Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to Essent Group's Limited, Fourth Quarter and Full-Year 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I would now like to turn the call over to Phil Stefano, Vice President of Investor Relations. You may now begin your conference.

Thank you, Julianne. Good morning, everyone and welcome to our call. Joining me today are Mark Casale, Chairman and CEO, and Larry McAlee, Chief Financial Officer. Also on hand for the Q&A portion of the call is Chris Curran, President of Essent Guaranty. Our press release, which contains Essent's financial results for the fourth quarter and full-year 2021 was issued earlier today and is available on our website at essentgroup.com. 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 26th, 2021, and any other reports and registration statements filed with the SEC, which are also available on our website. Now, let me turn the call over to Mark.

Thanks, Phil, and good morning, everyone. Earlier today, we released our fourth quarter and full-year 2021 financial results, which reflect the strength of our buy, manage, and distribute operating model. Our focus remains on optimizing our unit economics in generating high-quality earnings and strong returns, while continuing to fortify our balance sheet, reduce through-the-cycle earnings volatility, and take a measured approach to capital management. Our outlook for our business remains positive as several trends continue to support housing's resiliency. Demand outweighing supply should continue to support home price appreciation, albeit at a more moderate pace. While low unemployment with rising income should continue to benefit credit. In addition, purchased demand remains elevated as a result of demographic trends, which is positive for our franchise since we are leveraged to first-time home buyers. And now for our results, for the fourth quarter, we reported net income of $181 million as compared to $124 million a year ago. On a diluted per share basis, we earned $1.64 for the fourth quarter, compared to $1.10 a year ago. For the full-year we earned $682 million, or $6.11 per diluted share, while our return on average equity was 17%. At December 31, our insurance in force was $207 billion, a 4% increase compared to $199 billion at the end of 2020. The credit quality of our insurance in force remains strong with an average weighted FICO of 745, and an average LTV of 92%. Following our November ILN end transaction, we have reinsurance coverage on 90% of the portfolio as of December 31. During the quarter, we successfully rolled out the next generation of our risk-based pricing engine, EssentEDGE. We believe EDGE has a competitive advantage, given the number of data points that we analyze when pricing credit risk through machine learning and cloud-based technology. Given these advantages, our team will continue to strive for broader adoption of EDGE technology away from static rate cards. We believe this continued evolution of pricing is mutually beneficial, delivering our best price to borrowers while optimizing our unit economics. A Bermuda-based reinsurance company, Essent Re, had a strong year in writing high-quality and profitable GSE risk-share business and continuing to provide fee-based MGA services to our reinsurer clients. Essent Re ended the year with $1.8 billion of risk in force compared to $1.4 billion at the end of 2020. We believe there is a continued opportunity for Essent Re to capitalize on the growth in a GSE risk-share market. Our Essent Ventures unit was formed to make investments which are intended to give us access to information to improve our core business, enhance financial returns, and increase our book value per share. We closely monitor the ongoing intersection of the housing finance, real estate, insurance, and technology sectors, and believe there will continue to be opportunities to take advantage of this changing landscape by leveraging our mortgage technology, credit, and operational expertise. As of December 31, we are in a position of strength with $4.2 billion in GAAP equity, access to $2.7 billion in excess of loss reinsurance, and over $1 billion of available liquidity. With a full-year 2021 operating margin of 80% and operating cash flow of $709 million, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. As evidence of this, Essent Guaranty remains the highest-rated monoline in our industry at A by AM Best, and A3 and BBB+ by Moody's and S&P respectively. The strength of our model also enables a measured approach to capital distribution. In 2021, we returned over one-third of our earnings to shareholders in the form of dividends and share repurchases. We remain committed to managing capital for the long term, exhibiting patience in our capital planning to maintain strength in our balance sheet. As of December 31, our book value per share was $38.73. Since going public in 2013, our annualized growth rate in book value per share is 21%, and we continue to believe that success in our business is measured by growth in book value per share. Finally, given our financial performance during the fourth quarter, I am pleased to announce that our Board has approved a $0.01 per share increase in our dividend to $0.20. This is the fourth consecutive quarterly increase and represents a 25% increase from a year ago, which we believe is a meaningful demonstration of stability in our earnings and cash flow. Now, let me turn the call over to Larry.

Thanks, Mark and good morning, everyone. I will now discuss our results for the quarter in more detail. For the fourth quarter, we earned $1.64 per diluted share compared to $1.84 last quarter and $1.10 in the fourth quarter a year ago. We ended 2021 with insurance in force of $207 billion, a decrease of $1 billion from September 30th and an increase of $8 billion or 4% compared to $199 billion at December 31st, 2020. Persistency at December 31st, 2021 increased to 65.4% compared to 62.2% at the end of the third quarter and 58.3% at June 30th, 2021. Net earned premium for the fourth quarter of 2021 was $217 million and included $11.4 million of premiums earned by Essent Re on our third-party business. The average net premium rate for the U.S. mortgage insurance business in the fourth quarter was unchanged from the third quarter at 40 basis points. For the full-year 2021, our net earned premium rate was 41 basis points. Income from other invested assets in the fourth quarter was $15 million, including $12 million of net unrealized gains, compared to $41 million, including $39.5 million of unrealized gains recorded in the third quarter of 2021. Other invested assets are principally comprised of limited partnership interests in venture capital, private equity, and real estate funds, which are carried at fair value. The provision for losses and loss adjustment expenses was a benefit of $3.4 million in the fourth quarter of 2021, compared to a benefit of $7.5 million in the third quarter. The benefit for losses recorded in both the third and fourth quarters was impacted by the continued cure activity in our default portfolio. At December 31, the default rate is 2.16%, down from 2.47% at September 30, 2021, and down from 3.93% at year-end 2020. Since the fourth quarter of 2020, we have reserved for defaults reported using our pre-COVID-19 reserve methodology. As a reminder, for new defaults reported in the second and third quarters of 2020, we provided reserves using a 7% claim rate assumption. This assumption was based on the expectation that programs, such as the federal stimulus, foreclosure moratoriums, and mortgage forbearance may extend traditional default to claim timelines and result in claim rates lower than our historical experience. We have not adjusted these reserves previously recorded in the second and third quarters of 2020, which totaled $243 million as they continue to represent our best estimate of the ultimate losses associated with these defaults. Other underwriting and operating expenses were $41 million in the fourth quarter, down $1 million from the third quarter. The expense ratio was 19% for the full-year 2021, which we believe is the lowest in the industry and compares to 18% in 2020. We estimate that other underwriting and operating expenses will be in the range of $175 million to $180 million for the full year 2022. The effective tax rate for the full year 2021, including discrete income tax items was 17%. For 2022, we estimate that the annual effective tax rate will be 16%, excluding the impact of any discrete items. During the fourth quarter, Essent Group Limited paid cash dividends totaling $20.8 million to shareholders and repurchased $68.6 million of stock. Through December 31st, 2021, we have repurchased approximately 3.5 million shares for a total of $158 million. During the fourth quarter, Essent Guaranty paid a dividend of $100 million to achieve as a holding company. On November 10th, we closed the Radnor Re 2021-2 Insurance-Linked Note transaction, which provides $439 million of fully-collateralized Excess of Loss reinsurance protection approximately $12.4 billion of risk in force on mortgage insurance policies written from April 2021 through September 2021. Additionally, in December, the company completed an amendment to our credit facility, which included the issuance of an additional $100 million term loan and an increase in the revolving component of the facility to $400 million. As of December 31st, 2021, no amounts have been drawn under the revolver. The amended credit facility matures in December 2026. After applying the 0.3 factor to the PMIER's required asset amount for COVID-19 defaults, Essent Guaranty PMIERs sufficiency ratio is 177%, with $1.4 billion in excess available assets. Excluding the 0.3 factor, the PMIERs sufficiency ratio remains strong at 165%, with $1.2 billion in excess available assets. Now, let me turn the call back over to Mark.

Thanks, Larry. In closing, we are pleased with our fourth quarter and full-year 2021 financial results, which reflect our continued focus on optimizing our unit economics in generating high-quality earnings and strong returns. Our solid operating performance in 2021 also generated excess capital, which we continue to deploy in a balanced manner between reinvestment in our franchise and distribution to shareholders. Looking forward, we will continue to manage our franchise to grow book value per share and believe that our approach is in the best long-term interest of our employees, policyholders, and shareholders. Now let's get to your questions. Operator?

Thank you. We'll pause for just a moment to compile the Q&A roster. And our first question comes from Mark DeVries from Barclays. Please, go ahead. Your line is open.

Yes, thanks. Mark, I was hoping you could just comment on what you're seeing in a competitive environment around pricing.

Mark, nothing really different than we've seen in the last quarters. Again, with the engines, it's a little bit more opaque in terms of what you see. I would say our pricing was very consistent in the fourth quarter. So in terms of share, which we always say ebbs and flows, we may have lost a little bit in the quarter. But again, I think we've remained relatively consistent. And that's primarily driven by the engine now, Mark. I mean, it's agnostic to market share. We're really looking at the almost the intrinsic value of each loan. So there's going to be higher FICO's that we shy away from or price better or lower FICO's that we price a little bit better. Remember, we just rolled it out in the fourth quarter, so we're doing a lot of different testing around price elasticity, which we'll continue to do throughout this year. So again, long-term. I know it's around, but we'll grow over the market growth. But in terms of competitiveness, you've seen us. You can see some guys reaching in a little bit and some guys pulling back, but that's been the story every quarter. So again, I think from a longer-term standpoint, this is really going to be about credit selection, and I think that's where we have the advantage in terms of pricing. We feel like we're getting our fair share, but we're getting it at the unit economics that we're comfortable with.

Okay, great. And then would be it good to get your latest thoughts on the potential for consolidation in the industry?

I don't think much has changed. I still believe there needs to be a catalyst. I don't see the GSEs as a barrier, regardless of whether they say more or less. This suggests less in terms of scale. Do we really need six sales teams engaging with lenders, which we expect to keep consolidating? Since revenues are driven by price, the idea of losing market share is somewhat outdated. When companies merge, scale is actually crucial for providing better pricing to borrowers, especially with technology advancements. Long-term, I still think consolidation makes sense, but we need to see a catalyst. I can't speak to that specifically as I haven't identified any catalyst yet. My instinct is that it will be related to credit. If an event occurs where companies differ in capitalization, leverage, or expense management, a credit event could potentially trigger more consolidation than the current environment, where credit conditions are fairly stable and companies are performing well.

Okay. Great, appreciate it.

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

Hey. Good morning, everybody, and thanks for taking my question. We're entering or we're in the midst of a really interesting competitive environment for originators with the market shrinking. And as we've seen in the past, there are a lot of the behaviors that occur in terms of pricing, and in terms of potentially starting to weaken credit standards a little bit. The final factor that we're going to be facing is that there has been so much home price appreciation, and so a lot of the Refi activity that we would expect in the near-term will be cash out Refi. All of these potentially changed the credit profile for you. I am curious how you think about managing credit risk in an environment where there's probably a little bit more aggressive behavior on behalf of your originators.

Hey, Rick. It's Mark. That's an excellent question. We've thought about it quite a bit over the past few weeks. You can consider it from two perspectives. Firstly, we have hedging in place around the reinsurance, which means we've offloaded a significant amount of mezzanine risk. If there’s a credit issue, we believe we've mitigated a lot of the volatility in our model, something investors might not fully appreciate until an event occurs. Secondly, addressing your question more directly, our engine is designed for this type of situation. Consider the rate cards currently used in the industry; while some lenders and mortgage insurers favor them for simplicity and market share, our approach is focused on risk management rather than market share. For instance, if credit conditions loosen and cash-out refinances increase, lenders will undoubtedly try to capitalize on that. However, we should not be pricing every loan the same way nationwide, which is exactly what rate cards do. Our engine relies not just on FICO scores, but also on raw credit bureau data that includes mortgage payment history and other relevant factors. We're also in the process of enhancing the severity aspect of our model, which will allow us to selectively choose loans that align with our preferences. This capability will become increasingly crucial as the credit environment potentially worsens. Additionally, we observe varying home price appreciation across different markets, where some areas have experienced spikes that exceed expectations based on supply and demand dynamics. We aim to price those borrowers effectively, especially in a market with moderate home price appreciation. This approach will evolve over time as we feel confident in our tools and information for making informed decisions moving forward. While it might be beneficial to lower prices across the board in a favorable market, this strategy could be less effective when conditions become challenging.

That's great, Mark. Thank you so much.

Our next question comes from Thomas McJoynt from KBW. Please go ahead. Your line is open.

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

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

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

That's a good question, Tommy. We returned a third of the capital in 2021, which isn't necessarily a rule of thumb for the future, but it's worth noting. We take a measured approach and generally prefer both dividends and buybacks. It's not solely about the payout ratio; it's really about managing return on equity. As the business grows, return on equity becomes important, and we're generating excess capital. Both dividends and repurchases help reduce the denominator in that calculation. When considering new investments beyond our core operations, such as our ventures unit and Essent Re, those opportunities can increase the numerator. We aim for a balanced approach because our long-term goal is crucial. We don't want to raise payouts too quickly and then miss out on growth opportunities or face a credit event. Overall, we favor dividends and believe returning cash to investors is a clear sign of our confidence in our cash flow sustainability. We also incorporate share repurchases into our strategy, which I expect will continue in the future.

Appreciate talking to you, Mark.

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

Hi. Thank you for taking my questions. I wanted to start with the NIW. I understand the pricing and that you're not concerned about market share, which is fine. I just want to clarify my understanding. Was the business that came through the market this quarter primarily allocated towards areas that may not offer strong returns, which affected the quarter-over-quarter comparison? Or did you make adjustments in your models that might have redirected focus to certain areas or geographies?

Yes, there is a mix of factors involved. The model is new and not based on FICO. It has been fully implemented, with 91% of it now being credit-based. However, some lenders are still relying on the original data because we're not receiving those additional data points. We are still in the testing phase, but if you consider our average premium rate, it hasn't really changed. You can interpret that as you wish, but our average premium rate on new insurance written remained stable. We didn't significantly alter overall pricing, though there may have been minor fluctuations. Overall, it suggests that others might be adjusting their strategies. It's evident from the performance of the four mortgage insurers; some new insurance written declined while others did not. If your market share has increased significantly, it's usually not due to better performance, but rather because of lower pricing. This is the reality. Sometimes competitors increase their pricing and other times they reduce it, which creates the disparities we see. We view our model more as a risk management tool, and we believe it can also be utilized to gain market share, but altering pricing can only sustain a temporary advantage. Our average premium rate has remained constant, and we anticipate share decreases. How you interpret that is up to you.

Sure, that's helpful. I wanted to ask a broad question. On Slide 10, you outlined some key milestones in Essent's development. When we review this slide next year, what should we expect for 2022? What major initiative are you focusing on this year that we should consider from a strategic perspective for next year?

That's a great question. I wouldn't say we have a surprise every year. It’s a long-term business, so I don't want to raise expectations about new innovations. Overall, we believe our core business will continue to generate strong returns. While we may get caught up in unit economics, they aren't as favorable as they were a few years ago due to significant pricing declines. However, they remain decent. It's important to consider that the market has expanded considerably, leading to substantial cash flow from our business, with operating margins around 80% and $700 million in operating cash flow. We feel positive about the business and believe the housing market is still relatively strong for the long term, particularly over the next three to five years. The core demand from millennials is still robust, with a projected 4 to 5 million new potential homeowners emerging over the next four-plus years, which is encouraging. Although we might see fluctuations based on interest rates, the fundamental demand should persevere. Another aspect that may not be widely recognized is the positioning of our book. Seventy-five percent of it was originated in the last two years at an average rate slightly above 3%, while the remaining 25% is from before that period with rates over four. If interest rates rise, this could impact new origination activity, particularly refinances versus core purchases, but there's potential for our book to extend, which I believe is underrated. This context is vital for investors. Chris has taken on the leadership of the mortgage insurance business, and he will continue to focus on improving unit economics. We consider aspects such as premium and losses, and particularly how we can enhance EssentEDGE. One of our goals this year is to work on severity and start modeling home price appreciation impacts more precisely than we currently do. We aim to leverage EDGE for various parts of our business, using its information to enhance our underwriting processes and improve efficiency. We've made technological investments to enhance customer service, enabling easier access for our customers to get answers directly, rather than relying on account managers or call centers. Today’s consumers expect a streamlined experience, similar to what they enjoy in their personal lives with technology. We have that in mind and aim to create that experience because user-friendliness greatly matters to our customers. Additionally, transitioning to the Cloud brings many advantages, but we must also manage its risks, which differ from traditional data center operations. Chris's focus on the day-to-day management allows me to concentrate more on long-term strategies and potential new avenues for growth. The core business will always be challenging to outperform, but we also have Essent Re, which continues to grow, albeit at a slower rate. There have been questions about how Essent will venture into new businesses, as competitors have struggled with this. However, we successfully entered the reinsurance business in 2014, which has not only helped reinsure a significant portion of our core business but has also written third-party business with GSEs and established partnerships providing a substantial part of its income. This operation leverages our underwriting and modeling expertise, guiding our strategy for exploring new business opportunities and growth engines, which will be an area of increased focus for me moving forward.

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

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

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

I would break it down into two parts. I believe that affordability in certain markets is going to be a challenge due to the increase in home price appreciation, which we expect could rise another 7% to 8% this year. It’s essential to consider this on a regional level. Higher rates might help slow down the growth of home price appreciation, although they won’t necessarily improve affordability. This could potentially lead to a slowdown in purchases. However, in the long term, I don’t believe it will affect demand. When I mention a pause, I've spoken to both borrowers and loan officers. When the prices and rates increase, people have to readjust their expectations. If you expect a rate of three and it’s now four, you start to wonder if you should wait to save for a larger down payment or consider mortgage insurance, which we would encourage. These decisions are life choices often not completely driven by financial numbers, but it certainly takes time for people to recalibrate. Regarding Essent, as highlighted through our Essent EDGE, this will lead to different decision-making concerning borrowers, with some consideration of affordability in initial decisions. For instance, in certain markets in the Southwest where home prices have surged by 45% this year, buyers may stretch their budgets for a home compared to markets where home price appreciation is more moderate. Looking back at the last recession, I recall that the sand states experienced significant decline, and while the markets aren't identical now, avoiding pitfalls and potentially channeling capital into stronger markets could differentiate us if there’s a market disruption.

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

Yes.

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

Hi, thanks, good morning. I wanted to revisit your remarks about lending standards. From a practical standpoint, it's only been a month in 2022, but are you observing lenders actually relaxing their standards this year? Additionally, as we anticipate Federal Reserve rate hikes for the rest of the year, how do you foresee the evolution of lending standards and your thoughts on pricing and underwriting moving forward?

Sure, those are great questions, Ryan. It's important to remember that when discussing loosening standards, there are significant guardrails in place, which we've been discussing for quite some time. The first quarter acts as one of these guardrails, and our G&C team is performing very well. Our DU & LP systems have made considerable advancements, and our engine EDGE plays a role in how we access and analyze data. A lender might wish to loosen credit, but that won’t pass the scrutiny of the GSEs. This is an essential point for MI investors to keep in mind. We have established guardrails and upfront pricing that help differentiate between positive and negative aspects. The GSEs are not allowing anything to slip through. When it comes to loosening credit, one thing to monitor is that lenders may be inclined to shift more towards the PLS market. This area is less structured and not controlled by the GSEs. There are knowledgeable investors and rating agencies involved, but they lack the modeling and first line of defense that the GSEs provide. If higher yields lead to more loans moving to PLS and lenders seek additional sources of liquidity, they will pursue that option. We typically do not engage in this market and haven’t for 15 years. There may be potential for us if rating agencies become involved, but credit selection will be crucial since there’s no GSE backstop in that scenario. We feel confident about the credit that channels through the GSEs. We trust their protocols, systems, and quality control capabilities. Should loans move to the PLS market and an opportunity arise for us, we will need to put in more work. Some loans might end up on bank balance sheets. Generally, the banks we work with, both regionally and nationally, are quite conservative, often leaning towards non-QM options and focusing on jumbo loans, which have performed exceptionally well over the past decade.

Okay. Got it. Last quarter, we talked about flat-based premiums in 2022. Do you still feel good about that target?

I believe we need to analyze the base premium more closely. The base premium rate is primarily determined by the pricing of new insurance, which has decreased over the past few years, particularly for about 75% of our portfolio. I anticipate that the base premium rate will ease a bit this year. Regarding the overall premium, there are many factors at play. We expect a decrease in singles cancellation income, as we only achieved 2% singles in the fourth quarter, and the entire portfolio is now under 10%. Consequently, there is a limit to what we can gain from our unearned premium reserve. It’s difficult to make definitive predictions at this stage. We also anticipate growth in the ceded premiums line, as we are currently pursuing a quarter share, which we didn’t do in 2021. We appreciate this approach and aim to diversify our reinsurance sources. While this will impact premium rate negatively, it helps reduce losses and expenses, balancing out the effect. If you focus solely on premium rate, you might draw the wrong conclusion. In terms of yield, we finished the year around the 40% mark, but a decline over the year due to various factors wouldn’t be unexpected.

Okay. Got it. Thanks very much.

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

We evaluate it from both perspectives. We definitely consider it in terms of leverage, which I believe is the most straightforward approach because it's easy to deceive oneself by thinking there's minimal leverage and justifying lower pricing. We recognize that it does contribute positively, but when we set our prices, we still base it on an unlevered approach, which is the key difference. When we refer to unit economics, we are generally within the 12 to 15 range, depending on market conditions, and it's closer to 12 currently due to pricing. With leverage, it's possible to achieve mid-teen returns, and that's reflected in what we report through the profit and loss statement. Thus, through the financials, the advantages of these factors will be apparent alongside the tax rate, but we maintain a disciplined focus on assessing it in an unlevered manner.

Great. All right, thank you.

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

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