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spk00: Thank you for standing by and welcome to the Ascent Group Limited Fourth Quarter 2020 Earnings 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. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Chris Curran, Senior Vice President of Senior Relations. Thank you. Please go ahead, sir.
spk07: Thank you, Justin. Good morning, everyone, and welcome to our call. Joining me today are Mark Cassell, Chairman and CEO, and Larry McAlee, Chief Financial Officer. Our press release, which contains Essence financial results for the fourth quarter and full year 2020, was issued earlier today and is available on our website at Essingroup.com. Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in Exhibit M of our press release. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release. The risk factors included in our Form 10-K, filed with the SEC on February 18, 2020, as subsequently updated through other reports and registration statements filed with the SEC, which are also available on our website. Now, let me turn the call over to Mark.
spk01: Thanks, Chris, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2020 financial results. While 2020 was a challenging year for our franchise, we are encouraged by our fourth quarter results as defaults related to COVID-19 continue to decrease from the peak experience back in June. For the fourth quarter, we earned $124 million, or $1.10 per diluted share, while for the full year, we earned $413 million, or $3.88 per diluted share. At the outset of the pandemic, it was clear that the U.S. economy and our business were going to be impacted. However, we had limited vision as to the extent of this impact. Now, with almost a year gone by and having more visibility, we believe that the impact of the COVID-19 defaults on our insured portfolio has been contained. As such, for new defaults reported during the fourth quarter, we have reverted to our pre-COVID reserve methodology, and our view remains that the pandemic is an earnings event and not a capital event for Essent. Heading into 2021, our outlook on the economy and our business is increasingly optimistic. Unlike the great financial crisis when housing played a big role in the downturn, during the pandemic, housing has been a bright spot in the economy. Low mortgage rates and strong demand for single-family homes have been the primary drivers of robust mortgage volumes, and we believe that this strength will continue into 2021. On the business front, we continue to refine our risk-based pricing strategies in managing a profitable mortgage insurance portfolio. Since deployment, we view our pricing engine as a risk management tool and not a market share tool. In fact, the pandemic was a catalyst in demonstrating this, as we quickly changed price in response to the weakening economic environment. Looking forward, we remain focused on enhancing our engine through more granular analytics and sophisticated use of data. It's our belief that with the evolving intersection of mortgage finance and technology, we have just scratched the surface in our risk-based pricing capabilities. We continue to be pleased with the high credit quality of our NIW, noting that since the onset of the pandemic, our credit profile has been strong. This is primarily due to the credit tightening by the GSEs and MIs in response to the pandemic, along with an increase in the amount of refi mortgages. For the fourth quarter, our NIW maintained an average FICO of 748 compared to 745 for the fourth quarter a year ago. At December 31st, our balance sheet is strong as we have $3.9 billion of gap equity, robust liquidity, and access to $2 billion of excess of loss reinsurance. All these are the result of our buy, manage, and distribute operating model and other measures taken in 2020 to bolster our financial strength and flexibility. During the year, we raised $440 million of equity, obtained $950 million of XOL reinsurance protection, and increased our credit facility, which provides access to $300 million of undrawn capacity at December 31st. Combined with $728 million of operating cash flow generated in 2020, we increased and enhanced our capital and liquidity resources by over $2.2 billion. From a PMIRES perspective, we remain well-positioned at December 31st. After applying the 0.3 factor for COVID-19 defaults, Essendon guarantees PMIR's sufficiency ratio is strong at 173% with $1.2 billion in excess assets. Excluding the 0.3 factor, our PMIR's sufficiency ratio remains strong at 159% with $1.1 billion in excess assets. Note that the PMIR's excess does not include the $563 million in cash and investments at the holding company. S&Garanty remains the highest rated monoline in our industry at single A by A Invest and A3 and BBB Plus by Moody's and S&P, respectively. Looking forward, our buy, manage, and distribute operating model will continue to enhance our financial strength and flexibility in generating and deploying capital. We have always felt that strong capital levels beget opportunities. Given our long-term focus, we will continue to evaluate ways to optimize capital deployment. Immediate options include taking advantage of growth opportunities in our core primary MI and reinsurance businesses stemming from a favorable housing environment. Furthermore, we will also evaluate opportunities outside of our core. For example, we closely monitor the ongoing intersection of the housing finance, real estate, insurance, and technology sectors. We believe that there will be opportunities to take advantage of this changing landscape by leveraging our mortgage, technology, and operational expertise. Finally, we'll continue to evaluate capital distribution through increased dividends and buybacks. On the Washington front, there's been a recent focus on possible FHA price changes. We believe that a potential 25 basis point reduction in FHA premiums would have a small impact on our industry share of the mortgage insurance market. We also believe that any impacts could be offset by the recent increase in the GSE conforming loan limits and measures taken by the new administration to increase credit access. In summary, 2020 was a good test for our buy, manage, and distribute operating model, and we remain pleased with the strength and confidence it provides in managing the business during stressful cycles. In connection with this confidence, along with our strong capital and liquidity positions, our Board of Directors has approved a quarterly dividend of $0.16 per share to be paid on March 19. Now let me turn the call over to Larry.
spk08: Thanks, Mark. Good morning, everyone. I will now discuss the results for the quarter in more detail. For the fourth quarter, we earned $1.10 per diluted share compared to $1.11 last quarter and $1.49 in the fourth quarter a year ago. Our weighted average diluted shares outstanding for the third and fourth quarters of 2020 was 112 million shares, up from 98 million shares in the fourth quarter of 2019 due to the impact of our equity offering in May. We ended the year with insurance in force of $199 billion, a 4% increase compared to $191 billion at September 30th, and a 21% increase compared to $164 billion at December 31st, 2019. The growth in insurance in force during the fourth quarter was the result of $30 billion of new insurance written, partially offset by runoff as our persistency was 60%. Net earned premiums for the fourth quarter of 2020 was $222 million and includes $13.6 million of premiums earned by S&R on our third-party business. The average net premium rate for just the U.S. mortgage insurance business in the fourth quarter was 43 basis points, down from 46 basis points in the third quarter of 2020. Contributing to this decrease was a two-basis point increase in seeded premiums, due to our Radnor Re 2020-2 transaction and the ongoing quota share reinsurance transaction, and a one basis point decline in single premium cancellation income. For the full year 2021, we are estimating that our net earned premium rate will be in the 40 basis points range. The provision for losses and loss adjustment expenses in the fourth quarter was $62 million, compared to $55 million last quarter, and $176 million in the second quarter of 2020. During the fourth quarter, we received 8,745 new default notices, which is down 31% compared to 12,614 defaults reported in the third quarter, and down 77% compared to 37,357 defaults reported in the second quarter. At year end, our default rate decreased to 3.93% from 4.54% at September 30th and 5.19% at June 30th. As Mark mentioned, we have reserved for new defaults reported in the fourth quarter using our pre-COVID-19 reserve methodology, which incorporates an average 9% claim rate estimate for early stage defaults. As a reminder, for new defaults reported in the second and third quarters of 2020, we provided a reserve using a 7% claim rate assumption. This assumption was based on expectation that programs such as the federal stimulus, foreclosure moratoriums, and mortgage forbearance may extend traditional default to claim timelines and result in claim rates lower than our historical experience. We have not adjusted these reserves previously recorded in the second and third quarters as they continue to represent our best estimate of the ultimate losses associated with these defaults. Other underwriting and operating expenses in the fourth quarter remain consistent with the third quarter at $37 million. The expense ratio was 16.6% in the fourth quarter compared to 16.7% in the third quarter of 2020 and 19.9% in the fourth quarter a year ago. We estimate that other underwriting and operating expenses will be in the range of $170 to $175 million for the full year 2021. The effective tax rate for 2020 was 15.7% and our guidance for 2021 is that our effective tax rate will be approximately 16%. The consolidated balance of cash investments at December 31st, 2020 was $4.8 billion. Essink Group Limited paid a quarterly cash dividend totaling $17.9 million to shareholders in December and maintains $563 million of cash investments at the holding company at year end. Now let me turn the call back over to Mark.
spk01: Thanks, Larry. With a strong housing backdrop and robust levels of high credit quality NIW in 2020, our business ended the year operating on all cylinders. Given the measures that we took in strengthening our financial and liquidity positions during the year, along with having 96% of our portfolio reinsured, the economic engine of our business is firmly in place. As we enter 2021, we are increasingly optimistic about our company's prospects. The COVID vaccine is key in getting our country's economy back on track, while housing continues to be a bright spot. We believe that affordability, demographics, and the ongoing supply-demand imbalances should continue to fuel housing. As you know, our franchise is levered to the macroeconomic and housing environments. Now, let's get to your questions. Operator?
spk00: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, it's star one on your telephone keypad. We'll pause for just a moment to compile the career roster. Your first question comes from the line of Phil Stefano from Deutsche Bank. Your line is open. Please ask your question.
spk05: Yeah, thanks, and good morning. So I get the impression that the claims rate assumption was 9% for fourth quarter, and there was no adjustment made to the 7% used in mid-2020. I guess... When I tried to do the math to back into your incidence assumption, it feels like there was maybe another accrual or loss impact in the fourth quarter. Do you have any comments around that?
spk01: Hey, Phil, it's Mark. No, not at all. I mean, you're reading too much into it. I think it's 7% was for the second and third quarter. And, again, we've kind of isolated those cohorts, so to speak, and we did not make any change to the seventh. the ninth of the fourth quarter is really just reverting to our normal methodology. And the thing really is, you know, you get, you have to have the October, November and December and they seasoned a little bit. That's kind of how you get to the 12 that you see in the staff supplement. I think the key, the key point though, Phil, and we mentioned it in the script, I think it's important for investors as a takeaway is we believe that the faults are contained. So we feel like we're well-reserved and adequately reserved at the end of the year. And going into 2021, we don't expect any material changes to the provision based on new defaults, right? I mean, defaults really came down. I think Larry said 31% in the fourth quarter. So I wouldn't get – and we can obviously take offline in terms of some of the details. But I think the key message is, you know, I think we're looking forward. We feel really good about where losses are coming out.
spk05: Got it. Okay. And I guess just to push back on that a bit, I mean, as we think about the foreclosure moratoriums continuing, forbearance being extended, what would be the rationale? How would you help me understand assuming that the 9% comes back into play and maybe it wouldn't be better than that, at least in the short run?
spk01: Well, again, I think at some point you have to get back to your normal reserving methodology. And I think with the kind of tsunami of defaults that we had in the second and third quarter, very similar to the hurricanes, right, in terms of like an isolated event, we thought it was prudent to kind of quarantine them, so to speak. and really look at it that way. I think in the fourth quarter, I think the message, again, is it's back to kind of business as usual, right? We're back to our normal reserve methodology, where the 9% has been money good for years. And that'll just play out, Phil. So with the forbearance, extension and home price appreciation actually helps lower that, that'll come through the model. But you don't really want to run the company longer term kind of on how we did those isolated reserve adjustments. The model, it's actuarially correct and factual for 10 years. And to me, this is a strong message that we're going back to the model. So again, I wouldn't get too caught up in whether it's too high or too low. It's adequate. And the fact that we're back on the model, I think, is a really good thing.
spk08: And, Philip, Larry, just also, we view the second and third quarters as the exception. As Mark mentioned, that was the tsunami. Those were the exception. We felt it was the appropriate methodology for those two quarters. But now, as Mark said, we're back to business as usual.
spk05: Okay. And one quick one on reinsurance coverage. Getting back to business as usual, I didn't see anything that said the quota share was going to be renewed or extended for 2021 and forward, the external quota share. It feels like the premium yield guidance has that embedded in it. Any comment on that, or is the quota share still in a work in progress?
spk01: Well, remember, the quota share is still in place because new business stopped getting seeded last year, but we'll still have a significant kind of seeded premium for 2021, which is kind of all baked in the premium guidance framework. And also is a little bit reason why the expenses are lower, too. So, I mean, there's a lot of moving parts there. I think for 2021, Phil, I think it remains to be seen. If you think about where the ION market has really kind of come roaring back in terms of pricing, for us, really, it's going to be best execution. So, as we look at 2021, we will compare kind of ION pricing to quota share and And quite frankly, last time we checked, the quoted share pricing was a little wide. It hasn't really come in, you know, the reinsurers kind of pushing more of a hard market. That's not really where it is in the capital market. So, again, we'll look at it, you know, so stay tuned. But I wouldn't, you know, in terms of just the seating commission and premium, that's already kind of embedded in 2021 guidance. Got it. Okay. Thank you. Sure.
spk00: Your next question comes from the line of Mark DeVries from Barclays. Your line is open. Please ask your question.
spk09: Thanks. Mark, are you able to elaborate at all on some of those opportunities outside the core that you alluded to as being opportunities for investment?
spk01: Sure. Again, keep in mind that we're just thinking in terms of everyday, Mark, what we do, right? I mean, everyone kind of views us just as the MI company, right? And we're out just handing out donuts to lenders and getting loans. But it's way more complicated than that. I mean, we're integrated with All the vendors, so whether it's LEMA, Optimal Blue, other loan origination systems, you know, Blue Sage, you name it, we're integrated. And we work with them, you know, pretty much on a day-to-day basis, especially as we're evolving S&Edge, right? We're now on our second version of S&Edge. We're connected to all the servicers, so we understand that part of the business well. And also, as I mentioned in previous calls, we've invested in approximately $10 million venture FinTech funds over the last, I want to say, 24 to 30 months. And with our investments in those funds, we have look-throughs in, I want to say, 250 to 300-type companies. So we own, via the funds, a lot of the names that you see that are getting spat today or going public. And we've known them for years. So that's all the way from kind of the iBuyer market all the way down to servicing. So we feel like we're in a really good position. And we understand... a lot of these companies' strengths and their weaknesses. And I think we bring a few things to the table. We clearly bring kind of capital and liquidity, which I think helps especially provide growth capital to these firms. We also bring operational expertise around how to start a business early and grow it. I think we've done a pretty good job with that. I think our view on it is, and it's why we have a longer-term view, the valuations in some of those areas are a bit frothy right now. So I think as we continue to look at it, an investor's greatest strength is time. And our view is we own this business for the long term, and we believe we will have the ability to put that capital to work to continue to expand the Essendon franchise. We're not going to do it small. We're going to do things that we think really kind of move the needle. But, again, it's something as an investor we'll continue to look at, and we'll continue to, you know, update the market as we see things.
spk09: Okay, got it. And I think, you know, in your comments earlier, you also alluded to, you know, to just scratching the surface on some of the risk-based pricing capabilities that you've developed. Can you talk more about where you see opportunity there and kind of the implications for the business going forward?
spk01: Yeah, I mean, again, I think it's twofold, right? I think in terms of the business, where we've tested in the fourth quarter and we'll roll out through this year kind of version 2.0 of S&Edge, which is incorporating additional factors that machine learning is now incorporated into that development. So it gets really down to the loan level price that you give each borrower. I mean, we're telling lenders that we're going to give each borrower our best price. It may not be the lowest price, right? And other MIs may have a different view, but it's our best price. And as we've talked about recently, as you get into these engines and you get down to the borrower, it really is best price wins. So you don't want to go to a gunfight with a knife. So you really have to invest in analytics, and you better really understand what you're doing when you price that loan. That takes time to develop and to deploy. But over time, I think 75% of the market is kind of in the engine. And we were close to 70% of our production in the engine through 20 in 2020, you know, and there's some of the card lenders will eventually get to the engine in my view, because I do think the engine is going to be the best way to give each an individual borrower the best price, which I think is, it's good for lenders, you know, it's good for borrowers. And also then that helps us as we deal with these vendors in that front end development of that's an edge mark that gives us ideas from the investment front. So again, as you think about the convergence of, of finance, housing, and real estate, and you think there's something there, Essent's a good way to play that. I mean, it's a nice call option to have. I mean, when we first went public, we hadn't launched Essent Re. And our positioning of Essent Re was it was a call option, and we felt like we could eventually kind of exercise that option, and we did. Essent Re's been, I would say, very successful. It's allowed us to reinsure 25% of the core business. It had a very good year in 2020 in writing third-party business and also has an MTA, which is a little underappreciated, which I think five different insurers where we have You know, we kind of have the pen and they leverage our models to write that risk. So again, as you think about all this stuff, as we learn this every day, and this is, you know, Phil asked me one time, going back to Phil Stefano, like, what does Mark do day to day? Well, we spend a lot of time on this and kind of looking at opportunities. And again, if it's something, you know, we've always said if you like housing, you know, back when we went public, we thought housing would be stronger than people think because of the demographics. We got a ton of pushback from analysts and investors alike back in 2014 when, you know, it was probably a trillion dollars of originations. We felt like it would be a lot bigger, again, given the demographics that we studied. And, you know, again, we got pushback. So, I would look at it here. If you really think as an investor or an analyst, if you think there's opportunity, I know you guys cover other parts of the space. If you think there's an opportunity, again, Essence is probably a nice call option around kind of fulfilling those opportunities over the next several years.
spk09: Okay, great. Thank you.
spk00: Your next question comes from the line of Doug Carter from Credit Suisse. Your line is open. Please ask your question.
spk03: Thanks. Mark, as you talk about, you know, kind of getting back to normal with reserving, I guess, you know, returns have kind of returned to more normal. You know, I guess just how do you think about capital generation and therefore kind of the right level of capital to be holding for the business?
spk01: Yeah, I mean, again, I... I think in terms of the right level of capital, it's based on two things, Doug. One is kind of your PMARS excess. But that's not really the binding constraint. The binding constraint around capital is the dividend capacity out of the insurance units. And obviously, S&R also does. So our view is, you know, given where we are with the cushion, and we always look at the cushion kind of without the 0.3 factor, and, you know, it's right there at 159%. We think that's a good level. Is it too high? We think it's a strong level. We're going to continue to see how, you know, we're optimistic about where COVID-19 defaults are going. And I think we'll come out, you know, if we're in a cushion kind of at a 125-ish over time, that's not a bad level. But also, when you think about capital, it's back to my earlier comments around, you know, looking at excess capital as a way to deploy it to continue to grow assets. So, I think we'll look at that. And as we mentioned in the script, you know, we clearly give back capital every quarter to investors in the form of dividends, which I think, again, is when we first did it, it's really a testament to our confidence in the sustainability of our cash flows. And could we extend that to buybacks to some fashion? Of course. And again, I think that'll be, again, a sign. If we were to do buybacks, and it's certainly something that's on the table, it will be much more mechanical, right? We're not going to look at it and say, we're going to buy chunks of stock back at extra Y. I think it would be more in the normal flow, kind of like a dividend. So if you think about it, From my level, Doug, we have a capital. We're in a good capital position. We're generating a lot of cash flow at $720-plus million in 2020. We now accumulate that capital, and we reinvest it in the core business. We look for opportunities to invest it outside of the business. the core to grow, and then obviously you look to distribute it via dividends and buybacks. It's probably going to be a little bit of all. So I think we're in a very good position from that. And I think, you know, our ability to raise capital last May, and we said it could be, you know, for offensive reasons or defensive reasons, it turns out it's going to be probably more offensive. You know, we think we're in a good position.
spk03: Great. Thank you.
spk00: Your next question comes from the line of Jack Mecento from SIG. Your line is open. Please ask your question.
spk04: Good morning, everybody. Mark, I wanted to visit the prior question on some of the other outside potential opportunities. It seems like a pretty big message to the marketplace. Are we talking about doing more on the VC side and just planting more seeds there, or Would you contemplate something that's maybe more transformative, something that really changes the revenue complexion of the company and perhaps the multiple as well? Just thinking, trying to understand the context of the message that you're putting out for that.
spk01: Yeah, it's an important message, and we conveyed it on purpose, Jack. So I do think it's a little bit of each, right? We started with the funds, and I would expect us, the next phase of it would be to make smaller investments directly into the companies. And then the third evolution of it would be owning some of the companies and kind of changing or diversifying outside of MI to change the revenue profile. A lot of that depends on price, Jack. So, I mean, it's not like we understand the businesses and it depends on kind of where you want to play in that. And we could end up not doing anything, right? I mean, we're very good. We understand price value very well. And if we traded on a revenue basis, perhaps we would be able to do more from a stock standpoint in terms of our currency. but i do i do think it's an important message and you know we read a lot of your research and other research we know a lot of these companies well uh i do i do think there's a there's a nice opportunity for us you know kind of over the next several years okay thanks for that and then we call it uh we kind of call it s and 2.0 okay um and then on the pricing side
spk04: I know the industry increased price after the pandemic, and I think in the past you've been pretty helpful in speaking to some of those changes. Where has pricing gone in the last quarter or so? Has it held? It does look like your NIW mix kind of skewed a little bit less risk-tolerant, higher FICO, lower LTV over the past couple quarters, just if you could kind of help us understand those moving parts.
spk01: I think pricing's relatively, you know, kind of consistent, right? It's backing off a little bit from, you know, the pricing increase in the pandemic. So I do think it's normalizing through 2021. The ION market's normalizing. I would expect it to, right? I mean, if the claim rate assumption's coming down because of where the economy is and HPA has obviously been strong, I would expect you know, the pricing to normalize. I think we've seen a lot of that. So, you know, our view is our share was heightened in the second and third quarter. I think a lot of it was, you know, a few of the MIs backed up and we were open for business. added, you know, you can probably quantify the excess share we got in second and third quarter and what that addition was to insurance-enforced. But I would expect our share to normalize in 2021. A few of the MIs that kind of backed away, you know, have come back. But if you look at the results, Jack, it was successful for us, right? I mean, we increased insurance-enforced 21%, which was I believe it's higher than any of the other MIs in the industry by a pretty wide margin. And we did that with higher pricing. And a lot of it was just because we were able to leverage the strength of our balance sheet. Now that You know, the other MIs are kind of back in the game. You know, it's competitive. So we expect to go back to our normal one out of six, you know, 15%, 16% share. You know, it always ebbs and flows quarter to quarter. But, you know, and the market's so big. Jack, you know, you're talking about over $600 billion market maybe last year. And, you know, our estimate this year is probably in the $500 billion range. There's certainly plenty to go around, and the unit economics of the business remains strong, and I think that's another important message for investors to understand.
spk04: Yeah, and the insurance and course trajectory in the last couple months of the year for you seems to align with that statement as well. Thanks, guys. Sure.
spk00: Your next question comes from the line of Bozy George from KBW. Your line is open. Please ask your question.
spk02: Morning. Just to follow up on the pricing question, have you seen any changes in the bulk market just in terms of, you know, growth in that market relative to the rest, just given historically there's been a little more competition there?
spk01: No, again, it's kind of the engine part of the market, which is 75%. and I wouldn't call it bulk. I would call it just folks and lenders that are still on rate cards. Some of them, they bid out, but it's a forward bid, so it's not so much in bulk. And then there's other guys that still do negotiated cards. Our view is, again, we think the engine will eventually get closer to 100%. It may never get quite there. Some of the lenders believe They get better execution through the cards. Other lenders, they just haven't been able to make the changes to their systems. As the analytics continue to get better at the borrower level with Epson and others, I'm sure the other MIs are evolving their engines too, which I think is fantastic. It will get to that Geico progressive part kind of analogy that I alluded to, and the lenders that are on cards – my view is they're going to be at a disadvantage over time. So right now they think they're getting better execution. It's simpler. You know, that's how they think about it. But over time, as we get, you know, you really dig into the borrower level and you're able to kind of pick off the best credits, the execution will be better than the cards. And the lenders at some point will pick up on this.
spk02: Okay. No, it makes sense. Thanks. And I just wanted to go back to the question on credit again. the reserve for a loan in that four to 11-month bucket is up pretty meaningfully. Is that a seasoning of that book? Can you help us kind of think about that?
spk01: Yeah, it's just a seasoning. Remember, we set it at the second and third quarter at seven, and we're still holding to that, but they're running through the bucket. A lot of these borrowers, if they have 12 months, they're going to use it. So I wouldn't read again a lot into that. It's it's it's it's a regular reserve methodology with to larry's point an exception methodology for two quarters so it's all kind of together but eventually that'll flush through so okay great makes sense thanks your next question comes from the line of pre-chain from jp morgan your line is open please ask your question hey good morning everybody and thanks for taking my question
spk04: Mark, I appreciate the comment about this not being a capital event, but really an earnings event. I think it puts it in good context. When we think about that context going forward, one of the outcomes of what you've experienced over the last year is that you're entering 21 with a vintage skew that is very, very different than you would have anticipated, but for the events of the last year. And look, you know, I get vintages are kind of like kids. You love them all the same, but they're different. And I'm curious when you think about this along dimensions of credit, premium rate, persistency, what the changes in the book will be and how you think about the impact on sort of net profitability five years down the road.
spk01: uh wow that's a big one i'm gonna unpack that one rick uh i actually i hear you i think you know we think about 2020 it's such a large uh you know it's almost like half our book is was originated in the past 12 months it's originated at you know i think three and a quarter uh rate is so it's it's it's it could stick around for longer than people think especially If you start thinking rates are going to go up maybe in the second half of the year, there's a little bit of an inflation scare. So it turned out to be very well, right? We've kind of locked in something for longer. And our view is even on a persistency basis, we should start to think about, you know, we should start to see persistency be right around 70 by the end of the year. So we think we're pretty well positioned. I don't think we planned it, right? I mean, I think with COVID, but I think from an industry standpoint, looking back, and again, given the credit, the credit quality is actually better in 20 than it's ever been. And you're right, this could turn out to be a very kind of premium, no pun intended, you know, vintage. And it's something that could really bolster the profitability down, you know, for the next three to five years.
spk04: Got it. Yeah, thanks for taking it. Again, I realize it was sort of a long-winded question, but I think it's important just in terms of the transformation of the book.
spk01: It was a great question. No, I agree.
spk04: Thanks, guys. Have a great day.
spk01: You too. Thanks.
spk00: Your next question comes from the line of Ryan Gilbert from BDIG. Your line is open. Please ask it.
spk06: I wanted to go back, Mark, to a comment you made a little earlier about total market size this year, maybe being in the $500 billion range versus $600 billion in 2020. I think that would kind of imply a mid-teens decline in the overall market. And I'm wondering if that's something that you're already seeing so far in January and February, or if that's just your expectation around interest rates going up in the second half of the year.
spk01: Yeah, it's more of a forecast. Actually, I think January was higher than previous January. And just some perspective, you know, Ryan, the largest NIW market before last year was like $400 billion in 2003. So, I mean, for it to even be save the word, you know, to save $500 billion is actually, I wouldn't look at it as a 15% decrease. I would look at it and say the average NIW over the last 25 years is probably, you know, 200 ish billion. So this is, we're in a, and obviously that's, you know, we have higher home prices, you know, larger market, more people buy houses, but I actually think it's a pretty good number.
spk06: Okay. Um, and second question on, um, you know, the loss reserving and defaults, um, you know, going back to kind of a pre COVID normal, um, I hear you. But at the same time, you know, new default rate down 30% sequentially, but it's still up, you know, 130% year over year. Should we think about this kind of level of new defaults as the post-COVID new normal? Or do you think that new defaults can continue to improve from here?
spk01: Our view is they'll continue to improve. I mean, again, look at the just trend from second, third to fourth quarter. So, I wouldn't be surprised that they normalize over the next few quarters. So, yeah, I think we were 3,500 plus defaults in the fourth quarter last year. So for us to end this year kind of in that same neighborhood wouldn't surprise me at all.
spk06: Okay, great. Thanks very much.
spk01: You're welcome.
spk00: There are no further questions at this time. You may continue.
spk01: Okay. Well, thanks, everyone, for joining us today, and hope you have a great weekend.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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