Essent Group Ltd. (ESNT) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Essent Limited Third Quarter 2020 Earnings Conference Call. At this time, all participant lines 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 turn the call over to your speaker today, Chris Curran, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Whitney. 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 third quarter of 2020, was issued earlier today and is available on our Web site at essentgroup.com. Our press release also includes non-GAAP financial measures that may be discussed during today's call. A 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, and subsequentially updated through other reports we filed with the SEC and any other reports and registration statements filed with the SEC, which are also available on our Web site. Now, let me turn the call over to Mark.

Thanks, Chris. Good morning, everyone, and thank you for joining us. Earlier today we reported third quarter earnings and our I'm encouraged by financial results, notwithstanding the COVID-19 operating environment. For the third quarter we earned $125 million compared to $15 million last quarter and $145 million for the third quarter of the year ago. The increase in this quarter's earnings was driven by a decrease in new default notices, which resulted in a lower loss provision of $55 million versus $176 million for the second quarter. Our outlook on the COVID-19 economy remains cautious. However, we are pleased with the resilience and strength that housing has demonstrated throughout the year. Unlike the great financial crisis when housing played a big role in the downturn, during COVID-19 housing has been a bright spot in the economy. Low mortgage rates, affordability and rising demand for single family homes have been the primary drivers of strong refi and purchase mortgage volumes. For 2020, total mortgage originations are forecasted to be in excess of $3 trillion with over $500 billion of industry NIW. During the third quarter, we grew insurance in forced 19% to $191 billion compared to $161 billion at September 30, 2019. Our growth this quarter was driven by $37 billion of NIW, offset by runoff as our persistency was 64% compared to 68% last quarter and 82% for third quarter a year ago. We continue to be pleased with the high credit quality of our NIW, noting that the last two quarters’ production is stronger than earlier this year. This is due to the credit tightening citing by the GSEs and our industry in response to COVID-19, along with increased share of refi mortgages. For the third quarter, our NIW maintained an average FICO of 751 compared to 749 last quarter, and 744 for the third quarter a year ago. Since the onset of COVID, our focus has been on enhancing our balance sheet and further strengthening our capital and liquidity positions. Most recently, we closed on a $399 million ILN transaction, increased our credit facility to $625 million and generated $385 million in net operating cash flow during the second and third quarters combined. As a result of these actions and including our $440 million capital raise in May, we now have access to over $1.1 billion of incremental capital versus where we were at March 31st. From a PMIERs perspective, we remain wealth positioned at September 30th. After applying the 0.3 factor for COVID-19 defaults, Essent Guaranty’s PMIER sufficiency ratio is strong at 156% with $981 million in excess assets. Excluding the 0.3 factor, our PMIER sufficiency ratio remains strong and 132% with $657 million in excess assets. Note that the PMIERs excess does not include the $685 million in cash and investments at the holding company nor the capital credit provided by our October ILN transaction. Essent Guaranty remains the highest rated model line in our industry at Single A by A.M. Best, and A3 and BBB plus by Moody's and S&P respectively. On the Washington front, we continue to believe that Essent and private mortgage insurance are well positioned regardless of the outcome of the election. As mentioned, housing has been a bright spot in the economy during COVID-19 and private mortgage insurance plays a key role in facilitating homeownership. Certainly as the political landscape begins to take shape over the coming months, we will focus on any new initiatives pertaining to housing finance and implications on our business. Finally, our bi-managed and distributed operating model provides us confidence in managing our business through cycles and mitigating franchise volatility. 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 December 10th. We will evaluate future dividends as we continue to navigate the COVID-19 economic environment. Now let me turn the call over to Larry.

Thanks Mark, and good morning everyone. I will now discuss our results for the quarter in more detail. For the third quarter, we earned $1.11 per diluted share compared to $0.15 last quarter and $1.47 for the third quarter a year ago. Weighted average diluted shares outstanding for the third quarter 2020 was 112 million shares, up from 103 million shares in the second quarter due to the full quarter impact of our equity offerings in May. Net earned premium for the third quarter of 2020 was $222 million, which represents an increase of $19 million or 9% from $203 million in the third quarter of 2019. Third quarter earned premiums are up $11 million compared to the second quarter of 2020, primarily due to 9% increase in average insurance in force. The average net premium rate for the U.S. mortgage insurance business in the third quarter was 46 basis points, down from 48 basis points in the second quarter of 2020 and 49 basis points in the third quarter of 2019. The decrease compared to the prior quarter is primarily due to a 1 basis point decline in the base premium rates and a reduction in single premium cancellation income of $2.1 million. Single premium cancellation income contributed 5 basis points to the average net premium rate in the third quarter, while ceded premiums reduced the premium rate by 5 basis points. Note that these rates exclude the impact of premiums earned by Essent Re on our GSE risk share transactions. Related to the ongoing COVID-19 pandemic. During the third quarter, we received 12,614 new notices of default, which is down 66% compared to 37,357 defaults reported in the second quarter. Due to the lower number of default notices during the third quarter, the provision for losses and loss adjustment expenses was $55 million compared to $176 million last quarter. Also as a result of lower defaults, at September 30th, our default rates declined 65 basis points to 4.54% from 5.19% at June 30th. Since April 1, 2020, we've assumed that all reported new defaults relate to COVID-19. For these defaults, we continue to use a 7% claim rate assumption to provide for losses and loss adjustment expenses. This compares to an approximate 9% claim rate, which was used in the first quarter for early stage defaults prior to the onset of the pandemic. We believe programs, such as the federal stimulus, foreclosure moratoriums and mortgage forbearance may extend traditional default to claim timelines. Because of this, we are estimating a lower claim rate on COVID-19 defaults in our historical experience where borrowers did not have access to these types of programs. As of September 30th, our consolidated reserve for losses and loss adjustment expenses was $308 million. Of this amount, $247 million relates specifically to the COVID-19 defaults reported to the company in the second and third quarters of 2020. $12 million of these reserves were ceded under the quota share reinsurance agreement. The COVID-19 related reserve recorded in the second quarter was $189 million. Note that we did not adjust this reserve in the third quarter as this amount continues to represent our best estimate of the ultimate losses to be incurred for claims associated with the second quarters default. Other underwriting and operating expenses declined $2 million to $37 million in the third quarter of 2020 compared to the second quarter. The expense ratio was 16.7% in the third quarter compared to 18.4% in the second quarter of 2020 and 20.4% in the third quarter a year ago. The effective income tax rate for the nine and three months ended September 30th was 16%. The consolidated balance of cash investments at September 30, 2020 was $4.7 billion. Essent Group Limited paid a quarterly cash dividend totaling $17.9 million to shareholders in September. As Mark noted on October 14th, the company executed an amendment of our credit facility, which provided for issuance of an additional $100 million term loan and an increase in the revolving component of the credit facility to $300 million. The proceeds of the additional term loan, as well as cash at our holding company were used to pay down all amounts strong under the revolving credit facility. Accordingly, we currently have approximately $580 million of cash and investments at the holding company and $300 million of undrawn capacity under the revolving credit facility. The amended credit facility matures on October 16, 2023. On October 8th, we closed our second Radnor Re insurance linked note transaction of this year, which provided for $399 million of reinsurance protection on approximately $13 billion of risk in force. This transaction pertains to our new insurance written from September 2019 through July 2020, which was not previously covered by our quota share reinsurance agreement. Now let me turn the call back over to Mark.

Thanks, Larry. In closing, while the COVID-19 operating environment persists, we were encouraged by our financial results and the lower number of new defaults reported to us during the third quarter. Even though our outlook on the economy remains cautious, we are confident in managing our business during these uncertain times. With a strong housing backdrop and robust levels of high credit quality NIW, our business is operating on all cylinders. Given the measures that we've taken in strengthening our financial and liquidity positions along with having 95% of our portfolio reinsured, the economic engine of our franchise is firmly in place. Now, let's get to your questions. Operator?

[Operator Instructions] Your first question is from the line of Douglas Harter with Credit Suisse.

Mark, can you talk about the competitive dynamic that you're seeing for writing new business? You guys have been quite successful following capital raise of writing a lot more business than the industry. And just if you could shine some light on the competitive nature of it?

I mean, Doug, I don't think the competitive nature has changed too much. Although, there's been some changes in the second and third quarter, which I think resulted in higher market share for us. You had a few of the MIs kind of really back down for credit or capital reasons, and we mentioned this on the second quarter call. I think just our strong balance sheet and liquidity enabled us to probably write more business and take advantage of those opportunities. We're basically open for business. And again, a few other guys back that we were able to take advantage of it. And I think it's just a good signal of the strength of the franchise. Overall, just in terms of the market, it's very large. So all the MIs are writing a lot of business. I think the pricing levels remain elevated from a unit economics basis. They're pretty strong, pretty consistent with the 12% to 15% kind of returns that we look for. We continue to grow insurance in force and we grew at 19% year-over-year. So I think it's a healthy environment. And a lot of that’s because housing is healthy. I mean strong demand for housing, both with the millennials as we spoke about and then you're seeing kind of the impacts of COVID. I mean, you’re seeing more folks work from home, so they need a bigger house. Maybe the kitchen table isn't the perfect home office anymore. You're seeing folks leave the city probably a little bit earlier. You're seeing people move out, move further on the outskirts of cities, again, with telecommuting, makes it easier to live further from the home office. And I think even post-COVID, the work environment is going to change. So you're going to see more kind of a hybrid type model. All these things are positive for housing. Low rates have clearly driven mortgage origination. So we're really the beneficiary of all that. So I think that's much larger than kind of what the competitive environment is for repricing. I think, at some point -- sometimes we get too caught up in some of that minutia, so to speak, and not look at kind of the bigger picture, which is we really follow where housing is going and housing in the current environment is quite strong.

And I guess just to follow up on that, now that you kind of had another quarter of market share gains, and where the competitors were backing open for business. Any thoughts as to whether any of that is kind of sticky and your longer term view as to the shere that Essent can get has changed?

No, not really. I think, again, we're kind of want to stick so that 15% to 16% still kind of our long term kind of goal of disposition in terms of market share. It's pretty much where we are now in terms of even insurance in force. We've kind of reached I think 15% of the total pie. It's a commodity business. And I think it's price driven, both at the borrower level via the engines and it's price driven off of kind of the remaining rate card. So I would expect it to continue to be competitive where our shares going to end up in the fourth quarter, who knows. I mean, we didn't even know what our share was until the other -- to the other night when we got everyone's results. In terms of the pricing, Doug, the business is just changing. It's becoming much more opaque in terms of how pricing is delivered, it's done at the borrower level. I would say most senior management at the mortgage bankers don't even know who's getting the MI, it's really done the best price wins for the borrower. And I think that's great, it's great for the borrower, it’s great for lender, it's actually good for the MI, because we don't always have to be the lowest price. And you've heard me say this over the past couple of years, Essent [edge] is really a risk management tool. It's helping us shape the portfolio. And I know every EMI, we've heard all the calls, every EMI was the first one to change pricing. It seems like we all changed like the day after COVID hit. But the key point is the industry was able to respond very quickly and make changes. And let's just go back three years, and let's assume we all had rate cards. And we wanted to make a pricing change. Well, every MI has to file in all 50 states. We have to then -- we have to come up with the pricing first and we have to have discussions with the larger lenders who need to modify their systems. So in that environment, it's usually the first or second MI that kind of has pull position, because the larger lenders program for being [Indiscernible] tenant wants. That's very easy to do when prices are lower. The first guy there, the lenders, were making every other MI come in line. That's not the case today. I mean, if that was the case, it would have taken us six months to change pricing. And here everyone, most of the MI stated within say four to six weeks, and that’s a fundamental change to the business. And so when you think about what's the future hold? Is there going to be a PMIERs increase? Is there going to be change in the tax rate. I think the industry is well equipped to change pricing, not so much on a dime but really be able to change pricing quickly. So the pricing power has actually shifted much more to the MIs than I think investors think. So when you think about pricing, whether it goes up or goes down, it's really based on unit economics. And unit economics that's really what's driving kind of a lot of the pricing much more analytical industry across the board when you examine all this -- look at all the different management teams. I think that's a miss. I think people are still looking at the old pricing environment and just the power of the engines and the ability to kind of dial up or dial down is important. And I'll give you one more example. I think in the summer, over the summer, we raised pricing in approximately 6% to 8% of our insurance in force. And those were areas, Doug, in MSAs where we saw the default rates significantly higher than our core default rate. So that you start to surmise that unemployment is higher in those areas, which it is. And overtime unemployment correlates HPA. So again with our engine, we're able to go in there and raise pricing. If we're able to get that business at higher rates, that's great. Good unit returns as another MI sees the business differently and offers the borrower better rate, that's good too. So again, I think longer term, the engine is really a fundamental change. We said previously, the biggest change in the industry has been the reinsurance and the ability to take the volatility out of the balance sheet. And that's true. The pricing engines are becoming a close, number too and it’s really changing the nature of the business.

Your next question is from the line of Rick Shane with JP Morgan.

Mark, you've made some really interesting points about the granularity in terms of how you're looking at things. As we move forward and think about how the world is evolving, it’s fair to say that not all credit is going to be the same and that there are going to be some distortions that occur. When you look forward and think about how you want to continue to grow the book, where do you think the best opportunities for better credit are and where are the opportunities -- where are the greater risks in the system in the sort of new world post-COVID?

I think the answer is going to be just increased analytics, Rick. The old ways, I mean, remember, up until a couple years ago, we priced off of FICO and LTV and now we're doing you know, we're pricing off additional factors, such as the MSA and DTI and some of the other well known factors. I think the next step is just increased analytics. So it's going to be other factors that really differentiate between what the -- 760 borrower, there's really good 760 borrowers who have been on the job for 10 years and there's other 760 borrowers that maybe right out of school, much thinner file, and you know, this from your credit card industry background. So those 760s are different and they're going to perform differently and they should be priced differently. Again, up until this point, there hasn't been a technology available to not only you can use the technology to come to an answer and use many more factors, you couldn't deliver that to the point of sale and that's just changed. And you're going to see, you're going to really see analytics be the key differentiator in the business going forward amongst MIs. The model of, hey, Mark goes out and talks to a lender, they think he's great. It's a good relationship, we're going to bequeath you 20% of the volume, those days are gone, Rick. And they're not gone overnight. But if you look and to see over the next one or two, three years, you can see it changing. So the business is really going to be more about increased analytics, managing your costs, managing your capital, it's going to look a lot more -- you've heard me use the Geico, Progressive model. I'd also use the credit card model, where you’re going to try to get out and try to have as many users using -- remember used to drop mailings on the credit cards. It's very similar if you just think through that. The hold back in this industry forever was the lender technology, it wasn't the MIs, it was just -- because of the technology, we weren't able to deliver that increased pricing or more granular pricing at the point of sale. And I was saying now with Optimal Blue, Ellie Mae and Compass just some of the systems that the lenders themselves have, you're going to see that more and more readily available. I would say probably 70%, 75% of the volume of the industry is probably via the engine and there's probably 25% that’s still on the cards. But overtime you're going to see that move much closer to 100%, which again is a big advantage for folks who can really leverage analytics and technology.

And you've understood the question exactly in the spirit and the thought process behind it, I agree with you that there is going to be output to be generated, identifying and above average 760 borrower versus a below average 760 borrower. With that in mind, as you develop alternative sources of data. How easy is it to integrate new data strings into your underwriting API?

Five years ago, would have been impossible. Today, it's available and it’s readily accessible.

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

I just wanted to ask first about the OpEx line, the expense ratio obviously is very low at [17%]. So how should we think about that, the trend for that line item?

Bose, again, I think we're pleased with it. The lines moving, it's been going up for a long time. So it's nice to kind of see it to go other way. Couple of moving parts there. Clearly, now in a remote environment and again, we're not remote. I mean, our home office is actually back in and we've been back in since Labor Day and we're on kind of an alternative schedule and complying with all the safety standards. So we're kind of back in the office and being very productive in terms of looking forward to build a business, but we haven't done a lot of travel. So we saved a ton of money on travel and it's something quite frankly you're going to re-examine going forward. In terms of leveraging travel, technology resumes and you're not going to have to go to every single meeting and travel as much as you did before. You still going to go out and meet people and meet investors and meet lenders, absolutely. But you're going to be able to do it a little bit more judiciously and I would say more efficiently. And then the other moving piece is the ceding commission on the quota share. And again, that's a service we provide to the reinsurer and it's a way to leverage our expenses. And you've heard me say just earlier, as this business becomes more analytical and pricing expenses are key. So right now we have the lowest expense ratio in the industry. And we almost have the lowest nominal cost too. I mean, there's one other MI that has slightly lower operating expense levels, but their expense ratio is obviously significantly higher. So it's something we focus on all the time. There's the old saying the best risk managers are the best cost managers and we're focused on it. And I think part of that's our heritage. We started the company, a lot of the senior team put their own money into the business. I still sign checks over a certain size. And to me that's a long term advantage. It's one of the advantages we've had for a while and I think it's starting to actually widen when you start to examine expenses across the industry.

And then actually I wanted to go back to your question just on some of the market dynamic. You just talked about the bulk market. Has that grown as some of these big lenders who use that have become bigger? And then your comment about some of the MIs backing away a little bit. Was it more in bulk market or was that kind of a broader comment?

I mean, I think there's a misconception around the bulk market. I would kind of break it out between the lenders who use the engine and lenders who are still on card. So there's the bulk cards that get bid out. There's also negotiated card. So it's kind of like a -- it's another way to discount price. So again, that's about 25% of the market. In the bulk market, which I think it's apparent, we're the only MI that competes in it, because we haven't heard anyone else -- everyone else deny that they compete in the bulk market, which we find a little humorous. I think in that market, to be honest, Bose, two large lenders came to us during the second -- one in the second and one in the third, and said another MI could not fulfill the commitment. And we were able to basically step in at higher pricing, because we raised the cards and we're able to kind of -- and that's really kind of driving some of that incremental share. That did come up for bid again. And that was something where the pricing change. So I think one of the other MIs alluded to it on the call and we moved away from it. So we'll just continue. Again, we've always said market share ebbs and flows and we see opportunities to put on risk, originate risk at attractive pricing, we're going to take advantage it but they don’t have to reach for it. I mean, we've been in the business now 10 years. We're going to run it for another 10 years. We don't get too caught up in kind of the ebbs and flows but we're also not religious against competing entity. I mean this is all about growing insurance in force at good economics. Longer term do you want to drive the business more to the engine? Absolutely. But again, these things take time, nothing happens overnight. But I do think again, just the fact that those two lenders came to us is a good example of kind of the financial strength and the flexibility that we build into the model.

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

Mark, could you talk a little bit about the demand you saw for the latest ILN? How that compares to demand kind of pre-COVID, and the implications longer term for the ability to access that market through cycles?

We thought the demand was actually pretty strong, albeit a little bit higher pricing. It's not at the pre-COVID levels and we structured around that. So if you look at our west ILN deal, we kind of went from a 3 to 6, so we eliminated the band. And that was really to kind of reduce -- and we always think about in terms of premium basis points that we'd have to give up. So again, our equity raise, our ability to kind of hold more of that first loss fees even in our past business despite the revision we've had on the defaults, we don't think we're going to hit those levels. So I think from our view, we made kind of a risk reward trade off. It's all about managing those unit economics. And we were pleased. We were pleased with demand. And I think every MI has hit the market. And I think that goes well. I think it's close to $13 billion, $14 billion of MI ILN, so which is good. The more the merrier in terms of that market, because it provides more liquidity. And again, it's a big part of our model. And the fact that it came back so quickly and in such strength is a good positive indicator for the longer term.

And then what was of HPA are you guys assuming in current reserves? And if we remain on trend, kind of what are the implications for the current reserve levels?

I think with our reserves, I would say we were conservative. So I think we haven't -- HPA to us is a little bit of a backdoor opportunity. So when we set the reserve for the second and third quarter, as Larry mentioned, we set 7%. But it's right about 100% severity, which is our normal default. So you kind of flash forward over the next six to 12 months and say forbearance ends and that borrower goes into foreclosure. We think there's an opportunity with elevated HPAs for them to either not default, sell the house and get out of that. And part of that is just where our defaults are, and the mark to market on our defaults is close to 80%. So they definitely have some push and even if HPA doesn't move, or if it even goes down a little bit, say there's a second recession, a recession after the recession, there's enough build in equity, that that's a potential to limit default. So that's kind of in our estimate a 7%, our estimates tend to be light. I mean it can end up being 10% but then severity is lower. And you kind of get to the same place and that was all factored in.

Your next question is from the line of Jack Micenko with SIG.

Mark, I was curious how you think about, it sounds like Douglas questions for both business and from competing for it on that basis. How much does persistency or the forward view persistency factor into your decision, meaning on a per unit basis you make a policy today and that policy on the books for six to eight years instead of three to four. Does that change your pricing or your inclination so that you might increase a little more today, because while it onset that per unit transaction maybe a little bit lower the duration of it, it's your back into or above sort of your sort of target return requirements?

And I would say on the singles business, although that's kind of has dissipated, you've definitely going to factor in rates, visits and LPMI. The shorter the policy, the better the benefit and kind of unit economics. I think for BPMI, Jack, we’re really hesitant to make interest rate calls. I think that's not something we're very good at and I don't think we'd ever be good at it. So I think we structured on a kind of a consistent duration. And when we look at persistency versus kind of new originations, we do believe there's -- it's not a one to one correlation but they're pretty correlated. So again 500 plus billion NIW market this year, well, you're going to know that persistency is going to be in the 60. So if we look forward and as we price business, if NIW continues to stay strong, persistency will continue to stay low. So I’m not trying to dodge the question. It's just we don't try to hit -- we try to be generally right around a lot of these pricing decisions versus kind of precisely wrong. And I think sometimes you can get a little too precise if you kind of factor that stuff in.

It sounds like creditors still be overriding the driver of the matrix and the engine and the pricing strategy. Larry, quickly for you. We've been rolling the investment yields for all these companies this quarter since. Where are you [Indiscernible] money on relative to the portfolio and how do we think about additional yield compression going forward? And also understanding you've got more cash on hand than you have because of the capital raises over the summer.

Jack, I mean rates are down. So our yield on new investments purchased during the quarter, the most recent quarter, is about 1.6%. So you're seeing some rates go down. We've invested some thing shorter into their average duration of the portfolio, it’s come down as well. But we really are continuing to focus on the quality of the investment portfolio and managing a really high quality investment portfolio but you'll go down. And as some of the existing fixed income securities mature and we reinvest that at some of the lower yields, you'll see the average yield go down. But we continue to generate significant cash, as Mark had mentioned in his prepared remarks. So as a result, we would see the average balance going up. And I think that will drive a nominal increase in investment income ordinarily, but yield will continue to go down in this rate environment.

Again, it's really a philosophy. So we're trying to keep the investment portfolio as clean as possible. And I think that turned out to be a benefit, firstly, when COVID first hit. Because remember companies tend to, and it's natural, your reach for yield when things are good. But with a business like ours with talking 60%, 70% operating margins, the investment income, the reach for that is a little bit like taking pennies up in front of a steamroller, you don't really get paid for it. And then when things go bad you really start to lose focus, because you have to manage those type of investments. So we're going to try to isolate the MI business, keep it super clean in terms of the investment portfolio. So we're just going to follow rate. So if rates go down, we're obviously going to see lower yields. But again, you saw some of the benefits when new business being originated. So again, there is a correlation amongst all that but we're trying not to win every event there.

So it sounds like maybe dollars unchanged, because the offsetting growth versus lower yield…

Jack, I think that's fair. And again, the yield actually for the third quarter, is about 1.3% for new purchases…

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

Just real quick, I want to go back on the early comments momentarily. Just what are the -- make sure I understand it. So my understanding was you guys always price based on a normalized environment. So when times are good, it's not like you're saying prices go down? Now you increased your prices post COVID. And I suspect somewhat that had to do with just the uncertainty and what happens with credit. But clearly, housing has held up pretty nicely, you had some support. If we end up in a situation where you go back to what we had pre-COVID, where you had decent housing trends, and what -- I guess if that was the new normal, if you will. Does that mean we’ll see return about 12% to 15%, or is there something else that I'm missing here, when I think about it? Like it’s one to three years, we increase pricing and you have all the government support for housing, why are your returns going to be lower or even 12% to 15%? Why wouldn’t it’d be higher?

I mean, again, we usually of course, again, at the general range. These are three to four year predictions when you' write the business. So when we raise pricing in this frame, a lot of that was predicated on home prices kind of actually being -- I think we did flat to slightly down. It's still happening here, early six months into it and the future is a little bit uncertain. So that's why we're kind of hedging to that. If you model it out, it probably looks better than 12 to 15, but again, this is reality. And we still have an unemployment rate that again, it keeps going down but it's close to 7%. So I would look at it like even in the past with us, we price in this range. If returns or results end up being better we’ll print better returns. But you try not to factor a lot of that stuff into the model, I think it's very difficult to do that especially in this environment. The question is do the -- and I've heard this before. We've heard it kind of through the summer. Some of the prices stick if home prices remain kind of strong, and I kind of think they do. Again, I think again it gets back to the opaque nature of the engines, it's much easier for MIs to kind of change pricing and it's actually relatively transparent on the engines, because one of the providers, you can see they send us a monthly fee kind of where pricing is in the market. So you don't really -- you're not going to outsmart your competitors in terms of pricing. I mean, everyone kind of sees the same thing. Again, it gets back to my pricing power comments. I think folks, it will remain kind of in this range. As it decrease a little bit because some MIs may reach a little bit time, it could. But again, I think the factors or the fundamentals are in place to have pricing at this moment.

And just one last question for me. In terms of your October trends, it looked like the insurance in force growth was pretty healthy 2% month to month. Is there anything special worth calling out of October that we should be aware of? That's all for me. Thank you.

No, I mean, just to comment is the NIW market and the industry was strong in October, so I'm sure others did just as well. And our insurance in force is a little younger. So we're growing it. And it's a little smaller than some of the other guys, so they're the victim of kind of large numbers. So I think the NIW market for October for the industry remain quite healthy.

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

Going back to the questions earlier around risk based pricing. Are there metrics that you're capturing that you're not using right now? And just trying to think about the importance of analytics. And I'm wondering, to the extent you have other data points that you're not using in pricing but maybe you're collecting to help augment the analytics that you could do moving forward?

Yeah, I mean, I don't want to get into the details of it. We kind of had Essent edge 1.0, which is in the market now. But you're always working on improvements to that. So yeah, behind the scenes, we're definitely looking and testing improvements to the model, which again will continue to kind of roll out in stages. And I would expect the other MIs to be doing very similar things. Again, this is when this becomes the analytics game, I think we're kind of made for it. This is really probably our sweet spot. So we've invested in it. We brought in folks with credit card backgrounds to look at things. We're not inventing anything new. We're taking trends and analytics from other industries and just applying it to this business. So it's actually -- again, I think it bodes well for the industry to get much more analytical in terms of -- because I think it'll show off in returns over the long-term, and less volatility around the terms. When you think through, Phil, just the hedging on the back end, which is really kind of reinsuring out that mezz risk, which created all the volatility in the downturn. Back in the great recession, that's pretty well hedged out and it's kind of continuing, based on Mark's question around ILN market that continues to be healthy, the quota share market, some of the MIs have capped that. So the back end part of kind of capping the liability on the balance sheet is critical, this credit is the number one killer of the MI businesses. But just again, just the changing nature of the front end, I really think bodes well for the industry. And could eventually, again, just I think when investors start to understand it and see, I mean see proof of it. I mean, they see proof on the ILNs. I just think proof on the pricing side and how we can differentiate will start to separate some of the MIs even further.

I'm talking about the ILN. Structurally, can you just help me understand how they work, when we drop below the rate at which the amortization of the coverage freezes? I think it was somewhere in that 5% range once the default rate got above that, the ILN coverage stops amortizing down. If we drop below that rate, is there a onetime catch up or like a quick change in the amortization to get the portfolio back into alignment, and where are you going with it?

They just start to amortize again. So basically think it just the clock starts again so that there's no catch up, it just goes back to its normal kind of amortization schedule.

Okay, all right.

We can go offline and walk you through it, if you want that. We'd be glad to do that.

Yes, perfectly. Okay. And the last thing I have for you, feel like it's been a while since I asked about the internal quota share. And maybe it's early days, just given the uncertainty that COVID has before us. But if you could just talk about how you contemplate that in the broader capital management plan, any thoughts there would be appreciated?

It’s certainly something we've talked about over the past -- the past couple of months with the election. I do think it is -- again, it's another positive or flexibility in our model that we're able to kind of -- we have the ability to take that up, we haven't done that yet. There’s capital considerations with that. But again, given our capital positions, I think we're certainly in good shape around that. So we're going to wait to see. We'll see what happens kind of with the election and whether in terms of where corporate taxes are going, but we could. We do have the flexibility to mitigate some of that tax increase. And lot of tax rates stay the same. It's certainly something given our capital position, we may evaluate to lower the effective tax rate even further.

Next question is from the line of Geoffrey Dunn with Dowling and Partners.

I wanted to go back to the investment yield discussion and ask, how does your yield expectation play into how you set pricing? And Mark, as you said it's not always good to be too precise, is it one of those factors? Or is there a point at which yields drop enough that you have to think about not hitting the targeted returns versus what you assumed in your pricing scenarios?

I would say we use like a normalized yield. It's definitely a long-term yield that we've used, I would say over the past seven or eight years. We tweak it up and down based on where you -- we don't get -- we don't -- we certainly don't factor in higher yields. And at lower yields, yeah, that also get -- when I say 12% to 15%, that there's a range within there, where if yields are a little bit lower over the normal term that, again, that's kind of factored in.

So if we're envisioning an environment that rates could stay at current levels through '21. Do you think the industry needs to rethink pricing just based on that, or is it really more of a longer term view?

I think it's a longer term view. I don't think -- we certainly wouldn't change our pricing based on our expectation of investment yields. I'd rather just accept a lower return. Again we're really in the business of analyzing consumer credit, making sure we're pricing for that long tail risk precisely and well versus kind of factor in just changes in the investment yield. I don't think it moves the needle that much. I mean, just look at our P&L, Geoff, the investment income line is important and it's a nice revenue source. But it's certainly not the ultimate driver of kind of longer term profitability.

And Geoff, just echoing Mark's point. I mean, premiums are 12 times investment income, were just build a lot different than many other insurance companies. Premiums and insurance in force, that really drive economics of the business.

At this time, there are no further questions. I'll now turn the call back to management for final comments.

Well, thanks everyone for your participation today and enjoy your weekend.

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