Essent Group Ltd

NYSE:ESNT

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Essent Group Limited Third Quarter 2021 Earnings Call. All participants' lines are in a listen-only mode. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]

Thank you. I would now like to turn the call over to Chris Curran, Senior Vice President of Investor Relations. You may begin, sir.

[Chris Curran, Senior Vice President, Investor Relations]

Thank you, Paula. 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 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 26, 2021 and any other reports and registration statements filed with the SEC, which are also available on our website.

Now, let me turn the call over to Mark.

[Mark Casale, Chairman, President and Chief Executive Officer]

Thanks Chris, and good morning, everyone.

Earlier today we released our third quarter earnings, which continue to demonstrate the strengths of our buy, manage, and distribute operating model in generating high-quality earnings, robust returns and excess capital. Combined with investing capital back into the business and redistribution to shareholders through dividends and buybacks our business is operating on all fronts. For the third quarter we reported net income of $205 million as compared to $160 million last quarter. Income for the third quarter includes $41 million of earnings associated with some of our strategic investments and limited partnerships.

On a diluted per share basis we earned $1.84 for the third quarter compared to $1.42 last quarter, while our annualized return on average equity for the third quarter was 20%. At September 30th, our insurance in force was $208 billion, a 9% increase compared to $191 billion as of the third quarter a year ago. The credit quality of our insurance in force remains strong with an average weighted FICO of 745 and an average LTV of 92%. Also we have re-insurance coverage on 75% of the portfolio as of September 30th.

On the business front, we formally rolled out the next generation of EssentEDGE in October. The latest iteration of our risk-based engine offers more refined pricing as we continue to optimize our unit economics. With EDGE technology sitting in the cloud, we are able to analyze large amounts of data with machine learning and seamlessly deliver price to customers. Given the commoditized nature of mortgage insurance, we believe that collecting and evaluating more data to price mortgage risk is a long-term competitive advantage. As of September 30th, we are in a position of strength with $4.2 billion in GAAP equity access to $2.4 billion in excess of loss re-insurance and over $800 million of available liquidity.

With a year to-date-operating margin of 78% and operating cash flow of $518 million, our operating engine continues to drive our balance sheet strength. As evidence of this, Essent Guaranty remains the highest rate of monoline in our industry at single A by AM Best and A3 and BBB+ by Moody's and S&P respectively. While our preference has been to retain excess capital and reinvest back in the business, the strength of our model enables a measured approach to excess capital as evidenced by our dividend and share repurchase program. However, it's important to remind everyone that a credit event can quickly change the needs of our business or by capital distribution can quickly pivot the capital shortage, while reinsurance should help soften headwinds from credit cycles; we remain committed to managing capital for the long-term and maintaining a fortress balance sheet.

At September 30th our book value per share was $37.58. We believe that success in our type of business is measured by growth in book value per share. Since going public in 2013, our annualized growth in book value per share is 21%, which we believe is a meaningful demonstration of our ability to invest capital and build long-term shareholder value. Finally, given our financial performance during the third quarter, I am pleased to announce that our Board has approved a $0.01 per share increase in our dividend to $0.19. This represents a 19% increase from the dividend that we paid in the fourth quarter of 2020.

Now let me turn the call over to Larry.

[Larry McAlee]

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

For the third quarter we earn $1.84 per diluted share including $0.28 per diluted share associated with net unrealized gains on other invested assets. Compared to $1.42 last quarter and $1.11 in the third quarter a year ago. As Mark noted, income and other invested assets in the third quarter was $41 million, including $39.5 million of net unrealized gains. Through June 30, 2021 unrealized gains and losses reported on these investments were recorded in shareholders' equity through other comprehensive income. In the third quarter management determined that the unrealized gains and losses on these investments should be reflected in earnings rather than other comprehensive income.

Net premium for the third quarter of 2021 was $219 million and includes $11.6 million of premiums earned by Essent Re on our third-party business. The average net premium rate for just the U.S. mortgage insurance business in the third quarter was 40 basis points, down from 41 basis points in the second quarter. Persistency increased during the quarter to 62.2% at September 30, 2021 compared to 58.3% at June 30, 2021 and 56.1% at March 31, 2021. Our provision for losses and loss adjustment expenses with a benefit of $7 million in the third quarter of 2021 compared to a provision of $10 billion last quarter. The benefit for losses in the third quarter was impacted by the continued cure activity on existing defaults.

The decrease in the provision was due primarily to the makeup of the default portfolio as older, more seasoned defaults with higher case reserves cured during the current quarter, while new defaults reported with lowercase reserves were added. During the third quarter, we received 5,132 new default notices, which is up 4% compared to 4,934 defaults reported in the second quarter. We had 8,862 defaults cured during the third quarter compared to 10,453 cures in the second quarter of 2021. At September 30th, our default rate decreased to 2.47% from 2.96% at June 30th. Since the fourth quarter of 2020, we have reserved for new default accusing 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 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 total $243 million. As they continue to represent our best estimate of the ultimate losses associated with these defaults. Underwriting and operating expenses in the third quarter were $42 million compared to $41 million in the second quarter. We now estimate that other underwriting and operating expenses for the full year 2021 will be in the range of $170 million. Our updated estimate of the annualized effective tax rate for the full year 2021 is 16% before consideration of discrete items. The tax rate for the third quarter was 16.8%.

During the quarter Essent Group Limited pay a cash dividend totally $19.9 million to shareholders in September and repurchase $70.9 million of stock during the quarter. As of September 30th, we have bought back approximately 2 million shares for a total of $89 million. During the third quarter Essent Guaranty completed a dividend of $47 million to its U.S. holding company. From a PMIERs perspective after applying the 0.3 factor for COVID-19 defaults, Essent Guaranty's, PMIERs sufficiency ratio was strong at 162% with $1.2 billion in excess available assets. Excluding the 0.3 factor, our PMIREs sufficiency ratio remains strong at 152% with $1.1 billion in excess available assets.

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

[Mark Casale, Chairman, President and Chief Executive Officer]

Thanks Larry.

In closing, our third quarter performance was solid as we produced strong earnings and continued to generate excess capital. Our buying, managing and distribute operating model is driving robust returns and competence in our economic engine is high. We remain positive and continuing to leverage EssentEDGE in optimizing our unit economics in a competitive market as we continue to utilize technology to leverage more predictive pricing variables. We believe that combining AI with large quantities of data is where the financial services industry is moving. And we believe Essent is at the forefront of this.

The strengthen in our MI results affords us flexibility in allocating excess capital across the core business, potential strategic investments and redistribution to shareholders. While considering and executing on each of these levers. We are taking a measured approach around capital allocation. We believe long-term investors will be rewarded with his patients.

Now let's get to your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Rick Shane of JPMorgan.

[Rick Shane, JPMorgan]

Hey guys. Good morning and thank you for taking my question. Mark, one of the big changes that's occurred with the amount of refinance activity and the amount of NIW over the last 18 months is a significant shift in vintage of the portfolio? If you could just talk about any difference in characteristic of the new vintage or how we should think about seasoning of that over the next couple of years, that would be really helpful?

[Mark Casale, Chairman, President and Chief Executive Officer]

Sure. Rick, the fundamental kind of characteristics of the new business versus the old hasn't really changed that much. We've been – think about an average FICO of 745, kind of an LTV of 92-ish, that's been consistent. What we saw a little bit in 2020 was more refinancing versus purchase this year, but I would say the portfolio was continues to be strong. So I wouldn't look at any big differences. It's relatively young again versus where it was given the amount of refinancings but we've also had a lot of the embedded HPA already in that young portfolio. Our mark-to-market LTV on a portfolio it's right around 80%. So it's a pretty strong portfolio, Rick. So again, I wouldn't – I wouldn't look to see too many differences and again, I think we're pretty pleased with the portfolio as it stands today.

[Rick Shane, JPMorgan]

Got it. And on the second part of the question, just how should we think about the seasoning? Because, historically the portfolio has been sort of more homogenized in terms of vintage and now you have more concentrated vintages. So we probably need to think about seasoning just a little bit more. How do we – how should we consider that?

[Mark Casale, Chairman, President and Chief Executive Officer]

Yes. Good question. Again, I think if rates go up, which we think they will, right, as given some of the headwinds we're seeing around inflation, I think the persistency can really go back to normal. So you're right, it could be thinking of these vintages. It's not, were what stuck then almost in these kind of 2020 and 2021 vintages. I would look at this as actually a good thing, right? So we're locking in kind of the yields that we have on the premiums. We already have the embedded HPA. I would say the window is at our back in terms of the portfolio.

So as it's seasons, and as we enter into a potential headwind, right? I mean the industry or the economy is not going to grow forever. It's a pretty good portfolio to go into that type of environment. And remember most of its reinsured, 75% at the end of September. But probably we'll quickly approach 90% as we complete the latest ION, which we're at the market with now. So again, I think we're – I think we're pretty well positioned for the portfolio probably better, maybe the most investors that think in terms of, again, you know, locking into – two years of – two-year vintages, I think we'll end up performing pretty well.

[Rick Shane, JPMorgan]

Sounds great. Hey Mark. Thank you very much.

[Mark Casale, Chairman, President and Chief Executive Officer]

Sure.

[Operator]

Your next question comes from Mark DeVries of Barclays.

[Mark DeVries, Barclays]

Thank you. Mark, I think you get credit for being a little bit more candid about the competitive environment than some of your competitors. We've heard this earning season, that that competition has been pretty stable around pricing. Just wanted to get a sanity check to see if that kind of aligns with what you're observing.

[Mark Casale, Chairman, President and Chief Executive Officer]

Yes. I would say from a competitive standpoint, just in general taking a step back, the business is changing Mark. It's changing from a rate card only, relationship business to fee only. And I think a lot of the companies are struggling with that. I really do because you have; a lot of them are still using rate cards and promoting rate cards. We were at – you know, we've heard feedback from lenders directly to me that some of our competitors are trying to sell them off of the engine versus trying to use the card versus the engine. And no one that tells me they're behind on the technology. Clearly, so in terms of using a static card versus an engine, I think they're using the card to the crutch. I think a lot of the industry as we said is commission-based so people do what they are intended to do.

And I think, again, I think the industry is changing. I think we took that challenge head on; it's going from relationship to fee. We invested in a technology to make sure we could price more accurately and that's using more information. Again, if it's all about fee, you better have more information than the next guy and we started that process three years ago now, and the result is in EssentEDGE kind of the next generation of it. So I do think – I think they're struggling with that. In terms of – just in terms of kind of premiums though from an Essent perspective and I know we've been asked about, I know there's been a lot of questions around premium they're compressing, but really the majority of that compression is coming from the decline in SCI, right?

And also a little bit as the re-insurance ramps up. We see our premium levels, the gross premium levels stabilizing in 2022. Where it goes after that it's really a function of kind of a premium or new NIW. And Mark our premium on new NIW is been relatively flattish to the past eight quarters. I'm not sure everyone can say that. Again, what we see in the industry is a few guys, kind of chasing the market down. They go after the bid cards and there's two large lenders that bid out their product every four months, six months and folks gravitate towards that. We have not. Something that we've been involved in those types of lenders in the past and we just refuse to kind of lower our price every four months like clockwork, we don't think it's prudent in the long-term.

And again, that's why were the engine is going to be more of a long-term advantage we can pick our spots. And again, it's all about unit economics, right? It's about optimizing the premium level with pricing, which I think we're doing. And we're also in terms of investment income. Always looking to increase the yield there, and then Mark, sometimes it gets that down to old fashioned managed expenses. So again, you said we took our guidance down on expenses, that's something we can control every day. We don't see that across the industry. So yes, I mean, again, I think competitively either those are the factors really driving it, but I think from an Essent perspective, again we always feel like we're going to be kind of in the middle of the pack in terms of share. And we're going to use that the engine and our analytics to try to optimize the premium for whatever share we do get.

[Mark DeVries, Barclays]

Okay. That's very helpful context. And then I think you mentioned re-insurance, you're up to like 75% of the portfolio is now reinsured. Where you see that going?

[Mark Casale, Chairman, President and Chief Executive Officer]

Yes. I mean, generally it's around 90 and that's kind of a good guide for us to get where we were out in the market now with another ION. We like 90, so again, getting back to kind of the premium levels markets, think of about like four or five basis points that we are seeding to reinsurance. It's a meaningful number. I mean, you're looking at close to $100 million, if not more than $100 million, which is again significant, but we think again from a hedging perspective, enabled to hedge out that mezzanine exposure, it is money well spent. And when the COVID winds were blowing last year, I think investors and maybe not initially but longer term it's certainly that we're very glad that we had that re-insurance, and again that's all part of the buy, managed and distributed operating model.

I think it's critical because again, when you think about housing, right, housing is very good right now, Mark. I mean, you have tailwinds in terms of excess demand versus supply. HPA has grown a lot and we'll expect it to modify. GDP growth is good, but there's always clouds on the horizon, right? We talked about, about inflation given housing surplus or shortage could turn into a surplus someday. We will enter into another recession, right? At some point COVID was a scare in my view and it turned out not to be a real credit event, even though we booked a number of reserves around that. And it's almost like the hurricane that didn't quite happen. And people hopefully from an Essent perspective, you have to keep your guard up.

Hence my comment in the script around maintaining a fortress balance sheet. What does that mean? That means making sure you have not just excess capital, but low leverage that we're prepared for every event. So we kind of have a dual approach that is with capital, right? Are we using capital to look for opportunities outside of the core business, which we're doing? We're clearly investing in a lot of those – the venture funds, which turned out to – we had a nice gain on this quarter and in this year which I think is good evidence that we're pretty good at allocating capital, but that wasn't even the primary purpose of it. The primary purpose of it was to use things to improve our core business. And now I think we're going to expand that scope to look outside the core business.

Meanwhile, you still want to make sure you have a core balance sheet in case things don't go bad, so you don't want to grow and just try to run into a brick wall. So it's a balance that you have to have when you're managing a risk organization like we are.

[Mark DeVries, Barclays]

Okay, great. Thank you.

[Operator]

Your next question comes from Mihir Bhatia of Bank of America.

[Mihir Bhatia, Bank of America]

Hi, good morning and thank you for taking the questions. Maybe we'll start with just the ending of that last answer in terms of investing outside non-MI businesses. Valuations, have they got more interesting that anymore? Are we closer to seeing that investment actually happening?

[Mark Casale, Chairman, President and Chief Executive Officer]

Yes. I mean, I think the valuations have not gotten more interesting as evidenced by the gain in some of our limited partnership interest. I mean, those were comprised of some of our real estate funds, which have done well because of HPA. But also a number of the underlying companies have gone public or have specked. I would say pretty healthy evaluation, so we've been – we've been the beneficiary of that. But it's kind of – I think it hurts you on the front end, in terms of new businesses that doesn't – that doesn't stop us from continuing to look into evaluate here. So we're out, we've really started to build the infrastructure. So we started with the funds a few years ago. We started to bring on folks who are professional investors, who have experience in looking at these types of businesses.

I mean, we're operators. We're not professional investors, like the folks in the audience today. But we do understand the business and we're good operators. So we think it's a good comp. We think a combination of investors and operators is pretty good. So we'll continue to look at these venture types funds and the companies that they invest in. I was out traveling few weeks ago for two days visiting a lot of these companies. So I like to kind of – I used to always pre-COVID go out and visit our customers and get a chance to know them. And I'll continue to do that for probably not at the pace I did before. Again, just because of the changing nature of the business that I spoke to earlier, when I'm out a lot now looking at these young companies and I like to sit across with them, I like to try to understand their business, see how we can add value to them.

What do we bring to the table clearly capital? I think we bring infrastructure around managing a business. I think we bring a lot of experience on how to scale a business from start from scratch. We clearly bring regulatory expertise in terms of how to manage a business. And now we're looking for a good fit, right? These is a company that can grow; do they have the passion that we had when we started the business. I mean, I like to see a lot of that. We don't always see it, in some of the venture companies; they're more interested sometimes in getting from Series A to Series B at a better valuation than building a great business.

We want to work with the folks who want to build a great business. And I kind of know what I see it. So we have a watch list. We'll continue to work with these companies and we'll see what happens. But also Mihir, I'm not against anything big either. So we're open because we're here allocating capital for shareholders and whatever we can do to continue to grow Essent or to make Essent a better company for shareholders, we're going to do it. It's not about what I think – what I want to do. It's what we think is that needs to be done for shareholders. And if we don't find anything, we'll push more money back to the shareholders; it's kind of that simple.

[Mihir Bhatia, Bank of America]

No, thank you, for that is. Good to hear and helpful. I did want to ask – go back to your comments on persistency for a second. And they understand, given – given the rate expectations that persistency moves up, but I was curious that given the high level of home price appreciation. Could that have an impact on persistency? I mean, we're hearing more, I know historically it hasn't had a big impact, but we are hearing more and more from originators and services that there's potential for them to mind their portfolios to generate more refi type activity or cash outs and things like that. So I was curious if that's something you're seeing or hearing about it all from your customers? Thank you.

[Mark Casale, Chairman, President and Chief Executive Officer]

We're not seeing it yet, but again, that certainly could be, and again a lot of it's going to be dependent on rates. So, I mean, if they're in the money, they probably should be refinancing. Whether they can leverage HPA to potentially get out of their mind, good for them, good for the borrower. Whatever's good for the borrower is good for us longer term. But remember it's correlated. So if their level of refinancing goes up we certainly will see that in the NIW number. But again, we haven't seen, I think we're 90-ish plus percent purchase.

But again, I think as we go into 2022 depending where rates are, we think purchase market will – we think it'll continue to be strong. I think it's going to take a pretty big spike in rates for it to kind of damp into the demand of new home ownership. I mean, again the millennials, which, we sound like a broken record, but its 4 million to 5 million new potential homeowners come into that space every year, given how they're aging. So we feel pretty confident on purchase over the next couple years. And then refinance, I still think is just a function of rates.

[Mihir Bhatia, Bank of America]

Got it. And then my last question, just in terms of OpEx and we heard a lot this quarter about from the card companies in particular about getting more expensive to hire technology talent, I assume you're seeing that too. So my question is just, does that in any way slow your initiatives around ML and AI, and just building out that rate card more? Just – and also maybe just comment on the availability of talent affecting that? Thank you.

[Mark Casale, Chairman, President and Chief Executive Officer]

Yes. It's a good question. I would say yes, the technology talent is a little different than other talent that we have in the organization in terms of attracting them, there's a lot of opportunities. We haven't – we're pretty efficient in terms of leveraging talent. We haven't had much – we haven't had too many issues. We're bringing in one of the initiatives we're doing across the company is bringing in younger folks, right out of college. So we've done that.

We've done it in our underwriting group where we've had a really incredibly successful junior underwriting program. We've done it in the BD group. We've done it within our corporate development area. We're kind of on the hunt for talent both, I would say right out of college and also 15 years out of school, we've done a really good job building bringing in some really strong talent kind of in that mid 30-ish type range, which we think again is kind of building that next core for Essent to grow to the next level. On the IT front we're bringing folks in out of college through training and obviously across in another level.

So to answer your question, no, we haven't had met much, but we're not out hiring a lot. We were very in terms of who we hire and we also leverage outside resources. So we can also leverage – we're leveraging AWS – the AWS guys a lot just for our move to the cloud. They're actually bringing in a lot of their engineers to help accelerate our move to the cloud. We thought, I think initially our moved to the cloud was going to be at the end of what 2023. And now we believe we'll be fully on the cloud by the middle of next year.

And AWS is really been – really been a good partner in helping us accelerate that. So I want to say we have 20 plus folks of theirs working with us onsite and remote to make that happen faster. So a lot of it is just making sure, you can use either people on site or I mean, having them work for you here or using contractors or using third party consultants to kind of accelerate it. So always we kind of look at it faster, cheaper and who else – who can you, use to solve the problem quicker?

[Mihir Bhatia, Bank of America]

Understood. Thank you.

[Mark Casale, Chairman, President and Chief Executive Officer]

Sure.

[Operator]

Your next question comes from Ryan Gilbert of BTIG.

[Ryan Gilbert, BTIG]

Hi. Thanks, good morning guys. Wondering if you had any comments on how Essent might participate as the GSEs ramp up their CRT programs again?

[Mark Casale, Chairman, President and Chief Executive Officer]

Yes. Well, remember, we're participating in obviously out of Essent Re, so Freddie was, I think our sole provider last year. I understand they kind of pulled out of the market. So we would expect – we would expect the Fannie guys to as they're ramping that out, we'll participate in that. And we participate in this twofold, right? Not only of us taking principle risk but we also do via our MGA where we get pretty, it's been a nice fee business for us over the last few years. We also get a profit component of it. And so we see some – we see some nice potential there with Essent Re probably on a smaller scale than Essent. But again, as we think about strategic investments in new businesses and our ability to scale, that's a reason another good example of us starting a business in a post-IPO from scratch.

And it's at the point now where as we said before it's very efficient business, I mean, we earn on an annualized basis, $50 million and third-party premiums. And it's pretty – it’s a pretty efficient team over there in Bermuda. So again, it's never going to drive growth at Essent, but when you think about again, improving unit economics it's always the little things that count and we've been very pleased there. And again, with Fannie coming into the market, we would expected their potential, maybe to grow a little bit more than they have.

[Ryan Gilbert, BTIG]

Thanks very much. That's all I had.

[Mark Casale, Chairman, President and Chief Executive Officer]

Okay.

[Operator]

Your next question comes from Geoffrey Dunn of Dowling and Partners.

[Geoffrey Dunn, Dowling and Partners]

Thanks. Good morning. Just a couple more number-related questions. First, Larry, can you break down the liquidity between Bermuda and U.S. Hold co. and define any of the movements from U.S. to Bermuda, this quarter?

[Larry McAlee]

Geoff, we don't break out. We sort of decided to put them together because they're very fungible – the cash balance at U.S. Holdings and at Essent Group Limited. We did not move any distributions there up from the U.S. to Bermuda during the quarter. So we'll be disclosing just the combined cash and investment balances at both holding companies going forward.

[Mark Casale, Chairman, President and Chief Executive Officer]

And part of it, Geoff, is we're moving it out of Guaranty in the U.S. Holdings, and it may sit there. We don't need it up a group just because you have the 5% withholding tax. So, when you think about movement within U.S. Holdings, we did form another unit this year called Essent Ventures, which is where we're holding a lot of the venture funds, which we kind of removed them from Guaranty. We've also made – small direct investments in Ventures, very small, but we can use the cash for that, and any potential other strategic investments. And we can always move it up to group. Also, think of Essent Re, Essent Re's another backdoor way to get cash up to the group level. So again, we just thought it was simpler to say holding company versus like get into a lot of the ins and the outs.

[Geoffrey Dunn, Dowling and Partners]

Okay. And then, if you look at your relative reserving, your early stage delinquency buckets been running 11%, 12%. This quarter, we're down to 9%. Is that just a timing mix this year with the inter-quarter cures or has experience prompted you to carry a lower relative reserve on the earlier delinquencies?

[Larry McAlee]

Yes, no, Geoff, it's mix. We made no significant changes in reserve factors continue to use the same model, and again, just a mix between the timing of that, but yes, no. All mix.

[Mark Casale, Chairman, President and Chief Executive Officer]

And I think to be clear, Geoff, just so everyone understands kind of at the context of it, and I know Larry addressed this in the script, but we haven't touched the second or third quarter cohorts, yet. And they're trending very well. So, we had a 93% kind of cure rate assumption for both of those quarters. We're getting close. I mean, we're 86% on the second quarter cohort, 81% on the third quarter cohort. And I think the second quarter cohort was 88% at the end of October. So, we're moving closer to that number. What we believe, at the end of the fourth quarter – first quarter, we'll be able to make a call on – on reserve release. We certainly don't believe we're over reserved at this point. We think we're adequately reserved. But we'll continue – again, if it trends this way, always things can happen.

I think a lot of the negative provision this quarter was just a function of the model. We moved back to the model back in the fourth quarter of last year. So, a COVID default in the fourth quarter got hung up at 9% expected claim raise, and kind of ran through the delinquency buckets, so it build up higher reserves, and – because it stuck – went all the way to 180, why not if they're in forbearance. And then in cure, there is a big reserve release. So, I think it's, from an investor standpoint, I think it bodes well. I think it's something to look at that – the fact that we're running it through kind of mechanically through the model and seeing this type of performance, I think is actually pretty good.

[Geoffrey Dunn, Dowling and Partners]

Thanks for the comments.

[Operator]

We have one more question. Your final question comes from Bose George of KBW.

[Bose George, KBW]

Hey guys. Just a couple of little things. Actually on the expenses, so your guidance now suggests the fourth quarter is close to $45-ish million. So, is that a good run rate for 2022, as well, at least as the starting point?

[Mark Casale, Chairman, President and Chief Executive Officer]

I wouldn't – I wouldn't say that, yet. Some of it is – we always like to give the guidance. We're going to pump that till February, Bose. So, but again, yes. I mean it's not a bad run rate, but we'll firm that up in February.

[Bose George, KBW]

Okay. And then, actually, just in terms of the seeding that you did to Essent Re, this year, and NIW, I guess you took it up to 35 from 25. What are the variables you look at in terms of potentially increasing that either for the back book or prospectively?

[Mark Casale, Chairman, President and Chief Executive Officer]

It's – a lot of it – it's a good question. So, a lot of it is capital. A lot of it's making sure we don't trip anything around PFIC or the BEAT tax. So, we're pretty comfortable at 35. No plans right now, to be honest with you, to move it up. Certainly something we'll look at, but let's see how all the infrastructure bills go through and see where taxes land. Always a lot of movement there. So, we'll wait and see where the dust settles there, and then, we'll reevaluate it.

[Bose George, KBW]

Okay, great. That's all I had. Thanks.

[Operator]

This concludes the Q&A portion for today's call. I will now turn the floor back over to management for any additional or closing remarks.

[Mark Casale, Chairman, President and Chief Executive Officer]

No additional comments here. Just want [Abruptly Ends]