Essent Group Ltd (ESNT) 2015 Q4 法說會逐字稿

Good morning. My name is Sean, and I will be your conference operator today. At this time I would like to welcome everyone to the Essent Group Ltd. fourth-quarter 2015 conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Chris Curran, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. 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 2015, was issued earlier today and is available on our web site at essentgroup.com in the investor's section.

Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in our press release in Exhibit L.

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 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 27, 2015, and any other reports and registration statements filed with the SEC, which are also available on our web site.

Now, let me turn the call over to Mark.

Thanks, Chris. Good morning, everyone, and thank you for joining us today.

I am pleased to report that Essent had a very successful 2015. During the year we continued expanding our franchise by growing our customer base, our insurance in force and delivering high-quality earnings growth to our shareholders.

As we have stated before, Essent's long-term goal is simple and that is to build a high credit quality and profitable mortgage insurance portfolio. We are optimistic heading into 2016, as the US economy is stable, and the underlying fundamentals of housing continue to improve. Favorable affordability and low interest rates, along with positive supply and demand dynamics, create a solid foundation for housing's recovery.

In addition, as millennials enter their peak buying years we believe home purchase demand will continue to grow over the next three to five years. Our outlook for the MI sector remains positive. Our industry is stronger than it has been in a long time as capital levels have increased and profitability is on the rise.

With PMIERs now in effect, the industry has clear and sound risk-based capital requirements that serve as the foundation for adequate claims paying ability. Newly established credit guardrails, including QM, and improved quality assurance by the GSEs, lenders, and MIs provide additional stability to the overall mortgage market. These changes benefit our industry, policyholders and shareholders, and will enable our industry to continue playing an integral role in US housing finance over the coming years.

Now, let's turn our attention to Essent. For 2015, we increased net income 78% to $157 million from $88 million in 2014. On a per diluted share basis in 2015 we earned $1.72 compared to $1.03 for 2014. Our earnings growth continues to be driven by our insurance in force which grew 29% in 2015 to $65 billion.

In addition, our portfolio's credit performance is excellent, ending the year with slightly over 1,000 policies in default out of 297,000 policies in force. Our balance sheet remains strong, with $1.5 billion in assets and $1.1 billion of equity at year end. Also, we grew adjusted book value per share 18% to $12.01 compared to $10.20 as of the end of 2014.

As a reminder, senior management's incentive compensation is driven by annual growth rates and book value per share. We believe that book value per share growth is a key metric in demonstrating value to our shareholders.

Shifting our attention to the marketplace, we are encouraged to see the impact that PMIERs are having on the competitive pricing landscape. Unlike historical industry price changes where rates were reduced across the board, recent changes have been focused on maintaining return levels across the entire risk spectrum.

With PMIERs now in place, we believe that industry pricing is naturally evolving within the construct of strong and transparent capital standards. This is why we have strongly supported PMIERs as a long-term positive for our industry. They shine a light on pricing and increase transparency around returns and capital management.

At Essent, given our leverageable expense base and our Bermuda platform, we have a competitive advantage around pricing and generating strong returns for our shareholders. Based on the new pricing that we are seeing in the marketplace today, we believe that we can continue to generate strong earnings and mid-teen returns for our shareholders.

Turning our attention to Bermuda, we had a very successful year reinsuring domestic US mortgage risk through both our affiliate quota share and participation in both ACIS and CIRT transactions. Essent Re's platform provides us a unique opportunity to reinsure below 80% LTV loans, which is incremental to our strong above 80% LTV franchise. As of year end, Essent Re had $2.4 billion of net risk in force and $220 million of GAAP equity. We continue to be pleased with Essent Re's progress, its impact on our Company, and we look forward to further growth in 2016.

Now, let me turn the call over to Larry.

Thanks, Mark. Good morning, everyone.

For the fourth quarter, we reported net income of $44.5 million, or $0.48 per diluted share. This compares to $40.8 million, or $0.44 per diluted share for the third quarter of 2015, and $28.9 million, or $0.33 per diluted share for the fourth quarter a year ago.

Earned premium for the fourth quarter was $89.4 million, an increase from $83.7 million, or 7% over the third quarter, and $67.8 million, or 32% over the fourth quarter of 2014. The average premium yield for the fourth quarter was 55 basis points, which is in line with last quarter and down slightly from 56 basis points in the fourth quarter of 2014.

The provision for losses and loss adjustment expenses for the fourth quarter was $4.2 million, an increase from $3.4 million in the third quarter of 2015 and $3 million in the fourth quarter a year ago. The provision for the quarter is in line with the increase in the number of defaults, claims paid, and aging of our default inventory. The default rate as of December 31 was 35 basis points, as compared to 29 basis points last quarter and 20 basis points at December 31, 2014.

Our expense ratio for the fourth quarter was 33.1%, a decrease from 34.3% last quarter and a decrease from 37.8% for the fourth quarter of 2014. For the full year, our expense ratio was 34.6%, compared to 43.6% in 2014.

Other underwriting and operating expenses for the fourth quarter were $29.6 million, compared to $28.7 million last quarter, and $25.7 million for the fourth quarter a year ago. For the full year, other underwriting and operating expenses were $113 million. Looking forward, we believe that for the full-year 2016, other underwriting and operating expenses will increase approximately 10% as compared to 2015, with approximately 35% of the increase being driven by premium taxes and equity-related compensation.

Our effective tax rate for the full year 2015 was 31.1%. As a result of the decline in the annual effective tax rate from 31.5% as of September 30, 2015, the effective tax rate for the fourth quarter was 30.1%. Based on our current forecast, we estimate that for the full-year 2016, our effective tax rate will be approximately 29%. As a reminder, our estimated effective tax rate will be dependent on the mix of earnings forecasted to be generated in the United States versus Bermuda.

The combined statutory capital of the US mortgage insurance companies at the end of the fourth quarter was $913 million, reflecting an increase of $48 million compared to September 30, 2015. This increase was driven by statutory earnings during the quarter. The combined risk to capital ratio of the US mortgage insurance business was 15.2 to 1 at end of the year.

The consolidated balance of cash and investments at December 31, 2015, was $1.3 billion. The cash and investment balance at the Holding Company at December 31 was $71 million as compared to $69 million at September 30, 2015. The Holding Company did not make any capital contributions to the operating subsidiaries in the fourth quarter.

Looking forward, we expect statutory earnings will be sufficient to support our forecasted growth in the US mortgage insurance companies. Additionally, we believe that between Essent Re's current capital base, its forecasted earnings and cash available at the Holding Company, we have sufficient resources to support our projected growth in Essent Re through at least the end of 2016.

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

Thanks, Larry.

In closing, Essent had another strong year of operating performance in providing mortgage insurance and reinsurance solutions to our customers. We are pleased with our earnings growth and mid-teen returns that we are generating for our shareholders. Heading into 2016, our franchise and market position are strong, and we remain positive about mortgage insurance, our industry and housing.

Now let's turn the call over to your questions. Operator?

(Operator Instructions)

Your first question comes from the line of Eric Beardsley with Goldman Sachs. Your line is now open.

Hi, thank you. I just wanted to follow up on a remark you made, Mark, about having a competitive advantage on pricing and where you have seen the industry go. Could you just elaborate a little bit there?

Do you feel like you're able to price lower than competitors due to the Bermuda tax rate? And also just curious on your thoughts on the industry discounting on the 760-plus FICO business.

Hey, Eric. Good morning. No, I didn't mean it that way. We said in the past we've never led with price. I think the wording really is to say we're best equipped to handle any price movements in terms of, again, not just the Bermuda structure, but I would point to our low nominal operating expenses that we have, and we've really been able to leverage that operating platform.

So, from that standpoint, I think we're best equipped. And competitive advantage, meaning from an investor standpoint and the ability to generate strong returns.

In terms of the discounting of the pricing, what we're seeing, again, is really a transition. It started obviously in the fourth quarter. It's a transition with PMIERs out there and really clear and transparent standards around pricing.

You're seeing it naturally evolve. Better borrowers are getting better rates because obviously lower capital is needed against that, and vice versa, as you move across the risk spectrum. So, it's a natural transition.

It's been a little bumpy as it has played out in the public markets, quite frankly. But we just see it as a natural evolution. Again, based on what we're seeing in the marketplace today, we feel like we have the ability to adapt with the pricing in the market and still generate strong returns for our shareholders.

Great. Thank you.

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

Hey, guys, good morning. Just to follow up on the new pricing in the market, do you guys feel like you have to formally roll out a new rate card or do you think it's more of an evolutionary process as you work with your clients and see how they approach this going forward?

Yes, it's probably a little bit of both. It's tough to tell, Bose. I think that's why, when we talked about this in the last quarter, we were really just watching what's going on in the market. We're evaluating it. Rome wasn't built in a day. And I think, again, I thought people might have overreacted to the pricing.

These are long-term decisions that we're making. We own this mortgage risk for three, four, five years, so any decisions we make around pricing, we're very thoughtful around, and we're not going to be quick to match anyone. So, we're watching the market. And I think I'll just reiterate what we said earlier -- our ability to adapt, we feel very comfortable with our ability to adapt, with the pricing we're seeing in the market today, and still generate strong returns.

Okay, great. Thanks. And then just a couple on the industry as a whole. Do you have any thoughts on industry new insurance written in 2016?

I think going back to 2015, 2015 was a very strong year. We're very pleased as purchase mortgage originations continue to grow, penetration grew. It was a very strong year.

Looking at 2016, even though refinance will be a bit down -- although it may not be given what's going on with the 10-year -- but assuming that refinance is down, that, combined with purchase origination growth, we feel like the market will be fairly consistent, same level that it was last year.

Okay. Great. And then actually one more. The United Guarantee partial IPO, any reason to think that changes anything in terms of market dynamics?

No, not really. To me it's a matter of they're getting another source of capital. They're owned by -- they have a parent, and they're going to get some capital from the public markets. Day in and day out that shouldn't really impact how they run the business.

Okay, great. Thanks a lot.

Your next question comes from Douglas Harter with Credit Suisse. Your line is now open.

Thanks. Mark, do you have a view on where persistency goes,. Obviously it could be a little bit fluid given where rates wind up. But big picture, how do you see persistency trending?

Second half of the year was 80%. I think that's a pretty good run rate, at least for 2016 from what we're seeing and what we're forecasting with the book.

Okay. Your credit quality remains good. Where do you think new notices settle out? What's the right way to think about that as the book seasons?

We don't really forecast, get down to that level in terms of new notices. I would just say we did disclose within the staff supplement this time incurred loss ratios by vintage. As you guys peruse through that, you'll see they're actually pretty strong, which is what we knew. 1,000 policies in default, or a little bit over 1,000 policies, with 297,000 policies in force will generate pretty good incurred loss ratios.

Again, what we said in the past, the book is still relatively. It's 17 months seasoned. We're encouraged by the incurred loss ratios to date.

More importantly, Doug, and I think this is maybe not understood quite well, is just again how strong the manufacturing quality is. When you look at our portfolio, you have the guardrails of QM, along with the quality assurance processes by the GSEs, the lenders and MIs, and factor in the average FICO of the book is much higher than it was pre-crisis.

All those things beget, I think, for a pretty good, strong credit performance over the coming years. It's tough for us, again, with such a young book, to get into the detail around forecasting. It's just too early.

And on the quality of the underwriting, is it comparable in the 2015 vintages to the earlier vintages?

Yes, very comparable. And, again, we look at that more from a QA standpoint. QA scores amongst our lenders have remained strong. And then you also see it in the claims side. We've had a few claims. We have very few claims but the claims we've had have been death, divorce, job loss, old-fashioned and traditional reasons for default and claim.

Great, thanks, Mark.

And your next question comes from Jack Micenko with SIG. Your line is now open.

Good morning. Mark, I'm wondering, listening to your opening comments -- and I agree with that PMIERs should bring some pricing discipline -- if you have any thoughts on the Quicken monthly bid. I think it was out this week. I think that kicked off a lot of these pricings concerns a year ago on the singles. Any comments there on what you think the impact of that could be?

We don't comment on particular clients or transactions. I would just say, I think the LPMI is actually a good example, Jack. That was the concern of the quarter a few quarters ago with the LPMI. And I think with the implementation of the new PMIERs you have actually seen LPMI pricing go up across the industry.

That's a very good example of the discipline that we're seeing around that. So, I would expect, again, with PMIERs, and really the transparency around pricing, that investors will know what's going on. And I think investors will really look to invest with companies with higher returns versus lower returns. From that standpoint, people have always tried to discount.

And turning to Essent, Jack, when we started the Company, we started this from scratch back in 2010, we did it in the face of a price engine that was 20% below us. We did it through discounted LPMI rate sheets, we did it through discounted LPMI bulks, we did it through a number of other things. And we've managed to grow the business to $65 billion of insurance in force.

Our earned premium levels relative to the risk, which we disclosure every quarter, are strong. And our actual returns are strong. Our ROE for 2015 was 15% and that was on an unlevered basis.

So, again, we just feel comfortable in terms of what we see in the market. And Quicken is just an example of one thing -- one of many things, that we see on a day-to-day basis in terms of pricing or credit or how you call on a client.

And, again, I talked about this in the fourth quarter. There's a lot more that goes into our success and our ability to grow this franchise than just price. There's a lot more to our account team, the sales group does a fantastic job of calling customers. It's a matter of we have a good training group, our customer service and how we do underwriting turn times.

I'm still on the road extensively meeting with our clients, building relationships, really helping our lenders grow their business. And sometimes on these, at this level, gets reduced to facts that you know, versus facts that you don't know.

And I would just say, summon them up. We feel very comfortable. There's more into it. This is a long-term business. We don't really change our strategy based on the new rate card of the day or the new pricing disclosure or chatter in the market.

It really gets away from the strong results, and not only results that we're printing from a financial perspective but what we see in the portfolio and what we see day-to-day around the yields that are coming in on the business, and how the customer base is performing, especially around the credit side. The credit side is probably the most important over time. That's performing well.

And then even on the pricing, when you add it all up, our earned premium yields are still strong. And we think, again, our earned premium levels are welded to the risk that we're assuming will continue to continue to be at good levels.

Okay. Great. And then looking at the break down geographically, you're a little big in Texas, but I'm guess you said since inception Texas has been a great housing market when you guys rolled out. Can you talk about any early signs of anything there? Obviously you talk about the 1,000 defaults. That's a remarkable number. And then how big is Houston specifically out of the 8%?

We don't actually look at risk in force by state. We actually break it out by oil-producing MSAs, oil-dependent, meaning really looking at in terms of the percentage of jobs within their region. So, it's actually broader across the country than just there. But it's a little shy of 4% of our insurance in force, if you really look at those MSAs.

And what we did there -- and we talked about this actually in our February call a year ago -- we stressed that portfolio through the great recession, 20% drop in HPA. And the result on our cumulative claim rate is very small, almost negligible from a portfolio standpoint. And I would say there's a mitigant to that, too, which is low oil prices and low gas prices really help the rest of the other parts of the economy, whether it's the consumer or transportation type companies.

So, all in, it's something we're aware of. We obviously haven't seen anything in our portfolio but it's something we're aware of. We'll monitor it, as good risk managers do, and take it in the context of the whole portfolio. But I do think, just on a high level, there's some strong mitigants to that, too. So, all in, we're very comfortable at this juncture.

Appreciate the color. Thank you.

Your next question comes from Mackenzie Kelly with Zelman & Associates. Your line is now open.

Thanks, good morning. And congrats on another solid quarter. Mark, just another question on pricing but more on the delivery side. I know you have said Essent would obviously be able to adopt and be flexible based on customer preference.

So, just curious if you are getting any indication over the last couple of months now that we have had TRID out, have another competitor introducing its black box system, are you getting any indication that lenders' preferences might be changing and that we might see an evolution away from the rate cards sooner than you maybe would have expected?

No, we're not really seeing any evidence in the market from our lender customers. It's an excellent question. And I'd give you the example on the underwriting side, Mackenzie.

We customize our solutions for our customers. We have a number of customers, approximately 40%, that prefer to send loans in through a nondelegated delivery, and we adapt and meet their needs. Others decide to deliver through a delegator. We don't dictate those terms to the client.

So, I think it's really the same thing on pricing. And I think it's even a little bit more nuanced than black box or rate engines versus rate card. There's the electronic delivery, too, which we do today, and that could be through Encompass, that could be through Optimal Blue. There's other ways to get rates to our customers.

What we do is try to, again, meet the needs of the customers, but also you want to balance transparency. Transparency is critical in this day and age in terms of the regulators, what we're seeing with TRID. And if our lender wants transparent rates, we're going to give our lenders transparent rates.

So, we're going to do what our client desires and still fit in within regulations and obviously do what we have to do from a shareholders' standpoint. Again, I wouldn't try to get too confused around the delivery options. It's really back to risk-based pricing and I think that's where the evolution is really happening versus the delivery aspect of it.

Okay. Perfect. And just lastly, sorry if I missed it earlier, was there any expense guidance given for this year? And if not, how should we be thinking about the run rate and expenses in 2016?

Yes, there was. We said approximately 10% this year and about 35% of that increase is premium taxes and stock-based compensation.

Okay. Perfect. Thanks, Mark.

And your next question comes from the Mark DeVries with Barclays. Your line is now open.

Thanks. It looks your risk-to-capital ratio actually ticked down in the quarter despite some pretty healthy growth in risk. Do you feel like, at least in the US MI business, you're now at the point where, absent some large one-off capital market transactions, you're generating enough retained earnings to sustain whatever growth you would have?

Yes, Mark, we are. In fact, Larry referenced that in the script, self-generating at Essent Guaranty. And, in fact, just to give everyone an idea of the cash that we're generating, net cash flow from operations for the entire Company in 2015 was $220 million. So, we feel very comfortable within Essent Guaranty.

As we said in the past, really the slight unknown is really around Essent Re and should we have some outsized growth there. I think in Larry's comments we feel very comfortable with our capital position during this year, based on our forecasts. But, like we've said in the past, if there's an opportunity for us to put capital to work at returns that would please our shareholders we will obviously go out and do that.

Okay. And where do you stand with the potential for starting to establish a dividend up to the Holding Company from the US-based writing company?

Yes, we're a few years away from that. That's obviously, the cash is building up. But in terms of how the state regulations work, it takes a while to work through that. We're still in a growth mode, Mark, in terms of, we're still having good opportunities to put the capital to work. But obviously over time the cash will build up and we'll have the opportunity to look at those things.

Okay. And how are you assessing the size of the potential market in 2016 for reinsurance transactions? Are you seeing any opportunity for material growth there given what's been outlined in the score card for the GSEs?

I think we'll see, just broadly speaking, the GSEs continue to increase probably in that 10% to 15% range of how much risk they'll continue to share with the private markets. And that's obviously both through the cash markets with their cash execution and through the multi-line reinsurers. So, we see an opportunity within the Bermuda platform to continue to grow that business.

In terms of whether it happens on the US side, I think that's a longer-term opportunity. And I say that in a positive way. I think we have gotten caught up a little bit on a quarter-to-quarter watch on deep MI. And I think the industry has done a great job really, as I said earlier, rebuilding capital, ratings are improving, PMIERs are now in place. All those things had to be done before you can get to the next stage of taking on more risk. And I think we're working towards that.

When you work it back to Essent, Mark, I would look at it two ways. We're a micro growth story, and a macro growth story. On the micro side, we're writing at 12% of the market today. We're about 7.5% of the total industry insurance in force. So, simple math would tell you that over time we'll get to that 12%. So, we can grow without the market growing at all per se in terms of the overall industry insurance in force.

And then there's the macro part of it. And I think the macro, things that could cause the pie -- and when I say the pie, the market, the insurance in force -- to grow, clearly is housing. And as we said in our script, we think housing is going to be stronger over the next three to five years, which means more home demand, more mortgages, more purchased mortgages, more mortgage insurance. We see that as the number one factor that would cause the market to grow.

And then obviously deep MI, which is something, again, it gets thrown around, but deep MI is really just extended coverage. And, again, over time that's an opportunity, and I think that would cause the industry to grow even further. But from an Essent standpoint we don't need to do that. We expect the industry to grow, but we believe Essent can continue to grow just based on our place in the industry today.

Okay. Got it. And just one last thing on the deep cover MI opportunity, one of the other alternatives the GSEs are going to be considering, obviously, are the front-end capital markets transactions done by the PennyMacs of the world. Have you looked at trying to participate with them in any of those types of transactions that have been done so far?

We have evaluated those, and I think that's another potential opportunity, is to team up with our lender partners to help them achieve more of those transactions, should they wish to do. Again, we have an advantage welded to our balance sheet -- clean, no debt, very strong ratings. And lenders, we tend to do very well when lenders decide to keep it on balance sheet, which they have done, and we have done very well with that.

And also if they want to partner with doing some risk-share with the GSEs, I think we have had some discussions. We feel very comfortable with our ability to execute that, whether it's in the US or through our Bermuda structure. We have always said Essent Re gives us another platform in which to execute our ability to ensure mortgage credit risks. Again, those are all opportunities, and some that we're working on today.

But, again, back to Essent, we don't need a lot of those opportunities for us to do well. We mentioned earlier -- remember, on the road show we talked a lot about call options. The call options either get exercised or they expire. We like a lot of the optionality around the business. Again, when you think about more private capital being needed, continued secular growth story in housing, and we're growing today without any of that stuff. So, we really like our chances as we continue to move forward.

Okay, great. Thank you.

Your next question comes from the line of Vic Agarwal with Wells Fargo Securities. Your line is now open.

Good morning, and thanks for taking my question. I appreciate your comments around credit and the strength of your credit, and your book has been very strong. I'm just trying to balance that with what we're seeing in the credit markets with wider spreads. The question is, how do you gauge the expansions and the 95% greater bucket relative to the credit spreads widening? And is that a concern into the future?

I think that's a tough correlation to make. We have obviously seen credit spreads blow out, more on the corporate side with companies that have credit exposure, putting that down to 97 LTVs. And, remember, we don't do a lot, Vic. I think the average LTV of our book is in the 92% neighborhood. So, I hear you, and again, it's something we're aware of.

As a risk organization, we're looking at that. And I think from the borrower level, and given the level of HPA increase that we have had since we originated the book, we feel comfortable with our book. Again, is it going to be impacted in certain regions? It obviously could be. We didn't expect to operate this company over the next ten years recession-free.

But, again, we feel comfortable, not only with the book today but also with the controls we have on the front end and the manufacturing of credit quality that you see on the front and getting back to that. We feel like Essent and the industry in general is better equipped to navigate through some of these credit concerns.

Okay. I appreciate the comment. Thanks, Mark.

And your next question comes from Sean Dargan with Macquarie. Your line is now open.

Thanks and good morning. Just following up on the train of thought that corporate credit spreads widened, your HoldCo credit ratings are still below investment grade. Do you have a sense what it would take to get investment grade ratings? Is that something that's possible in 2016?

I think we're more concerned and more focused on credit ratings within the operating entity. So, I think we would like to get Essent Re rated before we would look to the HoldCo rated, because that's the counterparty that our clients deal with. So, I think that's much more important.

Again, given our capital situation, there's not a capital need for us to go out and enhance the ratings of the HoldCo. It's something over time, I think that will evolve, and as the ratings continue to strengthen within the operating entity that'll be reflected in the HoldCo levels. But it's not something we're targeting for 2016. It's a good question, it really is, but I think we're more concerned and more focused on the operating entities.

Where I was going is, could your Holding Company access the debt markets with where you are now?

Yes. I don't see why we couldn't access the debt markets, I think, given the strong financial performance of the Company and the fact that we're not levered at all, and just the strong ratings within the entity. There is obviously a notching exercise going on for the HoldCo. But given the amount of strong cash flow that we have, that will eventually work its way to the HoldCo over time, we would feel comfortable going into the debt markets, if we needed to.

But it's a little early for that, Sean. In terms of 2016 we're pretty comfortable, given the self-generating of the cash at Essent Guaranty, and plus the cash at HoldCo and the capital we have at Essent Re. We're in really good shape. That's why, from a market standpoint, volatility, we're just keeping our heads down and running our business. We don't have any need for capital at this time, so we're really not impacted from that standpoint, and that's a good thing.

And I think that back when we issued equity in the fall of 2014, we were asked by a number of investors and analysts, why not raise debt. And I think at the time my response was I didn't want to reduce our financial flexibility. And that's exactly what would have happened if we issued debt and then ran into a situation where we needed capital today.

And I think the fact that we chose to -- as we always said capital begets opportunities. We're entering this market in a position of strength. And we like our opportunities to continue to grow the business the right way, with insurance in force, and not having to look over our shoulders as to capital needs.

Got it. And you mentioned the notching exercise. There's another company going in the opposite direction, and it seems to me that the notching between GenWorth HoldCo credit ratings and USMI financial strength ratings is pretty wide and at risk. I'm just wondering if you're seeing anything in the marketplace, if GenWorth is now a weakened competitor.

Again, we don't focus on that. We focus on Essent and our customers. Again, we're keeping our head down. We're not looking a lot at what's going on with GenWorth or AIG and the spinout. We're focused and I think that's why we've continued to be successful.

You can only worry about so many things in a day, Sean. And I think our view is we focus on things that we can control, which is helping our lenders grow their business. My time is much better spent out visiting clients and looking for ways to help them grow their business, and help Essent grow their business than to worry what's going on at our competitors.

Great. Thank you.

And your next question comes from Rick Shane with JPMorgan. Your line is open.

Hey, Mark, good morning. You touched on this a little bit, but I would love to get your thoughts. We have seen this very much in the credit card space, and I think you're alluding to this in terms of mortgage credit, as well. It increasingly appears that what we're seeing in terms of good credit performance is not cyclical, but there has been a structural change that makes the effects of good credit longer lasting.

What do you think the long-term calibration is in terms of loss rates? And, again, I real it's still going to be cyclical, but what do you think the long-term impact is? And is that getting reflected already in your coverage ratios?

You're going to hate this answer -- it's too early to tell, just, again, given the relative aging of our portfolio. But I think you make a good point. We do believe there's structural changes, and we've thought that for a while, given -- I'll get back, we talked a lot about it on the road show with QM, which we thought was a structural change.

And, again, just given people history around the mortgage insurance business, every time there's been a downturn the industry has emerged stronger. Back in the 1980s, most of the mortgage insurers were regional based, and the state requirements around capital in terms of reserves was quite small.

That got corrected going into the 1990s where you had geographic dispersion in the portfolio amongst all the MI's, you had much stronger capital standards at the state level. And it led to 17 straight years of profitability. That gets lost in people.

And obviously the industry, in addition to most financial services, companies went through the great recession that we have had, and I think from an industry standpoint, all else being equal, came out of it okay. I think the reputation of the industry is not warranted in terms of an industry that paid $50 billion worth of claims through all that stuff.

But, again, coming out of this downturn, what happened? Again, strengthening, PMIERs, clear transparent capital standards for the first time ever. So, I think that's a structural change, along with QM, that you're going to see over the coming years.

And then, just back to the credit side -- we mentioned this in the script, Rick - the QA, quality assurance that were seeing at the GSEs, I think the MI quality assurance has gotten better, lenders has gotten better. All that bodes well for what you say is a structural change.

And then add on top of that the portfolio has a higher FICO than it did. In the downturn, probably pre-crisis, the average FICO was closer to 715. And also, again, jumping back to pricing, in 2007, there wasn't any FICO breaks. Everything was priced the same. So, the mortgage insurers were not prepared and able to price the risk as FICO started to migrate down with the advent of PMIERs and what we're seeing. We actually started seeing risk-based pricing post crisis, and PMIERs is really just a continued transition of that.

When you put that up, I think the industry is better positioned from a pricing and credit standpoint than it has in the past. I think your idea around structural change is actually a very good one.

And it's interesting. And you know I'm a [spec fan] analyst, not an insurance guy, but I know insurance analysts like to talk about hard markets. And to me a hard market is just pricing recalibrates temporarily. This feels different to me. It does feel structural.

Yes. And the mortgage insurance, most insurance businesses, hard market is really price. And I think in mortgage insurance, hard market means credit, credit standards. Credit is really the ultimate driver of success, at the end of the day, both micro, how well you underwrite a loan, and then macro, how well the economy performs. Pricing is a component of that but it's a little misunderstood in mortgage insurance.

Thank you. It was a thoughtful answer given your initial -- it's too early to tell instinct. I appreciate it.

And there are no further questions at this time. I'll turn the conference back to Mr. Mark Casale.

Thank you, operator. We would like to thank everyone for participating in today's call on President's Day weekend. And enjoy the rest of the weekend. Take care.

And this concludes today's conference call. You may now disconnect.