Essent Group Ltd

NYSE:ESNT

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by, and welcome to the Essent Group Limited Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Chris Curran, Senior Vice President of [Senior Relations]. Thank you. Please go ahead sir.

[Chris Curran, Senior Vice President of Investor Relations]

Thank you, Justin. 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 fourth quarter and full-year 2020 was issued earlier today and is available on our website 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, as subsequentially updated through other reports and registration statements filed with the SEC, which are also available on our website.

Now, let me turn the call over to Mark.

[Mark Casale, Chairman and Chief Executive Officer]

Thanks, Chris and good morning, everyone. Earlier today we released our fourth quarter and full-year 2020 financial results. While 2020 was a challenging year for our franchise, we are encouraged by our fourth quarter results as defaults related to COVID-19 continued to decrease from the peaks experienced back in June. For the fourth quarter, we earned $124 million or $1.10 per diluted share, also the full-year we earned $413 million or $3.88 per diluted share.

At the outset of the pandemic, it was clear that the U.S. economy and our business were going to be impacted. However, we had limited vision as to the extent of this impact. Now, with almost a year gone by, and having more visibility, we believe that the impact of the COVID-19 defaults on our insurance portfolio has been contained. As such, for new defaults reported during the fourth quarter we have reverted to our pre-COVID reserve methodology, and our view remains that the pandemic is an earnings event and not a capital event for Essent.

Heading into 2021, our outlook on the economy and our business is increasingly optimistic. Unlike the great financial crisis when housing played a big role in the downturn, during the pandemic, housing has been a bright spot in the economy. Low mortgage rates and strong demand for single family homes have been the primary drivers of robust mortgage volumes, and we believe that this strength will continue into 2021.

On the business front, we continue to refine our risk-based pricing strategies in managing a profitable mortgage insurance portfolio. Since deployment, we view our pricing engine as a risk management tool and not a market share tool. In fact, the pandemic was a catalyst in demonstrating this, as we quickly change price in response to the weakening economic environment.

Looking forward, we remain focused on enhancing our engine through more granular analytics and sophisticated use of data. It's our belief that will be evolving intersection of mortgage finance and technology we have just scratched the surface in our risk-based pricing capabilities. We continue to be pleased with the high credit quality of our NIW, noting that since the onset of the pandemic, our credit profile has been strong. This is primarily due to the credit tightening by the GSEs and MIs in response to the pandemic, along with an increase in the amount of refi mortgages.

For the fourth quarter, our NIW maintain an average FICO of 748 compared to 745 for the fourth quarter a year ago. At December 31, our balance sheet is strong, as we have $3.9 billion of GAAP equity, robust liquidity, and access to $2 billion of excess of loss reinsurance. All these are the result of our buy, manage, and distribute operating model and other measures taken in 2020 to bolster our financial strength and flexibility.

During the year, we raised $440 million of equity, obtained $950 million of XOL reinsurance protection and increased our credit facility, which provides access to $300 million of undrawn capacity at December 31. Combined with $728 million of operating cash flow generated in 2020, we increased and enhanced our capital and liquidity resources by over $2.2 billion.

From a PMIERs perspective, we remain well-positioned at December 31. After applying the 0.3 factor for COVID-19 defaults, Essent guarantees PMIERs sufficiency ratio is strong at 173% with $1.2 billion in excess assets. Excluding the 0.3 factor, our PMIERs sufficiency ratio remained strong at 159% with $1.1 billion in excess assets.

Note, that the PMIERs excess does not include the $563 million in cash and investments of the holding company. Essent Guaranty remains the highest rated monoline in our industry at Single A by A.M. Best, and A3 and BBB plus by Moody's and S&P respectively.

Looking forward, our buy, manage and distribute operating model will continue to enhance our financial strength and flexibility in generating and deploying capital. We have always felt that strong capital levels beget opportunities. Given our long-term focus, we will continue to evaluate ways to optimize capital deployment. Immediate options include taking advantage of growth opportunities in our core primary MI and reinsurance businesses stemming from a favorable housing environment.

Furthermore, we will also evaluate opportunities outside of our core. For example, we closely monitor the ongoing intersection of the housing finance, real estate, insurance, and technology sectors. We believe that there will be opportunities to take advantage of this changing landscape by leveraging our mortgage technology and operational expertise. Finally, we'll continue to evaluate capital distribution through increased dividends and buybacks.

On the Washington front, there's been a recent focus on possible FHA price changes. We believe that a potential 25 basis point reduction in FHA premiums would have a small impact on our industry share of the mortgage insurance market. We also believe that any impacts could be offset by the recent increase in the GSE conforming loan limits and measures taken by the new administration to increase credit access.

In summary, 2020 was a good test for our buy, manage, and distribute operating model and we remain pleased with the strength and confidence it provides in managing the business during stressful cycles. In connection with this confidence, along with our strong capital and liquidity positions, our board of directors has approved a quarterly dividend of $0.16 per share to be paid on March 19.

Now, let me turn the call over to Larry.

[Larry McAlee, Chief Financial Officer]

Thanks Mark. Good morning, everyone. I will now discuss the results for the quarter in more detail. For the fourth quarter, we earned $1.10 per diluted share, compared to $1.11 last quarter, and $1.49 in the fourth quarter a year ago. Our weighted average diluted shares outstanding for the third and fourth quarters of 2020 was 112 million shares, up from 98 million shares in the fourth quarter of 2019 due to the impact of our equity offering in May.

We ended the year with insurance in force of $199 billion, a 4% increase, compared to $191 billion at September 30, and a 21% increase, compared to $164 billion at December 31, 2019. The growth in insurance enforced during the fourth quarter was the result of $30 billion of new insurance written, partially offset by runoff as our persistency was 60%. Net earned premiums for the fourth quarter of 2020 was $222 million and includes $13.6 million of premiums earned by Essent Re on our third party business. The average net premium rate for just the U.S. mortgage insurance business in the fourth quarter was 43 basis points, down from 46 basis points in the third quarter of 2020. Contributing to this decrease was the 2 basis point increase in ceded premium due to our Radnor Re 2020-2 transaction and the ongoing quota share reinsurance transaction, and to 1 basis point decline in single premium cancellation income.

For the full-year 2021, we are estimating that our net earned premium rate will be in the 40 basis points range. The provision for losses and loss adjustment expenses in the fourth quarter was $62 million, compared to $55 million last quarter, and $176 million in the second quarter of 2020. During the fourth quarter, we received 8,745 new default notices, which is down 31%, compared to 12,614 defaults reported in the third quarter, and down 77%, compared to 37,357 defaults reported in the second quarter.

At year end, our default rate decreased to 3.93% from 4.54% at September 30 and 5.19% at June 30. As Mark mentioned, we have reserved for new default report in the fourth quarter using our pre-COVID-19 reserve methodology, which incorporates an average 9% claim rate estimate for early stage defaults.

As a reminder, for new defaults reported in the second and third quarters of 2020, we provided a reserve using a 7% claim rate assumption. This assumption was based on expectation that programs such as the federal stimulus, foreclosure moratorium, and mortgage forbearance may extend traditional default to claim timelines, and resulting claim rates lower than our historical experience.

We have not adjusted these reserves previously recorded in the second and third quarters as they continue to represent our best estimate of the ultimate losses associated with these defaults. Other underwriting and operating expenses in the fourth quarter have remained consistent with the third quarter at $37 million. The expense ratio was 16.6% in the fourth quarter, compared to 16.7% in the third quarter of 2020, and 19.9% in the fourth quarter a year ago.

We estimate that other underwriting and operating expenses will be in the range of $170 million to $175 million for the full-year 2021. The effective tax rate for 2020 was 15.7% and our guidance for 2021 is that our effective tax rate will be approximately 16%. The consolidated balance of cash and investments at December 31, 2020 was $4.8 billion. Essent Group Ltd. paid a quarterly cash dividend totaling $17.9 million to shareholders in December and maintains $563 million of cash and investments at the holding company at year-end.

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

[Mark Casale, Chairman and Chief Executive Officer]

Thanks, Larry. With a strong housing backdrop and robust levels of high credit quality NIW in 2020, our business ended the year operating on all cylinders. Given the measures that we took in strengthening our financial and liquidity positions during the year along with having 96% of our portfolio, reinsured, the economic engine of our business is firmly in place. As we enter 2021, we are increasingly optimistic about our company's prospects.

The COVID vaccine is key in getting our country's economy back on track, while housing continues to be a bright spot. We believe that affordability, demographics, and the ongoing supply demand imbalances should continue to fuel housing. As you know, our franchise is levered to the macroeconomic and housing environments.

Now, let's get to your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Phil Stefano from Deutsche Bank. Your line is open. Please ask your question.

[Phil Stefano, Deutsche Bank]

Yeah, thanks and good morning. So, I get the impression that – the claims rate assumption was 9% for fourth quarter and there was no adjustment made to the 7% used in mid-2020. I guess, when I tried to do the math to back into your incidence assumption, it feels like there was maybe another accrual or loss impact in the fourth quarter. Do you have any comments around that?

[Mark Casale, Chairman and Chief Executive Officer]

Hey, Phil, it’s Mark. No, not at all. I mean, you're reading too much into it. I think it's 7% was for the second and third quarter. And again, we've kind of isolated those cohorts so to speak, and we did not make any change to the [7%]. The 9 for the fourth quarter is really just reverting to our normal methodology, and the thing really is, you know, you have to have the October, November, and December and they seasoned a little bit, that's kind of how to get to the 12 that you see in the staff supplement.

I think the key point there Phil, and we mentioned it in the script, I think it's important for investors as a takeaway is we believe the defaults are contained. So, we feel like we're well reserved and adequately reserved at the end of the year. And going into 2021, we don't expect any material changes to the provision based on new defaults, right. I mean, defaults really came down. I think Larry said 31% in the fourth quarter. So, I wouldn't get and we can obviously take offline and, you know, in terms of some of the details, but I think the key message is, you know, I think we're looking for, we feel really good about where our losses are coming on.

[Phil Stefano, Deutsche Bank]

Got it. Okay. And I guess just to push back on that a bit. I mean, as we think about the foreclosure moratoriums continuing, forbearance being extended, you know, what would be the rationale, how would you help me understand the, you know, assuming that the 9% comes back into play, and maybe it wouldn't be better than that, at least in the short run?

[Mark Casale, Chairman and Chief Executive Officer]

Well again, I think it's, at some point, you have to get back to your normal reserving methodology. And I think, with the kind of tsunami of defaults that we had, in the second and third quarter, very similar to the hurricanes, right, in terms of like an isolated event, we thought it was prudent to kind of quarantine them, so to speak, and really look at it that way. I think in the fourth quarter, I think the message in it, again, it's back to kind of business as usual, right? We're back to our normal reserve methodology, where the 9% is the money good for years. And that'll just play out Phil.

So, if the forbearance extension and home price appreciation actually helps lower that that'll come through the model. But you don't really want to run the company longer term, kind of on how we how we did, you know, those isolated reserve adjustments. The model has, you know, it's actuarially correct and factual for 10 years, and to me this is a strong message that we're going back to the model. So again, I wouldn't get too caught up in whether it's too high or too low, it's adequate. And the fact that we're back on the model, I think, is a really good thing.

[Larry McAlee, Chief Financial Officer]

Phil, it’s Larry. Just also, we view the second and third quarters as the exception. As Mark mentioned that was the tsunami, those were the exception. We felt that was the appropriate methodology for those two quarters, but now, as Mark said, we're back to business as usual.

[Phil Stefano, Deutsche Bank]

Okay. And one quick one on reinsurance coverage, getting back to business as usual, I didn't see anything that said the quota share was going to be renewed or extended for 2021 and forward, the external quota share. It feels like the premium yield guidance. Has that embedded in it. Any comment on that or is the quota share still in a work in progress?

[Larry McAlee, Chief Financial Officer]

Well, remember the quota share is still in place, because the new business stopped getting [seated] last year, but we'll still have a significant kind of seated premium for 2021, which is kind of all baked into premium guidance. And also is a little bit reason why the expenses are lower, too. So, I mean, there's a lot of moving parts there. I think for 2021, Phil, I think it remains to be seen. Do you think about where the [ILN market] has really kind of come roaring back in terms of pricing? For us, really, it's going to be best execution.

So, as we look at 2021, we will compare, kind of ILN pricing to quota share. And quite frankly, last time we checked, the quota share pricing was a little wide. Hasn't really come in, you know, the reinsurers kind of pushing more of a hard market? That's not really where it is in the capital market. So, we'll look at it, you know, so stay tuned. But I wouldn't, you know, in terms of just the seeding commission and premium that's already kind of embedded in 2021 guidance.

[Phil Stefano, Deutsche Bank]

Got it. Okay. Thank you.

[Mark Casale, Chairman and Chief Executive Officer]

Sure.

[Operator]

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

[Mark DeVries, Barclays]

Thanks. Mark, are you able to elaborate at all on some of those opportunities outside the core that you alluded to is being opportunities for investment?

[Mark Casale, Chairman and Chief Executive Officer]

Sure, again, keep in mind that we're just thinking in terms of everyday Mark what we do, right. I mean, everyone kind of views us just as the MI company, right. And we're out just, you know, handing out [indiscernible] to lenders and getting loans. But it's way more complicated than that. I mean, we're integrated with all the vendors so whether it's Ellie Mae, Optimal Blue, other loan origination systems, you know, [Blue Sage], you name it, we're integrated, and we work with them, you know, pretty much on a day-to-day basis, especially as we're evolving EssentEDGE, right. We're now on our second version of EssentEDGE, we're connected to all the servicers.

So, we understand that part of the business well, and also, as I mentioned, in previous calls, we've invested in approximately 10 venture FinTech farms over the last, I want to say 24 months to 30 months. And with our investments in those funds, we have looked through and I want to say 250 to 300 type companies. So, we own [indiscernible], a lot of the names that you see that are getting [stacked today] or going public, and we've known them, you know, for years. So that's all the way from kind of the iBuyer market all the way down to servicing. So, we feel like we're in a really good position and we understand a lot of these company's strengths and their weaknesses. And I think we bring a few things to the table. We clearly bring kind of capital and liquidity, which I think helps especially provide growth capital to these firms.

We also bring operational expertise around how to start a business early and grow it. I think we've done a pretty good job with that. I think our view on it is and it's why we have a longer term view, you know the valuations in some of those areas are a bit frothy right now. So, I think as we continue to look at it, you know, an investor's greatest strength is time. And our view is, we own this business for the long-term. And we believe we will have the ability to put that capital to work to continue to expand the Essent franchise.

We're not going to do it small, we're going to do things that we think really kind of moves the needle, but again, if something as an investor we'll continue to look at, and we'll continue to, you know update the market as we see things.

[Mark DeVries, Barclays]

Okay, got it. And I think, you know, in your comments earlier, you also alluded to, you know, to just scratching the surface on some of the risk based pricing capabilities that you've developed. Can you talk more about where you see opportunity there and kind of the implications for the business going forward?

[Mark Casale, Chairman and Chief Executive Officer]

Yeah, I mean, again, I think it's two-fold, right. I think in terms of the business where we've tested in the fourth quarter, and we'll roll-out through this year, kind of a version 2.0 of EssentEDGE, which is incorporating, you know, additional factors, that machine learning is now incorporated into that development. So, it gets really down to the loan level price that you give each borrower. I mean, we’re telling lenders that we're going to give each borrower our best price. May not be the lowest price, right, and other employees MI’s may have a different view, but it's our best price. And as we've talked about recently, as you get into these engines, and you get down to the borrower, it really is best price win.

So, you don't want to go, you know, you don't want to go to a gunfight with a knife. So you really have to invest in analytics, and you better really understand what you're doing when you price that long. That takes time to develop and to deploy, but over time, you know, 75% of the market is kind of in the engine, and we were close to 70% of our production in the engine through in 2020, you know, and there's some of the card lenders, will eventually get to the engine, in my view, because I do think the engine is going to be the best way to give each individual borrower the best price, which I think is good for lenders, you know, it's good for borrowers.

And also then that helps us as we deal with these vendors in that front-end development of EssentEDGE market gives us ideas from the investment front. So again, as you think about the convergence of finance, housing, and real estate, and you think there's something there. Essent is a good way to play that. I mean, when we've – it's a nice call option to have. I mean, when we first went public, we hadn't launched Essent Re, and our positioning in Essent Re was it was a call option and we felt like we could eventually kind of exercise that option and we did. Essent Re has been, I would say very successful, what’s allowed us to reinsure 25% of the core business.

It had a very good year in 2020 [in rating] third party business and also has an [MGA], which is a little underappreciated, which you know, I think five different insurers where we, you know, we have, we kind of have the pen and they leverage our models to write that risk. So, again, as you think about all this stuff, as we learn this every day, and this isn't, you know, Phil asked me one time again, I'm going back to Phil Stefano, like what does Mark do day-to-day?

Well, we spend a lot of time on this, and kind of looking at opportunities. And again, if it's something, you know, we've always said if you like housing, you know, back when we went public, we thought housing would be stronger than people think because of the demographics. We got a ton of pushback from analysts and investors alike back in 2014 when it was probably a trillion dollars of originations. We felt like it would be a lot bigger, again, given the demographics that we studied. And, you know, again, we got pushed back.

So, I would look at it here. If you really think as an investor or an analyst, if you think there's opportunity. I know you guys cover other parts of the space, if you think there's an opportunity, again, Essent is probably a nice call option around, kind of fulfilling those opportunities over the next several years.

[Mark DeVries, Barclays]

Okay, great. Thank you.

[Operator]

Your next question comes from the line of Doug Harter from Credit Suisse. Your line is open. Please ask your question.

[Doug Harter, Credit Suisse]

Thanks. Mark, as you talk about kind of getting back to normal with reserving, I guess – return to more normal, I guess just how do you think about capital generation and therefore kind of the right level of capital to be holding for the business?

[Mark Casale, Chairman and Chief Executive Officer]

Yeah, I mean, again, I think in terms of the right level of capital, it's based on two things, Doug. One is, kind of your PMIERs excess. But that's not really the binding constraint. The binding constraint around capital is the dividend capacity out of the insurance units and obviously Essent Re also. So, our view is given where we are with the cushion and we always look at the cushion, kind of without the 0.3 factor and it's right there at 159%. We think that's a good level. Is it too high? We think it's a strong level. We're going to continue to see how that – we're optimistic about where COVID-19 defaults are going and I think we'll come out.

If we're going to cushion, kind of in a 125%-ish over time that's not a bad level, but also when you think about capital, it's back to my earlier comments around looking at excess capital as a way to deploy it to continue to grow Essent. So, I think we'll look at that and as we mentioned in the script and we clearly give back capital every quarter to investors in the form of dividends, which I think again, it's when we first did it, it's really a testament to our confidence in the sustainability of our cash flows.

And could we extend that to buybacks to some fashion? Of course. And again, I think that will be, again, of a sign - if we were to do buybacks and it's certainly something that's on the table, it will be much more mechanical right. We're not going to look at it and say, we're going to buy chunks of stock back at extra [indiscernible]. I think it would be more in the normal flow kind of like a dividend.

So, if you think about it from my level, we have a capital. We have – we're in a good capital position. We're generating a lot of cash flow like $720 million plus in 2020. We now accumulate that capital and we reinvest it in the core business. We look for opportunities to invest it outside of the business, the core to grow and then obviously look to distribute it via dividends and buybacks. It's probably going to be a little bit of all. So, I think we're in a very good position from that and I think our ability to raise capital last May and we said it could be, for offensive reasons or defensive reasons, it turns out it's going to be probably more offensive. We think we're in a good position.

[Doug Harter, Credit Suisse]

Great, thank you.

[Operator]

Your next question comes from the line of Jack Micenko from SIG. Your line is open. Please ask your question.

[Jack Micenko, SIG]

Hi. Good morning everybody. Mark, I wanted to revisit the prior question on some of the other outside potential opportunities. It seems like a pretty big message to the marketplace. We're talking about doing more in DC side and just if anything more cedes there or would you contemplate something that's maybe more transformative, something that really changes the revenue complexion of the company and perhaps the multiple as well? I'm just thinking – I'm trying to understand the context of the message that you put out for that.

[Mark Casale, Chairman and Chief Executive Officer]

Yeah, it's an important message and we want to – we conveyed it on purpose, Jack. So, I do think it's a little bit of each, right. We started with the funds and I would expect us – the next phase of it would be to make smaller investments directly into the companies. And then the third – kind of the third evolution of it would be owning some of the companies and kind of changing or diversifying outside of MI to change the revenue profile. A lot of that depends on price, Jack.

So, I mean it's not like we understand the businesses and depends on, kind of where you want to play in that and we could end up not doing anything, right. I mean we're not – we're very good. We understand price value very well and then if we traded on a revenue basis, perhaps we'll be able to do more from a stock standpoint in terms of our currency, but I do think it's an important message. We read a lot of your research and other research. We know a lot of these companies well. I do think there's a nice opportunity for us, kind of over the next several years.

[Jack Micenko, SIG]

Okay. Thanks for that. And then...

[Mark Casale, Chairman and Chief Executive Officer]

We call it – we kind of call it Essent 2.0.

[Jack Micenko, SIG]

Okay. And then on the pricing side, I know the industry increased price after the pandemic and I think in the past you've been pretty helpful in speaking to some of those changes where has pricing gone in the last quarter or so has it held – it does look like your NIW mix kind of skewed a little bit less risk tolerant, higher FICO, lower LTV over the past several quarters, just if you could, kind of help us understand those moving parts?

[Mark Casale, Chairman and Chief Executive Officer]

I think pricing's relatively kind of consistent, right. It's backing off a little bit from the pricing increase in the pandemic. So, I do think it's normalizing through 2021. The ILN market is normalizing. I would expect it to, right. I mean the claim rate assumption's coming down, because of where the economy is and HPAs has obviously been strong. I would expect the pricing to normalize. I think we've seen a lot of that. So, our view is our share was heightened in the second and third quarter. I think a lot of it was – a few of the MIs backed up and we are open for business.

We added – you can probably quantify the excess share we got in second and third quarter and what that addition was to insurance in force. But I would expect our share to normalize in 2021. A few of the MIs that kind of backed away have come back. But if you look at the results, Jack, it was successful for us, right. I mean we increased insurance in force 21%, which was I believe is higher than any of the other MIs in the industry by a pretty wide margin. And we did that with higher pricing and a lot of it was just because we're able to leverage the strength of our balance sheet.

Now that the other MIs are kind of back in the game, it's competitive. So, we expect to go back to our normal one out of six, 15%, 16% share. It always ebbs and flows quarter to quarter, and the market is so big, Jack. You're talking about over $600 billion market maybe last year and our estimate this year is probably in the $500 billion range. There's certainly plenty to go around and the unit economics of the business remain strong and I think that's another important message for investors to understand.

[Jack Micenko, SIG]

Yeah. And then – insurance in force trajectory in the last couple of months of the year for you seems to align with that. It's definitely the long way. Thanks guys.

[Mark Casale, Chairman and Chief Executive Officer]

Sure.

[Operator]

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

[Bose George, KBW]

Morning. So, just a follow-up on the pricing question. Have you seen any changes in the bulk market, just in terms of growth in that market relative to the rest just given historically has been little more competition there?

[Mark Casale, Chairman and Chief Executive Officer]

No. Again, Bose it's kind of the engine part of the market, which is 75% and I wouldn't call it bulk. I would call it just folks and lenders that are still on a rate card. Some of them, they bid out, but it's a forward bid. So, it's not so much in bulk. And then there's other guys that still do negotiated cards. Our view is again, we think the engine will eventually get closer to 100%. I mean, that's never get quite there. I mean some of the lenders believe they get better execution through the cards. Other lenders, they just haven't been able to make the changes to their systems.

As the analytics continue to get better at the borrower level with Essent and others, I'm sure the other MIs are evolving their engines too which I think is fantastic. It will get to that GEICO, Progressive part kind of analogy that I alluded to and the lenders that are on cards, my view is they're going to be at a disadvantage over time. So, right now, they think they're getting better execution. It's simpler. That's how they think about it, but over time as we get – you really dig into the borrower level and you're able to, kind of pick off the best credits, the execution will be better than the cards and the lenders at some point will pick up on this.

[Bose George, KBW]

Okay. No, that makes sense. Thanks. And then I just wanted to go back to the question on credit again. The reserve for loans in that 4 month to 11 month [bucket] was up pretty meaningfully, was that just seasoning of that book just – can you help us kind of think about that?

[Mark Casale, Chairman and Chief Executive Officer]

Yeah, it's just the seasoning. Remember, just – we said at the second and third quarter, it's 7% and we're still holding to that. But they run in through the bucket. So, right – I mean, a lot of these borrowers, they have 12 months. They're going to use it. So, I wouldn't read again a lot into that. It's a regular reserve methodology with, to Larry's point, an exception methodology for two quarters. So, it's all kind of together, but eventually that will flush through.

[Bose George, KBW]

Okay. Great. Makes sense. Thanks.

[Operator]

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

[Rick Shane, JPMorgan]

Hi, good morning, everybody, and thanks for taking my question. Mark, I appreciate the comment about this not being a capital event, but really an earnings event I think it puts it in good context. When we think about that context going forward, one of the things – one of the outcomes of what you've experienced over the last year is that you're entering 2021 with a vintage skew that is very, very different than you would have anticipated, but for the events of the last year. And – look, I guess, vintages are kind of like can't you love them all the same, but they're different. And I'm curious when you think about this long dimensions of credit, premium rate, persistency, what the changes in the book will be and how you think about the impact on sort of net profitability five years down the road?

[Mark Casale, Chairman and Chief Executive Officer]

Well, that's a big one. I'm going to unpack that one, Rick. Actually, I hear you. I think – we think about 2020 is such a large – it's almost like half our book was originated in the past 12 months. It's originated at, I think, 3.25% rate. So, it could stick around for longer than people think, especially if you start thinking rates are going to go up maybe in the second half of the year. There's a little bit of an inflation scare. So, it could turn out to be very well, right. We've kind of locked in something for longer and our view is even on a persistency basis, we should start to think about – we should start to see persistency be right around 70% by the end of the year. So, we think we're pretty well-positioned.

I don't think we planned it, right, I mean I think with COVID, but I think from an industry standpoint, looking back and again given the credit – the credit quality is actually better in 2020 than it's ever been. And you're right. This could turn out to be a very kind of premium, no pun intended vintage and it's something that could really bolster the profitability down, for the next three years to five years.

[Rick Shane, JPMorgan]

Got it. Yeah, thanks for taking it. Again, I realize it was sort of long-winded question, but I think it's important just in terms of the transformation of the book.

[Mark Casale, Chairman and Chief Executive Officer]

It was a great question. No, I agree.

[Rick Shane, JPMorgan]

Thanks, guys. Have a great day.

[Mark Casale, Chairman and Chief Executive Officer]

Sure. You too. Thanks.

[Operator]

Your next question comes from the line of Ryan Gilbert from BTIG. Your line is open. Please ask your [Technical Issues].

[Ryan Gilbert, BTIG]

[Technical Issues] I want to go back, Mark, to a comment you made a little earlier about total market size this year, you know maybe being in the $500 billion range versus $600 billion in 2020. I think that would kind of imply a mid-teens decline in overall market and I'm wondering if that's something that you're already seen so far in January and February or if that's just your expectation around interest rates going up in the second half of the year?

[Mark Casale, Chairman and Chief Executive Officer]

Yeah, it's more of a forecast. Actually, in January it was higher than previous January. And just some perspective, Ryan, the largest NIW market before last year was like $400 billion in 2003. So, for – even to say $500 billion is actually, I wouldn't look at it as 15% decrease. I would look at it and say the average NIW over the last 25 years is probably [200-ish billion]. So, we're in a – and obviously, that's – we have higher home prices, larger market, multi-family houses, but I actually think it's a pretty good number.

[Ryan Gilbert, BTIG]

Okay. And second question on the loss reserving and defaults going back to, kind of a pre-COVID normal. I hear you, but at the same time, your new default rate down 30% sequentially, but it's still up 130% year-over-year. Should we think about this kind of level of new default just as post-COVID new normal or do you think that new defaults can continue to improve from here?

[Mark Casale, Chairman and Chief Executive Officer]

Our view is, they will continue to improve. I mean, again, look at the just trend from second, third to fourth quarter. So, I wouldn't be surprised if they normalize over the next few quarters. So, yeah, I think we're 3,500 plus defaults in the fourth quarter last year. So, for us to end this year kind of in that same neighborhood wouldn't surprise me at all.

[Ryan Gilbert, BTIG]

Okay, great, thanks very much.

[Mark Casale, Chairman and Chief Executive Officer]

You're welcome.

[Operator]

There are no further questions at this time. You may continue.

[Mark Casale, Chairman and Chief Executive Officer]

Okay. Well, thanks everyone for joining us today and hope you have a great weekend.

[Operator]

This concludes today’s conference call. Thank you for participating. You may now disconnect.