowners coming online over the next, again, four plus years, that's pretty good. So we think kind of the intrinsic or core demand will continue. You know, that'll ebb and flow a little bit, right? If rates go up, that'll cause those homebuyers to pause. We saw that a lot in the fourth quarter of 2018. I think you'll see it again, especially if rates go over four. But keep in mind, in 2018, we're talking about rates going to five. So it's all relative, but I think.

Again, four plus years, that's pretty good so we think kind of intrinsic or core demand will continue.

That will ebb and flow a little bit right. If rates go up that will cause those those home buyers to pause and we saw that a lot in the fourth quarter of 2018, I think youll see it again, especially if rates.

Speaker 3: you know, go over 4. But, you know, keep in mind in 2018, we're talking about rates going to 5.

Go over four but keep in mind in 2018, we're talking about rates going to <unk>. So it's all relative but I think longer term. The core demand is there another thing thats, probably not that well appreciated is just how where our book is situated you have 75% of the book that was originated in the last two years.

Speaker 3: So it's all relative, but I think longer term, the core demand is there. Another thing that's probably not that well appreciated is just how, where our book is situated. You have 75% of the book that was originated in the last two years, you know, with an average rate of just a little bit above 3%.

With an average rate of just a little bit above 3%.

Speaker 3: uh... you know i think the other twenty five percent is before that and the rate there is you know kind of you know north of

And I think the other 25% as before that in the right. There is kind of north of four so if you do get this spike in rates, which again is going to hurt new originations mostly refinance.

Speaker 3: So if you do get this spike in rates, which again is going to hurt new originations, mostly refinance.

Speaker 3: versus kind of core purchase demand, I think you have a chance for the book to extend.

<unk> kind of core purchase demand I think you have a chance to the book to extend.

Speaker 3: which I think is underappreciated. So when you think of that, and then just, again, in terms of the core business.

Which I think is underappreciated. So when you think of that and then just and again in terms of the core business.

Speaker 3: You know, again, that's part of, you know, the reason, you know, trying to put this all in context for investors, you know, Chris, you know, kind of moved over to be the head of the mortgage insurance business. And a lot of Chris's focus is just going to continue to focus on those.

<unk>, that's part of the reason I'm trying to put this all in context for investors you know, Chris kind of moved over to be the head of the mortgage insurance business and a lot of Christmas focus is just going to continue to focus on those every individual item around those unit economics right. So we talk about us kind of how we think about it. So if you think about <unk>.

Speaker 3: you know, every individual item around those unit economics, right? So we talk about us kind of how we think about it. So if you think about premium and losses, kind of that net underwriting income, you know, that's really S and H.

Premium and losses kind of that net underwriting income and Thats really <unk> and we're going to continue to try to improve essent edge I alluded to it earlier I think one of our goals. This year is to improve it around severity and to start modeling out kind of HPA impacts at a much a much more granular level than we have today.

Speaker 3: And we're going to continue to try to improve S&Edge. I alluded to it earlier. I think one of our goals this year is to improve it around severity and to start modeling out HPA impacts at a much more granular level than we have today. Again, those are signs for improvement. The other thing we'll be able to do or working on is levering Edge for other parts of the business. So to use some of that information to improve our underwriting or to actually make our underwriting more efficient.

Again, that's those are signs for improvement the other thing we will be able to do are working on is levering edge for other parts of the business. So to use some of that information to improve our underwriting or to actually make our underwriting more efficient we've made investments in technology around customer service a lot of what we call self service right. So it's easier.

Speaker 3: We've made investments in technology around customer service, a lot of what we call self-service, right? So it's easier for a customer to get into our system and get their answer versus they call their account manager, who calls our call center, who gives the answer. I mean, that's kind of how it was done.

For a customer to get into our system and get their answer versus a call. Their account manager who calls our call Center, who gives the answer I mean, thats kind of how it was done and if you think about just how how employees are right every employees of consumer and the consumer has and the ease of use of the consumer outside of work with.

Speaker 3: And if you think about just how employees are, right, every employee is a consumer.

Speaker 3: and the ease of use of the consumer outside of work with iPhones and iPads is so much more streamlined, they want to come into work and have the same experience. So I think we have that in mind.

Iphones and ipads as so much more streamlined they want to come in the work and have the same experience. So I think we have that in mind and we're going to try to do that experience because ease of use is a big deal.

Speaker 3: And we're going to try to do that experience because ease of use is a big deal for our customers. And again, now that we've moved to the cloud, hey, the cloud has a lot of great things. There's a lot of things about the cloud that you want to make sure you have a really strong infrastructure around that and make sure that it doesn't break down.

For our customers and again now that we've moved to the cloud.

The cloud has a lot of great things Theres a lot of things about the cloud that you want to make sure you have a really strong infrastructure around that and make sure that it doesn't break.

Speaker 3: So, it's different than when you had data centers, you had hot backup and warm backup. These are different issues.

So it's different than when you. When you had data centers you had hot backup and warm backup these are different issues.

Speaker 3: uh... that were that we're working with so again we have all the benefits of the cloud we have to manage some of the rest of the clout so and again i think having chris

We are that we're working with so again, we have all the benefits of the cloud, but you have to manage some of the risks of the cloud too and again I think having Chris do that day to day and spending the time on it with me I'm still involved obviously, but also frees me up to think about longer term what other engines can we create so the core engine always going to be.

Speaker 3: You know, do that day to day and spending the time on it, you know, with me, you know, I'm still involved, obviously, but also frees me up to think about longer term, you know, what other engines can we create? So the core engine always going to be tough to beat, but we have S and re, which we said continues to grow, albeit at a much smaller pace.

Tough to beat.

But we have Essent re which we said continues to grow, albeit at a much smaller pace.

Speaker 3: We like it and, you know, I've heard it from you before me here directly, like, geez, you know, how is Essent going to get into a new business, right? They've, you know, they've never done it and competitors haven't been able to do it. But look at Essentreme here. We started that back in 2014. It was a new business. It wasn't a business we were in. It actually writes business that we don't do. It's an extension and it's analogous to our core business, which is kind of how we think about some of these newer businesses.

We like it and I've heard it from you before mihir directly like Geez.

<unk> going to get into a new business right.

<unk> never done it competitors haven't been able to do it but look at <unk>, we started that back in two.

2014, it was a new business it wasn't a business we were in it actually writes business that we don't do it as an extension and it's analogous to our core business, which is kind of how we think about some of these newer businesses and I think it's been a big success right and when you look at it it's done two things it's allowed us to right.

Speaker 3: And I think it's been a big success, right? I mean, you look at it, it's done two things. It's allowed us.

Speaker 3: to write, you know, reinsure 35% of the core business over to Bermuda, which improves unit economics. And they're writing third-party business.

Reinsurer of 35% of the core business.

Over to the Bermuda, which improved unit economics, and they are writing third party business.

Both mainly with the Gse's and they have an MGA, which is <unk> seven insurers now that provides I would think a third of their income is fee and Thats a business again thats has been if we if we if it was a separate company and there's like six folks over there. So what they do is but they leverage our underwriting expertise de leverage.

Speaker 3: vote mainly with the gsc's and they have an mga which is seven insurers now that provides i would think a third of their income is fit

Speaker 10: And that's a business, again, that's, you know, has been, if we, if we, if it was a separate company, and there's like six folks over there. So what they do is, but they leverage our underwriting expertise, they leverage our modeling expertise. And again, as we think of new businesses or ventures, which again, is our kind of our third, you know, potentially growing engine, that, that's kind of how we think about it. And I'm going to spend more of my time.

Our modeling expertise and again as we think of new businesses, our ventures, which again is our kind of our third potentially growing engine. That's kind of how we think about it and I am going to spend more of my time thinking through how we how we can kind of create and grow that engine.

Speaker 3: thinking through how we can kind of create and grow that.

Speaker 9: Got it. Thank you so much for that. Very comprehensive, thanks.

Got it. Thank you so much for that very comprehensive thanks.

Sure.

Speaker 1: Our next question comes from Doug Harder from Credit Suisse. Please go ahead, your line is open.

Our next question comes from Doug Harter from Credit Suisse. Please go ahead. Your line is open.

Speaker 7: Thanks. Mark, can you talk about home price appreciation? Obviously, a net positive for the existing book, but how you think about that from an affordability standpoint on NIW today, and just if you put it all together, the outlook for how that plays out over the next couple of years?

Thanks, Mark can you just talk about home price appreciation kind of how.

A net positive for the existing book, but kind of how you think about that.

An affordability standpoint on IW today.

Kind of as you put it all together.

Outlook.

For for how that plays out over the next couple of years.

Speaker 11: Yeah, I mean, Doug, I would break it into two things. I do think affordability in certain markets is going to become an issue, right? I mean, given the rise in HPA, and we think it could rise another seven, eight-ish percent even this year, but I do think you have to look at it on a regional basis.

Yes, I mean, Doug I would break it into two things I do think affordability in certain markets is it going to become an issue right I mean, given the rise in HPA and we think it could rise another seven eight ish percent, even this year, but I do think you have to look at it on a regional basis, so as I alluded to earlier.

Speaker 3: As I alluded to earlier, you know, that, you know, higher rates could actually, you know, that that could actually help.

That higher rates could actually.

That that could actually help.

Speaker 3: kind of stem the tide in terms of HPA growth, although it doesn't quite help affordability. I think it could potentially slow down and have that kind of pause.

Kind of stem the tide in terms of HVA growth, although it doesn't quite help affordability I think it'll it could potentially slow down and have that kind of a pause.

Speaker 3: on some of the purchases, although, again, longer term, I don't think it impacts the demand. And when I say pause, what happens, you know, because we've talked to borrowers and we've talked to loan officers, you know, when you first go in and the price is higher or rates are higher, there's a – you have to almost readjust your expectations. You're going in thinking the rate was going to be 3 and now it's 4.

On on on some of the purchases, although again longer term I don't think it impacts to demand and when I say pause what happens because we've talked to borrowers and you talk to loan officers.

When you first go in and the prices higher our rates are higher that there is a you have to almost readjust your expectations youre going into thinking that rate was going to be three announced for.

Speaker 3: Do you wait? Do you wait to save more money for a down payment? Do you use mortgage insurance, which obviously we would like to see? But I do think people at some point, these are life decisions that aren't generally driven by the numbers per se. But I do think it takes time for people to readjust.

Do you wait.

Do you wait for that to save more money for a down payment to use mortgage insurance, which obviously, we would like to see.

But I do think people at some point. These are these are our life decisions that arent generally driven.

Bye Bye bye bye the numbers for <unk>, but I do think it takes time for people to readjust and then getting back to <unk> again I think this is from from our from our <unk> youre going to make different decisions around our borrower and youre going to youre going to youre going to incorporate some of that affordability into your front end decisions right.

Speaker 3: and then getting back to ESSEN, again, I think this is from our ESSEN edge, you're going to make different decisions around the borrower and you're going to

Speaker 3: you're gonna incorporate some of that affordability into your front-end decisions, right? So if HPA was up, you know, we'll pick an MSA, right? There are certain MSAs in the Southwest that are up like 45% over the year. It's pretty heated. So someone there is more likely to be stretched.

Of HPA was up and I will pick an MSA right. There are certain msas in the southwest that are up like 45% over the over the over the year, it's pretty heated so someone there is more likely to be stretching.

Speaker 3: for the home, so you're probably going to price that differently, again, than another market where the HBA has been more moderate. So I think it's just like in the last recession, Doug, which I actually do remember because I unfortunately lived through it, even though it was 15 years ago, and folks tend to have a...

For for the home. So you are probably going to price that differently again that another market, where the HVA has been more moderate and so I think it's just like in the last recession, Doug, which actually do remember because unfortunately lived through it even though it was 15 years ago and folks tend to have.

Speaker 12: short memories there was it was the sand states that brought down a lot of things that that it was that's where that most of the damage was done.

Short memories. There was it was the sand states that brought down a lot of things.

And it was that's where that most of the damage was done so part of when we say credit selections key you can almost identify they're not the same markets as they were last time, but kind of.

Speaker 3: So part of, you know, when we say credit selection's key, you know, you can almost identify, they're not the same markets as they were last time, but kind of.

Speaker 3: you know, dodging some of the bullets there and maybe overallocating capital to lesser or more, you know, more markets where, again, the intrinsic value is holding up, I think will be a little bit of a differentiator, again, if there's a dislocation in the market.

Dodging some of the bullets, there and maybe over allocating capital to a lesser or more more markets, where again the intrinsic values holding up I think will be a little bit of a differentiator again, if there's a dislocation in the market.

Got it and then is that kind of the basis behind what you were saying of spending time on the engine for severity.

Speaker 7: Got it. And is that kind of the basis behind what you were saying of spending time on the engine for severity? Yes. Okay. Makes sense.

Yes.

Okay makes sense. Thank you mark.

Yes.

Speaker 1: And our last question will come from Ryan Gilbert from BTIG. Please go ahead, your line is open.

And our last question will come from Ryan Gilbert from BTG. Please go ahead. Your line is open.

Hi, Thanks, Good morning, guys.

Speaker 7: Hi, thanks for warning us. I wanted to go back to the.

I wanted to go back to that.

Speaker 7: the comments you made around lending standards, and I guess from a practical perspective, you know, so far, and granted it's only been a month in 2022, but in practice, are you seeing lenders actually loosen their standards so far this year? And as we, you know, look out to the rest of the year with the expectation for Federal Reserve rate hikes, how do you think lending standards evolve and your own thoughts around pricing going forward? Pricing and underwriting, I guess.

The comments you made around lending standards.

And I guess from a practical perspective.

So far and granted it's only been a month in 2022, but in practice are you are you seen lenders actually loosened their standards and so far this year and as we look out to the rest of the year with expectations for Federal reserve rate hikes, how do you think lending standards evolve and your own thoughts around.

Pricing going forward.

Pricing and underwriting I guess going forward sure.

Speaker 3: Sure. Really good questions, Ryan. I would say, remember, keep in mind...

Sure.

Really good questions Ryan I would say remember keep in mind and when you talk about loosening standards.

Speaker 3: And when you talk about loosening standards, there's a lot of guardrails, right? And we've talked about this for a long time. QM is a guardrail, and the GSE's doing an excellent job.

There's a lot of guardrails right and we've talked about this for a long time QM as a guardrail on the Gse's do an excellent job.

Speaker 13: All right, DU and LP have come a long way, and I would say our engine

<unk> have come a long way and I would say our engine.

Speaker 14: Edge is kind of applicable to there, so it's in terms of how we access data and how we look at it.

Edge is kind of applicable to there so in terms of how we how we access data and how we look at it so.

Speaker 15: a lender can want to loosen credit all they want. It's not going to get past the GSEs. And so I think that's something from an MI investor perspective.

And lender can want to loosen credit all they want is not going to get past the gse's. So.

And so I think thats something for from an Investor perspective keep focus on right. Because again, that's we have that guardrail, we have our upfront pricing.

Speaker 3: keep focused on, right? Because, again, that's, you know, we have that guardrail. You know, we have our upfront pricing, which we help, we can delineate between some of the goods and the bads, and we have that backstop of the GSEs not letting it get through. I think the loosening credit, the thing to be on the watch for, Ryan, is they're going to, you know, the lenders maybe try to go more to the PLS market, right? And that's not, that's, you know, that's.

Which we hope we can delineate between some of the goods and the beds and we have that backstop of the GSE is not letting and get through I think the loosening credit to thing to be on the watch for Orion is theyre going to the lenders may be try to go more to the pls market right and that's not that's I'm going to say, that's the wild west, but thats not.

Speaker 3: I don't want to say that's the Wild West, but that's not guided by the GSEs. A lot of smart investors, you have the rating agencies.

That's not guided by the GSE has a lot of smart investors you have the rating agencies, but they don't have the modeling in kind of that first line of defense of the Gse's have and if the pricing.

Speaker 16: but they don't have the modeling and kind of that first line of defense that GSEs have. And if the pricing in a higher yield market, does it help there? Do more loans go PLS? If lenders can try to get another source of liquidity, they're going to do it. We don't play in that market, per se. We haven't played in that market in 15 years, so is there an opportunity for us to play in?

And a higher yield market does it help there to do more loans go pls, if lenders can try to get another source of liquidity that theyre going to do it we don't really we don't play in that market per se we haven't.

Play to that market in 15 years. So is there an opportunity for us to plan.

Potentially if the rating agencies come onboard, but then again year and really want to have credit selection is going to be key there because you don't have that that kind of backstop that you have with the GSE. So again, we feel pretty comfortable around the credit business going to the Gse's I think again, we take a lot of again comfort just in the Gse's.

Speaker 17: Potentially, if the rating agencies come on board, but then again, you really want to have credit selection is going to be key there because you don't have that kind of backstop that you have with the GSEs. So again, we feel pretty comfortable around the credit now that it's going to the GSEs. I think, again, we take a lot of, again, comfort just from the GSEs in their protocols, in their engines, in their QC abilities. Once it gets to the POS market, if it does, and there's a chance for us to play, I think we're going to have a lot of confidence in the GSEs. I think we're going to have a lot of confidence in the GSEs. I think we're going to have a lot of confidence in the GSEs.

Their protocols and their engines in their QC abilities. Once it gets the pls market. If it does and there is a chance for us to play.

I think they are going to have to we're going to have to do a little bit more work in some of these loans could go to bank balance sheets, but in general a lot of the banks, we deal with on the regional and the National side are very conservative so usually they're going to do if they're going to do like a non QM issue is going to be more kind of on the jumbo side in those those loans that we've had over the past 10 years have performed.

Speaker 3: I think there we're going to have to do a little bit more work. Some of these loans could go to bank balance sheets, but in general, a lot of the banks we deal with in the regional and the national side are very conservative. So usually they're going to do like a non-QM-ish, it's going to be more kind of on the jumbo side. And those loans that we've had over the past 10 years have performed extremely well.

Extremely well.

Speaker 7: Okay, got it. Last quarter we talked about flat base premiums in 2022. Do you still feel good about that target?

Okay got it.

Last quarter, we talked about.

Flat based premiums in 2022 do you still feel good about.

That target.

Yes, I mean, I think it's the base Premier if you have to break it down the base premium rate.

Speaker 3: Yeah, I mean, I think it's, you know, the base premium, you have to break it down the base premium rate.

Speaker 18: is really a function of a pricing on new insurance, and again, some of the pricing is lower over the past couple of years, or over the past three years, and as we said, that's been kind of, you know, 75% of our portfolio, so that's working its way, so I could see the base premium rate lightening up.

It's really a function of our pricing on new insurance and again some of the pricing is lower over the past couple of years or over the past three years and as we said thats been kind of 75% of our portfolio. So thats working its way so I could see the base premium rate lightening up.

Speaker 3: A bit this year and then if you think about kind of the all-in premium a lot of drivers there Ryan You know we're looking at probably

This year and then if you think about kind of the all in premium a lot of drivers there Ryan.

Looking at probably a reduction in singles cancellation income I mean, we only did 2% singles in the fourth quarter. The whole portfolio is less than 10% now so even if you look at our unearned premium reserve. There's only so much you can get from that so again, it's hard to predict again.

Speaker 3: a reduction in singles cancellation income. I mean, we only did 2% singles in the fourth quarter. The whole portfolio is less than 10% now. So even if you look at our unearned premium reserve, there's only so much you can get from that. So again, it's hard to predict, again, where it is today in terms of where it's going. And then the seeded premiums line, we would expect that to grow. We are in the market currently for a quota share.

Where it is today in terms of where it's going and then.

The ceded premiums line, we would expect that to grow where we are in the market.

We are currently for a quota share.

Speaker 19: uh... and and we haven't we did not do a quota share

And we haven't we did not do a quota share in 2021.

Speaker 20: in 2021. We like the aspect of it again, so we're back in the market. We want to diversify kind of our sources of reinsurance, and that's actually a bigger hit to premium rate. However, it also lowers losses and lowers expenses. So it kind of comes out in a wash, but if you just focus on premium rate, you probably come to the wrong conclusion.

We like the aspect of it again, so we're back in the market we want to diversify.

Our sources of reinsurance and that's actually a bigger hit their premium rate.

However, it also lowers losses and lower expenses. So it kind of it kind of comes out in the wash, but if you just focus on premium rate you're probably come.

To the wrong conclusion, but again just.

Speaker 21: you know, in terms of the yield, it's still, you know, I think we exited the year, you know, kind of in the 40-ish range, but again, for it to, you know, decline, you know, over the course of the year because of some of those factors, you know, I wouldn't surprise me. Okay. Got it.

In terms of the yield is still and I think we exited the year kind of in the 40 ish range, but again for to.

On a decline.

And over the course of the year because some of those factors I wouldn't surprise me.

Okay got it thanks very much.

Sure.

Speaker 1: And we have a question from Jeffrey Dunn from Dowling and Partners. Please go ahead, your line is open.

And we have a question from Geoffrey Dunn from Dowling <unk> partners. Please go ahead. Your line is open.

Thanks, Good morning.

Speaker 22: Thanks. Good morning. Mark, I just wanted to follow up on what you just said about the QSR. How do you think about a committed QSR when you price new business? Do you factor the return leverage into your pricing, or do you still do it on a, I guess, a naked basis?

Mark I just wanted to follow up on what you just said about the <unk>.

How do you think about <unk>.

Committed <unk> when your price new business do you factor the return leverage into your pricing or do you still do it on a I guess.

<unk> basis.

Yes.

Amy.

Speaker 23: We look at it both ways. We clearly look at it unlevered. I still think that's the purest way to look at it because you can't see, you can kind of fool yourself, Jeff. You say, hey, we have a little bit of leverage over here and you know, we used a little debt. You can kind of rationalize.

We look at it both ways, we clearly look at it on lever I still think that's the purest way to look at it you can't see you can kind of full yourself Jaffe say, hey, we have a little bit of leverage over here and we used a little that you can kind of rationalize.

Speaker 3: You know, lower pricing. I do think that we clearly look at it. There's a lift to it. There's no doubt about it. But when we think about kind of

Lower pricing I do think we clearly look at it if there is a lift to us theres no doubt about it but when we think about kind of.

Speaker 3: you know, as we price, it's still the unlevered basis. And that's really the difference. When we say unit economics, you know, we're still kind of in that 12 to 15 range, depending on kind of what's going on in the market. Clearly closer to 12-ish now, given, you know, kind of where pricing is.

As we price, it's still the unlevered basis, and Thats really the difference when we say unit economics, we're still kind of in that 12% to 15 range, depending on kind of what's going on in the market clearly closer to 12 ish now given kind of where pricing is and with leverage in some of those things that you can get to that.

Speaker 24: You know, with leverage and some of those things, you can get to that kind of mid-teens return. And that's kind of what we're seeing, what we're printing through the P&L, right? So obviously, through the P&L, you're going to get the benefits of those things along with the tax rate. But we still like the discipline of looking at it unlevered.

Mid teens return and that's kind of what we're seeing what we're printing through the P&L right. So obviously through the P&L, you're going to get the benefits of those things along with the tax rate, but we still like the discipline of looking at it unlevered.

Sure.

Great Alright, thank you youre.

Youre welcome.

We have no further questions I'd like to turn the call back over to management for any closing remarks.

Speaker 25: If we have no further questions, I'd like to turn the call back over to management for any closing remarks.

Speaker 3: No, thanks everyone for your participation today and have a great weekend.

No. Thanks, everyone for your participation today and have a great weekend.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Speaker 26: This concludes today's conference call. Thank you for your participation. You may now disconnect.

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