Ladies and gentlemen, thank you for standing by and welcome to the Essent Group Ltd. Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mr. Chris Curran, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Amy. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer. Our press release, which contains Essent's financial results for the full year and fourth quarter of 2019, was issued earlier today and is available on our website at essentgroup.com, the Investors section. 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 L 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 19, 2019, and any other reports and registration statements filed with the SEC, which are also available on our website. Now, let me turn the call over to Mark.

Thanks, Chris. Good morning everyone and thank you for joining us. I am pleased to report that Essent produced another strong quarter of financial results as the operating environment remains favorable, and credit continues to perform well. Also during the quarter, we were very pleased with Moody's upgrade of our financial strength rating to A3. We believe that this upgrade is a validation of our transition to a stronger operating model. Specifically, during the year, we continued reinsuring our portfolio and evolving our pricing engine. The utilization of these tools make Essent a more sustainable franchise and is a long-term positive for policyholders, shareholders and employees. Our performance for the fourth quarter and full year 2019 continue to benefit from strong secular and cyclical tailwinds. Affordable mortgage rates, low unemployment and first-time home buying by millennials continue to drive strong credit performance and elevated housing demand. As a franchise that is levered to U.S. housing, the economy and purchase mortgages, our outlook on our business remains positive heading into 2020. Now, let me touch on our results. For the fourth quarter, we earned $147 million or $1.49 per diluted share; while on a full year basis, we earned $556 million or $5.66 per diluted share. Also, our return on equity for 2019 was 21%, and we grew adjusted book value per share 22% to $29.66 at year end 2019. As a reminder, senior management's long-term incentive compensation is driven by growth in book value per share, which we believe best demonstrates its value to shareholders. On the business front, we continue to increase our sophistication around originating and distributing mortgage credit risk. We believe that the use of data analytics will be a key differentiator in selecting and pricing credit. Because of this, we continue to refine EssentEDGE to be…

Thanks Mark and good morning everyone. I will now discuss our results for the quarter in more detail. Net earned premium for the fourth quarter was $208 million, an increase of 2% over the third quarter of $203 million and an increase of 20% from $173 million in the fourth quarter of 2018. The increase in earned premium over the third quarter was due primarily to a 3% increase in average insurance in force. Persistency declined during the quarter to 77.5% from 82.1% at September 30th, 2019. The average net premium rate for the U.S. mortgage insurance business in the fourth quarter was 49 basis points, which was consistent with the third quarter of 2019. Note that this rate excludes premiums earned by Essent Re on our GSE risk share transactions. Single premium policy cancellation income continues to contribute favorably to the average net premium rate. Cancellation income was $14.8 million in the fourth quarter of 2019 compared to $14.6 million in the third quarter and $3.7 million in the fourth quarter of 2018. Investment income, excluding realized gains, was $22 million in the fourth quarter of 2019 compared to $21.1 million in the third quarter and $18.6 million in the fourth quarter a year ago. The increase in investment income over the fourth quarter of 2018 is due to an increase in the balance of our investments. The yield on the investment portfolio in the fourth quarter of 2019 of 2.8% is consistent with the yield in the fourth quarter of 2018. Net realized gains on the sale of investments were $833,000 in the fourth quarter of 2019. We recorded a loss of $3.6 million in the fourth quarter compared to a loss of $760,000 in the third quarter for the change in fair value of embedded derivatives associated…

Thanks Larry. In closing, Essent had another strong quarter as the operating and credit environments were favorable, and we remain pleased with progress in transitioning our operating model. The combination of EssentEDGE on the front end and reinsurance on the back end is a key component in building a more sustainable franchise. Looking forward, we will continue to take advantage of positive secular trends while also mitigating against the cyclical nature of our business through the use of reinsurance. Heading into 2020, Essent is well-positioned, and we remain positive about our business and prospects. Now, let's get to your questions. Operator?

[Operator Instructions] Your first question today comes from the line of Soham Bhonsle of SIG. Your line is open.

Hey good morning guys. Mark, just wanted to start off, I guess, I wanted to get your high-level thoughts on how do you guys think about the trade-off between the continued use of reinsurance? And maybe what the impact that has on premium yield going forward? Because I think there's a good understanding about the benefit on loss ratios long term here. But at what point do the economics maybe not make sense for you guys?

It's a good question. I think I would take a step back, Soham. In terms of the risk-reward, we think it's pretty one-sided on the use of reinsurance. Protecting the tail risk, especially in times of uncertainty, is critical. Remember, and I've said this in the past, credit kills these businesses. And it hurt the businesses back in the 1980s, destroyed them back in the Great Recession. And to me, that's the number one, number two, and number three risk we have in this company. So, to me, the program and the progress around the reinsurance has really been transformational in the business. I think it's been validated by Moody's in regards to our upgrade to A3, but it is dilutive, right? I mean we've said this in the past. If we say our insurance in force is 200 and it's going to cost us four to five basis points to reinsurance, that's right off the topline, and that's going to stunt growth. But it hasn't really impacted returns, Soham. So, you have to really look at that. The unit economic return to the business are strong. There is much more confidence around those returns when you can hedge the risk out. I mean if you look at a forecast of Essent that you did two years ago versus today, yes, maybe the growth isn't as it was a few years ago. One, we've gotten a lot bigger. But the confidence and the volatility around those returns is much less. And again, I think that's the key message around Essent and it's 1 of the reasons why we were able to declare a dividend. So, I would look at it that way. I mean we really continue to have a lot more sustainability around the cash flows while they continue to grow. So, insurance in force grew close to 20% year-over-year. And again, the return on equity was 20%. So, again, I think it from that standpoint, you have to run it through your models. But the end result is, I would say, a lot more confidence around the sustainability of your estimates.

Fair enough. And then just on NIW, the growth rate year-over-year was a little below the peers. Was that a function of you guys maybe just stepping away from the business with your price engine and other stepping in? Any color there would be really helpful. Thanks.

Again, I think I said this before. Market share ebbs and flows quarter-over-quarter. I would never read too much into 1 quarter. And as I said in the last few quarters, we've been testing a lot with the pricing engines, pricing elasticity. And the reason we're able to do that is, again, I've said we're kind of year three now into a five-year transition around both the front end and the back end. We had a market last year, Soham that was so large. I mean you're talking $385 billion close of NIW. We posted $63 billion of NIW. That's three times the amount that we did back in 2014, almost three times. The market, the NIW market, our first year of writing in 2010 was $70 billion. We wrote almost that this year. So, when you try to parcel through market share, it's a little misleading. Another thing to factor in is our market share for the year, Soham, was 16%. Our market share for 2018 was 16%. By the way, our market share for 2017 was 16%. So, we said we're comfortable with the mid-teens. And again, I think you just have to take a step back and just look at the absolute level of NIW that's coming into the business. Clearly, it ran off a little bit with the persistency, but we couldn't be more pleased I think where we are in the market. And I think in terms of the insurance in force, the size of it is, I would say, was above our expectations over the past few years.

Anything on the competitive side that you're seeing at all or everything seems pretty straightforward?

It's the same story that it's been for the last 10 years. Everyone tries to pick their spots. For years, it was LPMI singles was your way into it. A few are now trying the BPMI singles. That's kind of the new play. We've seen some use the pricing engine to grab some share. And remember, you never -- you always rent market share. You never have market share. So, we've seen that, but that's par for the course. I mean the engines are relatively new. It's like a new toy for the industry. And -- but I would look at the engines longer term, Soham. From an Essent point of view, it's the risk management tools. Our view is we have in almost every lender the ability of the engine now to do a few things. One, just today, our ability to change price, both operationally and from a regulatory standpoint, is much greater. We don't have to file rates in all 50 states. We don't have to have conversations with lenders about new rate cards. We can change it pretty much every day if we wanted to. Not that you would, credit doesn't change that quickly. We can now target geographies. And again, it's very important when there's a down cycle. Second, we now have the ability to bring on more factors and introduce new factors to estimate the borrower characteristics of that estimate of the fall. Four, we were only able to bring a couple of those factors to the point of sale. Now with technology, there's the ability to bring more factors in and continue to test new factors. And as I said in the past, I think credit selection will be a key differentiator for MIs, not dissimilar to the GICOs and the progresses. It's going to take a while. Credit is very good right now. It's a little bit of a pricing game. I mean credit is so good that it's hard to see that, but credit is not always going to be good. The economy is not always going to be strong. And as we look at how we manage the business for the longer term, we think the engine will be a huge advantage for Essent going forward. And I wouldn't expect the rest of the industry to look at it in a very similar way.

Yes, that makes sense. Thanks guys.

Sure.

Your next question comes from the line of Douglas Harter of Credit Suisse. Your line is open.

Thanks. Sort of following up there on competition. What is your outlook for the premium yield in 2020? And I guess how do you see -- how much of a differential is there kind of between the business you're writing and the business that's rolling off?

Yes, Doug. I mean I think we were 49 basis points for the fourth quarter, and that's net of the cost of reinsurance. And as I said before, as we reinsure more of the book, you're going to see the seated number continue to grow. You're starting to see the impact of the rate reduction back in 2018 work its way through the portfolio. And that was kind of post-tax reform. So, 49, I would say, for 2020, I would expect it to come down. Probably in the mid-40s would be a good estimate. I mean there's a little bit of give and take with singles premium cancellation. But all else being equal, kind of mid-40s is a good estimate for us in 2020.

Great. And then, I guess, how do you think that persists kind of even more rates out today, what's kind of the path for persistency over the next couple of quarters?

Yes, I mean I think for 2020, in general, it's a little hard to predict given where rates are. But normally, I would forecast out and say 80% is a longer-term guide, which is bringing people down when they were in the high 80s or the mid-80s. I think for us, I think, high 70s for this year is a pretty good estimate. And then we'll kind of see where rates kind of fall out. I would expect rates to remain low, at least through the first half of the year. I mean as we enter into the election season, all bets are off, I think, in terms of what's going to happen. But I think for the first half of the year, I would expect rates to remain low and persistency in the high 70s is a pretty good estimate for you.

Great. Thank you.

Your next question comes from the line of Bose George of KBW. Your line is open.

Yes, good morning. Actually, I wanted to go back to Larry. The guidance you gave on operating expenses for next year, was that $165 million to $170 million?

Yes. Yes, that's correct, Bose.

The -- so that level of increase, obviously, is very modest. And the -- like when we think about sort of going further out, 2021, et cetera. I mean, can you kind of sustain that, whatever, a couple of percent increase given the -- there's obviously a lot of insurance in force growth going on.

Hey Bose, it's Mark. I just wanted to -- I'll take that just because I want to add some color. The $165 million to $170 million incorporates some of the benefit of the quota share so we're able to see some of that expense. All else being equal, it's everything else. So, we don't -- we're not breaking out contract underwriting expenses. To us, this is all really expenses to run the enterprise. And you can -- we don't want to cut too fine of a line on it. I do think, though, as we get into a market where it becomes best execution around the borrowers and the lenders picking the best price costs and capital management are key, I think we pride ourselves on the absolute level of managing our cost, I would say. Our nominal level of cost is right up there with the best in the industry. I think our expense ratio is right up there with the best of the industry. I'm not sure anyone can say both. They can say nominal, they can say expense ratio. They can't say both. And I think there's some -- and I would urge the analyst to look at the cost, the expense differential amongst the different MIs because, again, as -- it's really around cost to originate, and all of our origination volume is relatively similar. So, I think cost is going to become another differentiator as you start to think about MIs in the future because that's a big part. That's why I get back to kind of scale matters as the industry continues to mature.

Okay, great. Thanks. That's helpful. And then actually just the -- Mark, the fair value mark you have on the embedded derivatives in the ILN, can you just remind us what that is? And should we think of that as kind of a core number or do you have -- just some color on that would be great.

Yes. Bose, it's Larry. One, I probably would not consider it a core number. It is a mark-to-market noncash adjustment. You will see some volatility quarter-to-quarter. And at the close of each transaction, the fair value of that will be zero, but it does create a little bit of volatility quarter-to-quarter. But it relates to our insurance-linked note transactions, and the premium stream on that is tied to interest rates. And under the accounting rules, we have to account for a portion of the premium stream as an embedded interest rate derivative and record the change in that derivatives value in earnings quarter-to-quarter. The premium rate we pay is based on LIBOR. But we're able to offset a portion of the premium cost with earnings that are held in the offshore assets in the trust, which is invested in U.S. treasury money market fund. And the value of the embedded derivative is driven by the expected future cash flows based on the difference between the forward LIBOR curve and the forward treasury curve. And during the fourth quarter, the spread between the forward LIBOR and treasury curves widened, so that's what created a larger loss in the fourth quarter.

Okay, great. That's helpful. Thank you.

Your next question comes from the line of Mark DeVries of Barclays. Your line is open.

Yes, thank you. Just a follow-up question on the expenses. Mark, as you pointed out, you guys are already kind of sub-20% expense ratio here, which is kind of where some of the legacy players have kind of bottomed out. And when they reset on, they kind of failed to find any more operating leverage in the business model yet. I think the guidance here for zero to 3% OpEx growth, but you're still growing insurance in force, suggests you've got a lot more operating leverage. Could you just discuss that dynamic and kind of where you think you might actually be able to get to on an expense ratio?

Yes, I wouldn't say we have a lot more room, Mark, just because as the premiums -- remember when we're calculating this net premium, so after ceded reinsurance. So, I think 20 is kind of -- can we get to the teens yet, but if you look at just -- and I'd do simple math, Mark. I'd look at our operating and underwriting expenses, and I divide it by net premium earned. And again, I would urge folks to do that for the rest of the industry versus just looking at the expense ratio. There's really probably -- most of the legacy guys are not in the teens. They're above that if you look at just raw numbers. So, I wouldn't look at a lot more leverage. But again, with a loss ratio of five, again, taking a step back, Mark, you have a business that has operating margins of 75% longer term as well as the start to season. We've always kind of give -- we gave guidance kind of into that 30 to 35 combined ratio. We're not much different today with that guidance. The only thing I would add with reinsurance, there's a lot less volatility around that guidance, which I think should give investors comfort.

Okay, that's helpful. And then are there any benefits worth calling out from -- tangible benefits to your business from the Moody's upgrade?

Yes, I think the biggest -- there's some benefits a little bit around our cost of funds will come down on our line. I do think it makes us a split investment-grade at the HoldCo, which allows us -- opens access to the debt markets at a better execution, what I think is good. It clearly helps us with the GSEs. I think from a counterparty perspective, they've been very -- they were very pleased, I think, with the upgrade. I mean it really does set you apart, that A is -- and we said -- I said this a few quarters ago, we felt like the rating agencies would get there around that. And I think it helps us in D.C., I think it helps the whole industry as the industry continues to improve ratings. You can say what you want about ratings, but they really are a clear indication. And it's third-party validation, Mark. So, I think when we first were investment-grade back in early 2013, I really believe that helped us when we went public because it was another set of eyes kind of taking a looking at the P&L and the forecast and the business and the balance sheet and opining on it. And I think from an investor standpoint, that Moody's A rating should give them very similar comfort. But I do think in D.C. might be the most tangible benefit that we'll see.

Okay. Do you think the rating agencies will ever get back to AA on the model line? If not, does it even really matter?

I don't think it matters, per se. I don't see it as a AA industry, to be honest. I felt from the beginning that this is a well-managed from a capital and expense and business standpoint in addition to the reinsurance, that this is a solid A industry. And I think we're very comfortable with that. I think given the monoline nature of the business, I think AA is a reach. I thought it was in the past. And so I think A is a solid rating and will allow us to execute the business plan, tap the equity and debt market should we need them and also be a strong counterparty to both the GSES, and I would say, some of the larger depositories that like to keep loans on balance sheet.

Okay. Thank you.

Sure.

Your next question comes from the line of Mackenzie Aron of Zelman & Associates. Your line is open.

Thanks. Good morning. Just one question around the dividend. Can you just provide a little more color around the rationale to increase it just only two quarters after it was implemented? And also kind of on a go-forward basis, what is the board looking for, for further increase in capital return?

Yes. Really good question on the dividend. I think our view is we're growing cash flows as excess capital continues to build. We've said before, Mackenzie, that dividend is a good tangible way to distribute cash to our shareholders. And just given the growth, we felt like the dividend should grow along with it, kind of a quasi-payout ratio concept. So, our expectation, at least for 2020 is to continue to grow the dividend. And we think that's a strong signal to the market in terms of sustainability of cash flows, and it still gives us the flexibility. And we've talked about this in the past when we think about our capital position. PMIERs is one thing, but you really have to kind of look at statutory capital along with some excess we have at Essent Re and obviously HoldCo cash. And clearly, we have more liquidity with our line of credit. So when I think about that capital, Mackenzie, I look at it a number of ways. First, we feel like we have the opportunity to continue to invest in the business given our growth rates; two, we'll continue to look for opportunities outside of the business. And we've talked about this on the last call; we have a pretty disciplined process around how we view new opportunities. We've made a number of investments in both, I would say, venture funds and a few private equity funds that give us kind of an outsourced corporate development, look at early stage companies, both on the tech side, and in financial services, the tech more. Is there a company out there that can help us around cyber? Can it help us risk better? It's really kind of utilizing that to make the core business better. I think on the private equity…

That's great. Very helpful. Thanks Mark.

Yes.

Your next question comes from the line of Mihir Bhatia of Bank of America. Your line is open.

Hi, thank you for taking my questions. I just wanted to start with just premium rates in general. I was curious, could you just comment on how MI pricing today compares with last year? And I understand that there's maybe a little bit more variability with the price engines there. But I'm thinking more just post tax law changes. Are the returns and even the absolute premium levels pretty similar or have you seen a little bit more competition or variability in there?

I would say on this -- in general, they're relatively the same. I would say, relatively flat to where they were kind of post-tax reform. We've seen a little bit more competition in the higher FICOs, and you've seen that in some of the portfolios as some people price that up a little bit to get that part of the market. But again, all -- it's relatively -- it's not a big move. So, I think all in, the premium levels have been to remain pretty constant, and I expect them to remain that way. Again, whenever credit's this good, you always -- folks probably can get a little too close to the fire sometimes. But I wouldn't expect that in a -- to a high degree. I think the unit economics of the business continue to be solid, right? And we look at this -- we look at the unit economics of the business kind of unlevered, meaning full tax rate and really no benefit of reinsurance. And it's a pure way to look at the business. And we still like the returns, I would say, kind of solidly in that mid-teens. And when I say mid-teens, call it, 12 to 15, 13 to 16. The thing to be careful about and for people to watch out, again, is new capital requirements. So if capital requirements come higher, those returns could come lower. So, I think the industry needs to be Essent, in particular, needs to be careful around pricing to make sure we're getting an adequate return on that capital. And that's why we've always said PMIERs is a clear and transparent capital standard. It's a pretty good pricing guardrail. And I would expect that to kind of reemerge as the PMIERs talk starts to pick up over the next 12 to 18 months, but it's a reminder for us. So, as we look at pricing and we look at share, again, a market this size, our view is if we can be in that mid-teens return and still get in not only the unit economics, but absolute premium levels are important too in this market. I think we're pretty focused just on absolute premium levels. And I think when you put it all together; I think we feel pretty good about it.

Let me -- I guess just following up really quickly, not -- I mean maybe not exactly a follow-up. But on just market share, I understand and completely appreciate your point that it's been 16% for three years. If you look at it over a year or so, it's pretty stable in that range. But I was curious; can you give us maybe a little bit of color, what drives the quarter-to-quarter volatility? Like is it just pricing actions and competition in general or is there something else that's going on, actions that either you are doing? What's happening quarter-to-quarter that's making it move around? Because I think we saw like, if you look at it this year, it's 400 basis points between the high and the low. And I was just curious, what is driving that?

I think the simple answer is yes. It's a lot of different factors. As you move, you have a few things going on, right? You have the pricing engines and you have the ability of all the MIs to change the pricing engines. And like I said, it's like a new toy for some in terms of how they can price. You have the bid cards, right? And then there's three large lenders that do bid cards, and that can really swing share back and forth. And then you also have what we call custom cards. And those are the lenders that don't -- they're not only engines yet, they expect to get on the engines. But they kind of put out like a card for people to -- and they try to get every -- and they take cards, and then people can kind of just give them custom cards. And we've seen that move share kind of quarter-to-quarter. And it just -- it kind of all equals out at the end. That's why I don't lend a lot of credence to it, and that's why I would recommend everyone take a step back and look at this on an insurance in force basis and look at share over a time period. I mean for the quarterly share here, just to give you a sense of it; we didn't even know it until Tuesday night. It's not like we get daily market share reports and we're adjusting. And we don't target market share. And the result -- not that we're surprised by the result, but you never know. We're always within one or two basis -- 1% or 2% guesses, to be quite honest. So, it's not like we focus on it day in and day out. I don't think the other MIs do either. I think everyone has their business plan. I think for us, it's really about getting to our production levels and making sure we get to the production levels at a certain premium and making sure the unit economics are correct. We're not -- it's not all about get as much as you can. And I think that's how Essent's always been. I would remind you and the investors, we're the only mortgage insurer that doesn't pay a sales commission to our sales force. And we think they get paid base bonus and they get equity just like me. So, they're all -- everyone in the company is a shareholder, obviously, including the sales force. And we look at longer-term growth, not just quarter-to-quarter market share, because there could be swings in a lot of those things. So, I think it's really about how do you grow book value per share and all those things. And it's not kind of a quarter-to-quarter kind of thing that we move the dial up and down on.

Understood. And last question, just turning to regulation. Maybe just any early thoughts on the GSE increase that's been proposed? And just in general, just a regulatory update, if you don't mind? And that would be all. Thank you.

Sure. Sure. I mean I think the GSE, I wouldn't read too much into it. It's kind of a draft budget. So, I would wait on that. So, it's hard to comment on it until it gets in, but we don't -- it's too early to tell. I think I did not have any prepared remarks in Washington just because we don't think there's been a lot of change. I would echo what others may have said is that it's a pretty positive dialogue in Washington. And we've seen that with the new administration really increasing over the last couple of years. Discussions with FHA, CFPB, FHFA, we sense and can tell is there is a great deal of coordination amongst those. And the common goal is to make sure we have a better and more stable housing finance system, and I think that's a key takeaway for investors. And I think when you think about GSE reform and what FHFA is doing, I think they've done a very good job of kind of being very clear. I mean the path forward is difficult, obviously. I mean there's a lot that goes into it. But I think the intent around strengthening housing finance, I think, it's good for lenders. It's good for GSES, and I think it's clearly good for the MI. So, I think we've been very pleased with just the overall focus on Washington on what was best for housing finance and the borrower.

Got it. Thank you. Thanks for taking my questions.

Sure.

Your next question comes from the line of Chris Gamaitoni of Compass Point. Your line is open.

Hey everyone. I don't know if this is for Mark or Larry, but it looks like the reserve or the provision for new default declined a little bit quarter-over-quarter. I think seasonally, you typically see an increase in the fourth quarter. Just wondering if you changed your default to claim ratio on new notices? Or if it's just kind of one-month, two-month, three-month mix differences?

Yes. Chris, it's Larry. Our reserve model considers actual cure and claim activity over a historical multi-quarter period. And what we have seen is we've continued to see favorable cure and claim results versus our estimates, and we've been adjusting our reserve factors down accordingly. So, I think it's that and a little bit of mix as well.

Okay. Thank you. That's all I have.

Your next question comes from the line of Phil Stefano of Deutsche Bank. Your line is open.

Yes. Thanks and good morning. So, I wanted to talk a little more about the testing that you're doing in the risk-based pricing engine. And I'm guessing if it's one of two things or maybe a mixture of the both. Is the testing more around the elasticity of the live pricing metrics that you're using? Or are you testing new metrics that you may be able to accurately price, more accurately price in the future?

Excellent question. I would say it's the former. So, we're really looking at price elasticity across FICOs, obviously, LTVs, and more specifically, geographies. A little bit of lender testing in there, but basically, it's around kind of at the borrower level. We have not introduced new factors yet around borrower characteristics. I would say that's something that continues to be under development. I think we continue to make good progress on there, but it's relatively early. And that's why, Phil, when I say kind of year three now of the five-year transition. I know it sounds long, but Rome wasn't built in a day. So, we do think spending time on that, we have a good sense of the models, and now it's a matter of how you implement it. And part of that is just going to be -- also the success of it's going to be what the competitive level is. But we do think getting better at selecting credit will be a differentiator. Maybe not in this market where all the credit is good, but it's not always going to be this market. I think that's -- again, the message is, we manage this business for the long term. I make decisions, and our plan in 2020 is how to continue to create a good environment for us in the next three to five years, not quarter-to-quarter. So, yes, we -- some of the price testing may not have gone as well as we thought. And we lost some volume, so be it. We did $63 billion of NIW last year, and what a great market to test these things. And again, we have an incentive structure. Remember, folks do what they're incented to do across every company, whatever the incentives are. My incentive along with the…

Got it. Are you collecting more metrics on the risk-based engine that you're using? I guess part of the question is when I think about the expense to maybe build this out or make it a more robust pricing engine versus the outlook for expense growth, it feels like maybe there isn't too much investing that needs to be done on the engine. It's in pretty good shape.

Yes, it's a good question. The investment is -- when we think about investments, and earlier, we talked about expenses. And when you manage expenses, you also make sure there's a trade-off between investment and making sure you have a sound and solid infrastructure. So, we certainly don't -- we've made a number of investments in the past year in cyber. I mean cyber is a day-to-day kind of event that you have to manage. We continue to invest in moving the platform to the cloud, and that's something we're committed to. And I think around kind of the pricing engine, two things to think about. So, one is just the modeling, right? And there, you don't really have to reinvent the wheel. I mean there's other industries, and credit card is one that comes to mind where that modeling has been in place for years, years and years. And it's really just taking some of those patterns and things that folks have done in other industries and applying them to ours. The second thing is you have to bring to the point of sale. And then so whether you have two factors or four factors or 1,000 factors, getting them to the point of sale within two seconds, right, because you have to do it very quickly, that's where -- that's another work stream. And I would say there, five years ago, that would have been close to impossible. And now with the advent of APIs and so forth, the ability to bring that to point of sale has really improved and the cost of it isn't as great as it would have been years ago. So, I think that's why we continue to work on it. We're collecting, obviously, more factors, but you need to test those factors, back test them. And again, we're not in a hurry to get to the market with it. I think our view is you want to make sure when you get there, that it's a good process. And it's relatively seamless for our customers, right? It has to be a good user experience with our lenders. And obviously, you want to make sure it works in that aspect. So, again, our view is it's -- it continues to be -- it gets back to my five-year transition that you want to continue to work at it every day, and we think this is a good market to do that. And I'd rather spend -- have our folks spending time on that versus going out and trying to get that extra loan from a market share perspective.

Got it. I'm going to play devil's advocate for a minute here. Credit is fantastic, and you're doing this testing in the risk-based pricing engine and you're learning how things move and whatnot. If and when credit turns, do these lessons mean anything? Are you actually going to be able to use them when it's a completely different credit world?

I think the answer is absolutely yes, we could use them. And I think that's when that's when they'll be the most useful. And I think the rest of the industry is going to be very similar to this, Phil. I do think this idea that the industry doesn't have discipline and all those sort of things is a little bit -- is only not true when you walk through with the lenders, have a tremendous amount of power from a card standpoint. So, as things move to the engine and the ability to change things, I would see the industry moving in lockstep. Another thing to keep -- because again, you can have the best model, and I think your question would be, can you pass that on to the point of sale? And we feel confident we can. You don't really know that because you don't know the competitive dynamic. But the other metric that you have is our reinsurance. So, if you think about the capital markets that we work with and the reinsurers, you now have another set of eyes looking at credit and opining on it, right? So, if we get into a stressful period, I would fully expect the cost of reinsurance to rise. And there, you also have the ability. That's, again, a third party telling you that they think credit costs are going to rise. You can choose to accept lower returns or you can now, with the engine, pass that on to lenders. Day-to-day, lenders don't think about mortgage insurance or the cost of mortgage insurance. They only care about mortgage insurance that they think someone else has a lower mortgage insurance. Trust me. They don't -- if you're a lender, they don't spend more than five minutes a day thinking about MI. So, we can't get too caught up in that and just make sure we continue to invest in analytics and making sure we're giving the borrower our best price based on our estimate of default.

Got it. All right. Thanks guys. Happy Valentine's Day.

Thanks Phil.

Your next question comes from the line of Geoffrey Dunn of Dowling & Partners. Your line is open.

Thanks. Good morning. I've got a few for you. Mark, as companies in the industry continue to pick their spots in the marketplace and play with the pricing engines, are there any areas that Essent has backed away from as a result of that?

I don't think we've backed away from anything. I think there's places where we're not being as successful. And I think you can see it just in how our portfolio, the NIW characteristics, match up versus some others in the industry. So, I think you can see where others are kind of picking their spots. Our view is we're pretty focused on premium rate, Geoff, overall premium rate. And I think in a credit environment like this, you're a little bit splitting hairs on the loss rate where the premium rate is a big deal. So, I think that's something where -- and that might not all be the case depending on what your view of the economy is. So, our view is we see the market a little bit like it was, almost, I would say, 11 and 12 when UGI had their model and they really targeted super high FICOs and we felt like they left some money on the table. So, we're seeing some of those patterns again around premium rates. So, our view is we're pricing it the way we think the returns are. Others have different views on returns, and they could be right, certainly, and I could be wrong. But I think our view is we feel pretty comfortable around where we are kind of pricing in the market.

Okay. And then with respect to PMIERs obviously, the two-year review was thrown off-schedule right from the start. Have 3.0 discussions, formal discussions started at all at this point? And do you have an expectation on actual timeline--?

No, I mean, it all depends on CCF. So, that needs to be finalized first. It's not even out for comment. Once it's out for comment and then gets approved, I wouldn't expect PMIERs discussions to pick up until that's even done. But I do think it's something for investors to think about because that's -- when we think about kind of our capital situation, I think that's something you want to keep in your back pocket because you just don't know what the answer is going to be. I'm not certain it's going to be anything that we're particularly worried about. And remember, reinsurance is a good mitigant against that because you can do no capital market transaction that goes little higher attachment point to help you manage that stuff. But having real capital on the balance sheet's important, too. And I think that's something we want to -- we've heard some comments around capital-light type businesses, and you can get carried away. I think we all got As in corporate finance, so we know how it works around the efficient frontier. But having core equity capital and using reinsurance as kind of in addition to that, it's pretty important. You don't want to become too overly reliant on the reinsurance markets because, again, in times of stress, Geoff, you don't know if they're going to be there. So, capitals came, and we like our capital position, as I said. It gives us a lot of optionality around the future. And that's why we've chosen dividends. And obviously, in the first quarter, increasing dividends is our expression and our distribution of capital kind of going forward for the near-term. Longer term, I think once PMIERs, if it comes out, is settled, we know where the market is going. We would continue to be, I would say, look at other forms of capital distribution. No one's asked the question around buybacks, but I think our view on buybacks short-term is we don't see a lot of need for them longer term, clearly. We're going to look at buybacks as another way to release capital to maintain returns. Not necessarily EPS, but I think we want to make sure our view is this business is in that kind of low to mid-teens returns. Right now, we're at 20. But as we build capital, we'd also look at other ways to make sure we're providing-- making sure the returns are at elevated levels and making sure we think about total return to shareholders. And since I'm a pretty large shareholder, I think about it a lot, and I think we're always going to look at methods to make sure that we make money for our shareholders.

Okay. And so you kind of front run my last question there, which is, it sounds to me like you want to see at least the GSE capital rules and maybe even finalization of 3.0 before you would maybe consider taking dividends out of Essent Guaranty? It does look like there's still some excess down there, but I just want to get an idea whether you think you could do that.

We could probably do it today. I think the view is we just -- we have the cash, both at Essent Re at the HoldCo in order to do that. So remember, with us, Essent, we have a tax -- there's some tax friction from getting it from Guaranty to the group. So our view is we like it within Guaranty for now. But once we move it, we have the ability to move. We just don't need to move it now given the cash situation we have. Good question, though.

Well, I guess, the other way to ask that is, how much excess drag is too much drag when you think about optimizing your returns?

Well, I'll think about this as math. So, if we think -- I mean, I'll just pick a number. If we think we want returns at 15%, then the math is we'd have to release capital to get to -- if the returns are 12 and our goal is 15, you can just do the math. So, I think of it that way. And I don't know if we're going to necessarily wait to that. So, I don't think we're going to say wait to PMIERs 3.0 because that could be three years. So, we're going to always constantly assess the situation and making sure that we're kind of managing to the returns. So, hopefully, that helps give you some color.

All right. Thanks.

Your next question comes from the line of Rick Shane of JPMorgan. Your line is open.

Hey guys. Thangkas for taking my question. And Mark, you spoiled me. You know I like to ask the repurchase question, so thanks for getting that in before I got on the call. I want to ask a little bit; the last two years have been a little bit about an arms race in terms of the shift towards pricing, new pricing mechanisms, new pricing tools. I'm curious if the arms race has sort of carried out on the other side amongst the mortgage lenders? Are you seeing some of the platforms that they're using enhance price discovery? And is that causing any pricing pressure or any short-term dislocations in terms of where business is going?

That's a great question. I wouldn't call it an arms race more as just an investment. And as arms race sounds, it doesn't have the greatest connotation. I think everyone in the industry has done a really good job in terms of embracing this and investing in it. It is really not at the lender level, Rick. And the reason being is the GC doesn't differentiate based on credit risk. And so if you have a flat fee, it doesn't make sense to price different FICOs and different LTVs different. There's no incentive like they say on the credit card side. So, I don't -- we don't see it much on the lender. The lender game is a little different. They're more about keeping their cost to originate low and making sure they manage the servicing asset. So, they don't really look at differential from a price perspective that way.

Okay, great. Thank you so much.

Sure.

And ladies and gentlemen, that is all the time we have for questions today. I will now turn the call back to the presenters for their closing remarks.

Thank you, operator. Before ending our call, we'd like to thank you for your participation today and enjoy your holiday weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.