Essent Group Ltd (ESNT) 2021 Q1 法說會逐字稿

Good day and thank you for standing by. Welcome to the Essent Group Limited First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your host, Chris Curran, Senior Vice President of Investor Relations. Thank you. Please go ahead sir.

Thank you, Katrina. 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 first quarter of 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.

Thanks, Chris, and good morning, everyone. Earlier today, we reported our first quarter results and are pleased with our financial performance in starting out the year. We believe that these results demonstrate a return to pre COVID-19 profitability as default trends continue to normalize. As the economy gains momentum coming out of the pandemic, combined with an already strong housing environment, our outlook is positive.

Over the last 12 months, our buy, manage and distribute operating model has served us well in navigating a stressed economic environment. The deployment of our pricing engine, EssentEDGE, and use of reinsurance has been transformational as it allows for better risk selection and it removes the historical boom and bust nature of a franchise like ours.

Our performance during COVID demonstrates the strength of our model and deepens our confidence in the economic engine of our business. It is this confidence that was the primary catalyst in initiating a dividend in 2019 and maintaining one through the pandemic environment.

Now let me touch on our results. For the first quarter of 2021, we reported net income of $136 million as compared to $124 million in the fourth quarter of 2020. Our first quarter results were negatively impacted by a $5.7 million discrete tax item associated with state deferred taxes. On a diluted share basis, we earned $1.21 in the first quarter compared to $1.10 in the fourth quarter of 2020 and our annualized return on average equity was 14%.

During the quarter, we were pleased with our insured portfolio's performance. At March 31, our insurance in force was $197 billion, a 19% increase compared to $166 billion a year ago. The credit quality of our first quarter NIW was strong with a weighted average FICO of 747 and a loan-to-value of 91%. As mentioned, our default trends continue to normalize as our default rate at March 31 was 3.7%.

On the business front, we have rolled out the next iteration of EssentEDGE with success and analyzes more data. Specifically, we are applying sophisticated machine learning techniques across increased amounts of data. The machine learning algorithms leverage our cloud platform with the resulting models outperforming traditional approaches. This should give us an edge in managing our portfolio through business cycles. Looking forward, we will continue blending artificial intelligence with more consumer data. We believe that EssentEDGE 2.0 will be a key differentiator for us in optimizing our unit economics and risk adjusted returns.

At March 31, our balance sheet and capital were strong, with over $3.9 billion in GAAP equity and access to $2 billion in excess of loss reinsurance and over $800 million of available liquidity at the holding company, we are well positioned. Also Essent Guaranty remains the highest rate of monoline in our industry, A by Invest, and AAA and BBB+ by Moody's and S&P respectively.

Our strong financial position at March 31 is due to the benefits of our buy, manage and distributed operating model, along with the measures that we had taken last year in bolstering our capital levels. As the U.S. economy reopens, unemployment levels improve and defaults begin to normalize, we now have more visibility on optimizing capital management. Our primary focus continues to be deploying excess capital back into the business to support growth in our core MI and reinsurance businesses, while secondarily we continue to pay a dividend.

Today, I am pleased to announce that our Board has authorized a $250 million stock repurchase plan to be executed by the end of 2022 and approved a $0.01 per share increase in our quarterly dividend of $0.17. Finally, to further leverage our Bermuda platform, effective January 1, 2021, we increased the percentage of NIW that is seeded under our affiliate quota share from 25% to 35%. Over time, this change is expected to reduce our effective tax rate by 150 to 200 basis points.

Now let me turn the call over to Larry.

Thanks, Mark, and good morning, everyone. I will now discuss the results for the quarter in more detail. For the first quarter, we earned $1.21 per diluted share compared to $1.10 last quarter and $1.52 in the first quarter a year ago. The weighted average diluted shares outstanding for the first quarter of 2021 and fourth quarter of 2020 was 112 million shares, up from 98 million shares in the first quarter of 2020 due to the impact of our equity offering in May of 2020.

Income tax expense for the first quarter was calculated using an estimated annualized effective tax rate of 15.9% before consideration of discrete tax items. As Mark noted, our first quarter results include a $5.7 million discrete charge to income tax expense to provide deferred taxes for states where Essent pays an income tax in addition to a premium tax. For the balance of 2021, we currently estimate to record income tax expense using a 15.9% effective tax rate.

We ended the quarter with insurance in force of $197 billion, a 1% decrease compared to $199 billion at December 31 and a 19% increase compared to $166 billion at March 31, 2020. Net earned premium for the first quarter of 2021 was $219 million and includes $11.2 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 first quarter was 42 basis points, down from 43 basis points in the fourth quarter of 2020. This decrease in the premium rate compared to the first quarter was principally due to the 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 first quarter was $32 million compared to $62 million last quarter. The provision for losses in the first quarter benefited from a decline in new notices of defaults reported and a higher level of favorable prior year development compared to the fourth quarter of 2020.

During the first quarter, we received 7,422 new default notices, which is down 15% compared to 8,745 defaults reported in the fourth quarter of 2020. Prior year favorable development was $16 million in the first quarter of 2021 versus $2 million in the fourth quarter. At March 31, our default rate decreased to 3.7% from 3.93% at December 31. Note also that favorable trends continued as our default rate at the end of April was 3.4%. With default trends normalizing, we have decided to discontinue the monthly default reporting that we had initiated post the onset of COVID-19 last year, and we'll update the markets as part of our quarterly regular cadence.

Consistent with the fourth quarter of 2020, we have reserved for new defaults reported in the first quarter of 2021 using our pre COVID-19 reserve methodology. As a reminder, for defaults reported in the second and third quarters of 2020, we provided reserves using a 7% claim rate assumption. This assumption was based on expectations that programs such as the federal stimulus for closure moratoriums and mortgage forbearance may extend traditional default to claim time lines 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 as they continue to represent our best estimate of the ultimate losses associated with these defaults.

Other underwriting and operating expenses in the first quarter were $42 million compared to $37 million in the fourth quarter. The increase in expenses over the fourth quarter is primarily due to an increase in the level of payroll taxes associated with the vesting of shares and incentive payments, which historically occurs in our first quarter, an increase in professional fees and a reduction in deferred policy acquisition cost.

We expect expenses to decline in the second quarter of 2021 compared to the first quarter. We continue to estimate that other underwriting and operating expenses will be in the range of $170 million to $170 million -- $170 million to $175 million for the full year 2021. From a PMIERs perspective, after applying the 0.3 factor for COVID-19 defaults, Essent Guaranty's PMIERs efficiency ratio was strong at 151% with $1.1 billion of excess available assets. Excluding the 0.3 factor, our PMIERs efficiency ratio remained strong at 149% with $1 billion of excess available assets.

Now let me turn the call back over to Mark.

Thanks, Larry. In closing, we were pleased with our performance for the first quarter as we produced strong earnings and generated excess capital. Our buy, manage and distribute model is operating on all cylinders and confidence in our economic engine is high. Combined with the strong housing environment and an improving economy post COVID, our outlook on our business is positive.

Over the last 12 months, the strengths of our operating model were on display as we remained profitable, raised additional capital and maintained our quarterly dividend through a stressed environment. Now as we return to strong profitability, we are pleased to augment our capital strategy with a share buyback program. Similar to dividends, repurchasing shares is a tangible demonstration of the benefits of our model on generating capital. It also provides further balance in deploying excess capital between the business and redistribution to shareholders.

Finally, we are excited about the progress that we are making with EssentEDGE 2.0 and its potential to be a game changer in evaluating the price and credit risk. While we are in the early stages of its deployment, combining AI with large quantities of data is where the world is moving, and we want Essent to be at the forefront of this.

Now let's get to your questions. Operator?

(Operator Instructions) First question, we have Mark DeVries from Barclays.

There's been a lot of investor focus this quarter just on share shifts. Mark, I know you guys don't focus on market share at all, but I do think it would be helpful just to get your color on what you think might have impacted share this quarter?

Mark, again, we've talked about this in prior quarters. We didn't really know what our share was until the last couple of days. I would say, from an Essent standpoint, we continue to focus on insurance in force, and that was relatively flat in the first quarter, which was relatively flat last year in the first quarter. In fact, I don't think we grew insurance in force to May of last year.

So given what -- while we expect to write with new insurance, and I think we wrote close to $20 billion in the first quarter, and what we expect to write for the rest of the year, we think we'll grow insurance in force at a healthy clip. So we continue to be focused on that. So we're not -- again, the quarterly market share shifts, there's a few reasons to get into them, but it ebbs and flows all the time.

We've been -- longer term, our goal is really around that 15% to 16% share mark. And one of the things around EssentEDGE 2.0 that we're really excited about, it gives us the chance to optimize the premium around that share, right? We're always going to -- and you want to -- if you're getting to be 20% share or more than that or you see large swings, it's price. It's such a price-driven business. Lowest price wins, whether it's the card or the engine. And our view is if you're going to be in that type of environment, you need to be armed with more information. And hence, that's why we started the development of EDGE 2.0 a couple of years ago now. And rather than the 3 or 4 factors of the rate card or the 12 to 15 factors with the first iteration of our engine, we're analyzing over 400 factors. And we're using machine learning and we're deploying that back to the loan officer in 3 seconds.

We are seeing across the board, ways that we're going to be able to, again, optimize premiums. If it's a low premium environment or competitive premium environment, and we can be better by 2 or 3 basis points. That's a big win from a unit economic standpoint. So again, that's how we look at it. So we don't get caught up in the chatter of the quarter of who's winning share, who's losing share. That's all -- it's kind of a -- it's just not important in the grand scheme of things. And as we look forward, we're spending our time making sure that we're building the analytics that are really going to separate the winners and the losers in the long run.

Credit selection, as I said, is going to be a key differentiator as the business moves. Again, it's going to be -- it's going to move more towards Guido progressive or credit card providers like Capital One. They're going to be the winners. So yes, there's still cards today, and you can lower your price to the engine. But the strength of the engine longer term, Mark, is it's a risk management tool. And I think that's what we believe in that and that's where we're putting our investment dollars.

Okay. That's helpful. On a separate note, as you guys highlighted, you're in a very strong capital position here. Could you just talk about opportunities you're seeing to deploy that into the business? And then kind of what the implications are for your new repurchase authorization and how you might expect to use that?

Yes. I mean, again, with strong capital position at the holdco, right, with over $500 million of cash. And of course, we have the line of credit. We also are generating significant amount of cash and guarantee. And in fact, we pulled $100 million dividend out of guarantee in -- over the last couple of weeks. So again, that process will start too. So I think from a cash standpoint -- in terms of redistribution, we have the dividend, which we increased, and we'll obviously continue to look at that each quarter.

The repurchase is really through the end of 2022. So we could obviously increase that if necessary, but that's really the plan now. And it's kind of think about it, Mark, in terms of longer term, given the cash generation in the business, dividends and repurchases now, which is new for us, it's a way for us to maintain ROEs. So when we see business, maybe if we don't like it as certain unit economics, maintaining ROEs through this distribution is a good use of capital.

In terms of the business, we feel like the Essent Guaranty is actually pretty good in terms of cash generation, in terms of needing new capital. Essent Re, that could always use capital if we see opportunities. We've written kind of outsized business over the last half of 2020 and in the first quarter of 2021, just given the opportunities we've seen there. It's obviously not as meaningful as Guaranty, but it's certainly a use of capital.

And as I mentioned on the last call, we'll continue to look and study and analyze ways to leverage the business or leverage some of the things we do well outside of the core MI. But we're still early in that. But I think that the real story is we have a pretty, I would say, well-constructed and diversified capital management plan.

Next question. We have Doug Harter of Credit Suisse.

Just wanted to follow-up on the comment you just made, Mark, about being able to pull $100 million out of Guaranty. Can you just talk about kind of the approval process and kind of thoughts about kind of how dividends from Guaranty could look in the future?

Yes. I mean, the approval process is, again, given some of the haircut or the 0.3 multiplier we require GSE approval, which we received. And just remember, again, from our capital position, Doug, we're pretty strong with the PMIERs with and without the multiplier. And also just reflect on our balance sheet. We're not that levered. So our leverage is below 10%. So we're in a pretty strong capital position, which -- and again, it's reflective in our ratings, which I think the GSEs recognize.

So in terms of going forward, we're not going to speak to it being a regular occurrence, but you can do the math. And when folks think about in terms of just NIW or insurance in force, we're in a really good position. So we think we'll continue to grow insurance in force. But today, we don't, Doug. All of a sudden, our required assets flatten out and the available assets will keep growing. So it actually increases kind of cash available for shareholders. So it's -- we're in a very good position.

We're either going to redistribute it into the businesses to grow or we'll have opportunities to increase distributions to shareholders and again, as I noted, increased opportunities to allocate that capital to provide another leg of growth down the road. So we're really pleased just again with the cash flow generation of the business. I believe it was $180 million in the first quarter, our booking cash flow. So I think from that standpoint, I think there's more great things to come.

Great. And then just to clarify, that $100 million would be -- that would add to the $540 million that of holdco cash that you reported with earnings?

It's not. Remember, it was done in the second quarter and it's really going to be a matter of whether we upstream it or not. Remember, Essent Guaranty's a cell of U.S. holdings. So we may just keep it at U.S. holdings.

But Doug, we have 2 holding companies. We have the top-tier that Mark referenced earlier. We report that. And now we -- and we also have the U.S. holding companies. So between the 2 holding companies, this will add to cash at the 2 holding companies.

Next question, we have Rick Shane from JPMorgan.

When I look back through our model, and Mark, I suspect you will chew this number up when I throw it out there, but I see over -- since 2010, $67 million of claims paid. You currently have a $410 million reserve. The home price appreciation story is really strong and I think that that's a fundamental tailwind both in terms -- I think that, that will fundamentally continue. Do you think that there is a divergence now between reserves and a realistic economic outlook? And how do you think that, that resolves over time?

Again, it's hard to say that there's a divergence. We would just say, one, we feel pretty good about the $400 million plus in reserves because it just adds to our balance sheet strength. And it kind of gets to the point we made last year, which was the reserves we took were 2020 event. It was really an earnings event, which got reflected in the provision.

Looking forward, it's really going to center around the ultimate performance of the second and third quarter cohorts. Because remember, in the fourth quarter and the first quarter, we're now back to the normal reserve. So if you just isolate -- let's just look at the second quarter cohort. We have 37,000 defaults in that quarter, 70% of them, I've cured already. However, we assume 93% would cure. So let's give it a few more quarters. I think it's going to take 2, 3 plus quarters.

And also, Rick, you got to remember just what's going on with forbearance, right? They extended forbearance. In fact new loans going into the fall are still eligible for forbearance. So until that kind of cleans up, you could see borrowers stay in forbearance for a longer period of time, which is going to make it hard for us to remove it from the provision. So I think we're levered to the upside. But again, I think it's going to take time for this to play out.

Got it. Yes, look, I hear you on that. I think that that's one of the things that's clear is that with forbearance being extended, but when we draw an analog perhaps between what we've seen in auto finance where collateral values has been so robust, I'm assuming that the severity of loss given home price appreciation versus the historical reserves really creates some opportunity as well. Is that the way you guys are looking at it?

Well, I mean, that's what we did when we set the reserve, right? So we assume 7 -- basically 7% would go to claim. Right now, 30% of them are still sitting in default. So over time, we expect as they clean up, yes, a lot of them could end up selling the house without ever having to -- before close upon.

So yes, again, I think we're favorably levered to that, Rick. But again, we get paid the rates. So it's sitting on the balance sheet. It's strength. We don't feel the need to aggressively kind of forecast that it's going to be better than we originally thought. I'm not quite sure we could do it even from an accounting standpoint. We'll let it play out over time.

Yes. And Rick, your point is a good one. Just to clarify, the 7% claim rate assumption seems 100% severity. So to the extent that severity is lower than 100%, it would give us the capacity to pay more claims.

Your next question is from Bose George from KBW.

Can you talk about the factors that went into the decision to see more premium now to Bermuda? How you set the 35% level? I think your -- of your peers, that's Bermuda based, see 50%. Is that the possibility over time?

Well, again, it was a first. It was something that we had contemplated last year, Bose, to be honest. But given COVID, it kind of took a backseat. So we think it's a good first step. It's -- again, we like to do things in increments. So going from 25% to 35% and focusing just on NIW. I think it helps normalize some of the cash flows throughout the company. Will we look at 50% over time? We possibly could. But I would say right now, we're very comfortable with 35% and just on NIW.

I think if we did anything going forward, it would be more looking at the back book and moving in. But that's down the road. I think right now, we're very comfortable. And again, as we said over time, it plays into 150 to 200 basis points. It kind of gets back to an earlier point I made, those around unit economics, right? We think a lot about unit economics. And quite frankly, that's the whole business. So if our new engine or the iteration of it can help us optimize premium, that helps unit economics, both in terms of the premium and in managing the credit losses.

We're already pretty darn good at managing expenses and that's another, again, driver of unit economics, investment yield, which we spent a lot of time on and some of the things we look at can clearly help investment yield. And the tax rate is another lever. And I think when you put it together, so yes, it's a commodity business on the front end. There's no doubt about it. It's probably becoming more of a commodity business given when you see how price can move the needle. So you have to be a lot better at the little things. So once that loan comes in the door, being able to manage up and down unit economics to optimize returns, again, I think that's what differentiates us.

Okay. That makes sense. And then actually just one more on the tax. Is there anything in the Biden tax plan that impacts the arrangements of the Bermuda reinsurance structure?

Again, they've been after that. That's been going on. I mean, this is a newer approach to it, but that was a lot during the Obama administration too. We've seen a lot of proposed rules. It's a wait-and-see game. So again, it's tough to comment on a rule that's just kind of got floated out there, but certainly, something we'll be watching.

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

The first question I actually wanted to ask is just wanted to clarify the comments on premium rate. I know you talked about a 2 basis points, a bit of a decline. Just wanted to see if we can get any more color on the cadence? And really what I'm trying to understand is, are we talking about the exit being below 40, so like the 40 is for the full year, so the exit will be below? Or are we saying 40 is where you end up in fourth quarter?

40 is where we end up in the fourth quarter. However, I mean, it's going to depend a little bit on the persistency of the book. And clearly how much we write in the second half of the year, and also the shift between purchase and refinance. But I think we're comfortable with that, but there's so many moving parts. I think we'll leave it at that in here. But there's definitely a difference in the premium yields amongst the different players. And I think that's something, again, that's when we talked about the engine and looking for ways to optimize that premium level.

It's very important for investors to understand how -- around premium. So it's easy to give away premium to get NIW. However, it's always going to come home to roots in terms of the top line revenue. So that's why we're so focused on making sure we can optimize the premium level. And we believe we can do that with our new iteration of the engine. And I can give you an example, right? I mean, 760 -- and there's 760 loans out there right now that have been in forbearance for 9 months. And guess what, that shows up as a 760. Our model can sell that they have payment pattern histories, that they're probably not representative of 760. Well, we're not going to give them the same price we give -- we would think a more stable 760.

And then on the other end, when you go down the credit spectrum, can we pick off the 720 that we think is going to perform better than the 720. Remember, we don't price off FICO anymore. We price off a custom mortgage score that we've developed. It's very proprietary. But again, it's something and we back-tested it over the last several years with different sorts of data.

So on that 720, we can price a little bit below the market. However, that's going to perform better. So again, this is where -- when we get into the -- as you think about the next 2 to 3 years, 5 years, Mihir, and I remember you and I talking about this out in California a couple of years ago. This is really where the business is going. And again, you can give away premium to get yield. It's been done -- I mean, to get NIW it's been done in this business since we started, but it ebbs and flows. You can always rent share for a quarter or 2 quarters. But again, we're focused on the longer term drivers of the business. Again, it's all relative to market levels, obviously. But again, we're trying to be a little bit better just around the edges.

No, that makes sense and really appreciate those comments. Just one other quick one from me. I just wanted to check if you had any update -- I may have missed this in this side. But any update on the NIW? I think you've given like a $500 billion-ish market at the last quarter. Any update to that view given are quarter into?

Yes. I mean, it's -- I thought the first quarter was pretty strong. So yes, could it be kind of more in the 5.50-ish? Yes, certainly. I mean it's certainly a strong market. A lot of it is going to be dependent on our rates in the second half of the year. If they go up, that will push refinancings down, but the purchase market, as we all know, is incredibly strong. So I think it's a strong -- very strong NIW market, but just keeping a perspective, the 20-year average is like $250 billion. So this is a nice market and over the last couple of years, but certainly much higher than it has been previously.

Your next question is from Ryan Gilbert from BTIG.

First question is on the favorable development in the losses incurred in the quarter. I think it was $16 million, stepping up from $2 million in the fourth quarter of '20. Is that a -- that $16 million of good run rate going forward? Or was there anything one time in nature in the quarter that I should be thinking about?

Yes, Ryan, it's Larry. Respond to that question. I don't think you can assume a run rate as it relates to prior period and prior year development tends to be a little bit more lumpy. But what we saw in the first quarter that contributed to the $16 million was we had favorable cure activity on both the fourth quarter defaults when we move back to the pre COVID-19 reserve methodology and also the defaults that had been reported prior to COVID. So the defaults that were recorded in the first quarter of 2020 and prior periods. So we have good cure activity on those cohorts.

And in addition, we're observing some decline in our reserve factors due to the favorable housing environment and strong credit performance. So a little bit of reserve factors and also continued strong activity in the fourth quarter and then pre-COVID default cohorts.

Okay. Got it. And then the April default rate dropping to 3.4%, 3.5%. I think what we've noticed from peers is there's been a really nice pickup in your activity in April. Would you say that's the case for you? Or has it been -- is that drop in the default rate being driven by both lower new defaults and also the coming years?

It's really both. And if you look back at the 8-K that we released in early April, that will be the last month in which we are reporting our default activity on a monthly basis, we'll just be reporting that quarterly going forward. But we saw an uptick in both the cure activity as well as a reduction in the number of new defaults reported. So continue to see favorable trends in that area.

I would point out also, though, that April tends to be a reasonably good month in terms of kind of cure and default activity. But we did see a nice decline in default and a pickup in cure activity in April.

Your next question is from Geoffrey Dunn from Dowling & Partners.

I got a few questions. First, Larry, last quarter, when you shifted to pre-COVID methodology, you had some adverse current period development, I think it was $18 million because of solar cures versus historical trend on the early-stage bucket. Did you have that same adverse development this quarter?

No, we did not. And Geoff, that adverse development in the fourth quarter was really due principally to the shift from the COVID-19 reserve methodology. That sort of fixed 7% claim rate on new defaults versus going back to the model. So that was kind of the anomaly of we went really to a different reserve methodology in the fourth quarter, but we didn't see any significant. In fact, we saw some favorable development for the -- during the current quarter.

Okay. Then in terms of moving $100 million to the U.S. holdco, I believe that can help on the debt side, but what other advantages other than avoiding the excise tax to Bermuda, do you get? Or what other options do you have keeping it there? Is that something where you can do, for example, acquisitions from? Or there are other opportunities outside of debt and M&A?

Yes. No, you got it. Keeping it at holdings, gives us a lot of flexibility around investments. So it's not really about avoiding the excise tax, so to speak. I mean, we're flushed with cash at the holdco. So there's no need to do that, pay the tax and have to kind of downstream in again. So it gives us a lot of flexibility really around the investments and what we're looking to do on a go-forward basis.

Okay. Sorry, 2 more. Essent Re, obviously, you can always use capital, you're increasing the seed or have increased the seed. Is there a planned downstreaming of capital in the next quarter or 2?

No. We're actually pretty good with capital there. Hence -- and that's -- that's what we didn't do the back book. There, we would have needed to kind of move some capital around. And we like the idea of just kind of doing a measured approach. But yes, we're pretty good from a capital standpoint there too.

Okay. And then last question. Obviously, you currently tap the ILN market as to your peers. But one of the things that is very clear is that the benefit under PMIERs can disappear very quickly as the risk amortizes down and the effective cash flow points rise. How do you factor in these varying speeds to your capital management? And then should we see the pace of that benefit erosion slow as refis decline?

It's a good question. We certainly -- we look at the ILNs over kind of a 2-to 4-year forecast, that we do. So it's -- we generally look at it in matching the NIW on a regular basis. So yes, it's certainly something you kind of have to stay in the market on it to maintain the benefit. But there's a certain benefit that we expect to get. So it's a good point, but I think we're -- as long as you're continuing to issue, it should be in good shape. It's when you stop is when -- and we saw that last year where it really created an issue for some.

Also, Geoff, just to finalize that. You don't want to become over-reliant on ILN. Just to your point around the nature of it. So we look a lot at where we are with and without ILNs just in terms of capital management.

Your next question is from Phil Stefano from Deutsche Bank.

Yes. Mark, I was hoping you could talk to us about the mix of dividends and repurchases. And the repurchases is new, so maybe you could talk about your philosophy around valuation-based sensitivity and thinking about is dividends or repurchases the right way to return capital, seeing both as a valve to ease the excess capital to maintain returns?

Yes. Really good question, Phil, around the pricing. It's certainly -- I mean, I take a step back, it is a mix, right? You want to -- we think mixing dividends is cash in hand to investors. And obviously, repurchases is a little different way to get cashback, maybe a little bit more kind of tax effective. So we like both. And given -- in terms of our program, it will be -- think of it almost as a dollar-cost averaging type program. So we'll be in the market on a continuous basis.

But when the shares are up, we'll be buying less and when the shares are down, we'll be buying more. And given the volatility day-to-day in our stock price, we think we'll probably -- it's probably a good plan. We're not going to make bets, right? I mean, management teams are very poor, I think, in terms of predicting valuations up and down. So it will be more of a 10(b)(5) plan that we'll execute off a matrix, and we would expect to -- we'll look at it every 90 days.

So we always could accelerate it in certain instances and we could add to it in certain instances. So I would, again, it's going to be a dynamic use of capital management. I don't think we'll jerk the dividend around too much. So repurchases is going to be more the toggle. And then there's obviously the investment opportunities in the core business, which continue to slow, right, because we continue to get to kind of critical mass. And then there's the investment opportunities outside the core, which again, we've just started with our investments in the fund, and that's something we'll continue to build and develop over the next several years.

Okay. Maybe I'm parsing words too finely, but the reading of the release from mind seat says it to be executed by the end of 2022. I feel like that's, in some ways, an affirmation that we're going to at least do this. I mean, is that the right way?

Yes Phil, we're going to be in the market probably over the next 30 days. Yes, this is not -- this isn't a signal, we're actually going to be in the market in 30 days, repurchasing shares on a continuous basis through the end of 2022. So if you're building your model, you can almost figure out how many shares we're going to buy a day, and you can work that into a repurchase over the next -- to the end of next year. That's why we're very specific on it. Yes. It's not a signal. It's going to happen. We're not going to stop it if prices get too high per se. That would be actually a good problem to have.

So think of it as continuous. The change will be and we'll update you guys every quarter. We'll toggle it. Like we say, Oh, my god, this is -- we have more excess capital and we want to increase that, then we'll now step to the market. But it's not a signal. So it's actually -- it's a program that we intend to execute upon. Again, it's very consistent with our approach. We like to do kind of slow and steady. So the dividends was one aspect of it. And we didn't -- we announced it and then we did it. And now we're announcing us -- we're going to do it.

Okay. And then switching gears, I wanted to dig into EssentEDGE 2.0 a little bit more. And you had mentioned that this was a proprietary platform. I tend not to think of insurance companies as tech companies. So maybe you could talk to us about, is this being developed in-house? Are you leveraging an external provider? What's the real differentiator here that this can't be replicated by the other 5?

No. I mean, it can certainly be replicated. It just takes time, right? So we started this 2 years ago. We hired -- and it came out with one of our larger banks started a -- I think they had 4 MIs, and they started the machine deciding which MI they were going to affect. It used to be kind of the old allocation method. And as soon as we saw it, we're like, wow, this is definitely where the business is going. And then in 2019, we were down meeting with the folks at Optimal Blue, and they're a big pricing provider of the MI industry.

And prior to that, a loan officer had to decide who they were going to price. Essent or another MI. And generally, a loan officer would have taken, say, 2 or 3 MIs, right? They're not going to run all 6. It takes a lot of time, and their laws are focused on making sure the borrower gets into the right lung. Optimal Blue changed that. Their new system starting, I believe, at the end of 2019, delivered all of the MI pricing back to the loan officer with the 2 best prices highlighted in green. I mean it would be pretty difficult to pick your favorite MI rep when they're not in green.

That just further solidified our conviction that we needed to get better at using more information to make a decision. So we're giving every lender our best price, not necessarily the lowest price. So the way the model works is, yes, we hired folks from the credit card industry and we got other data sources. And again, we have folks in-house that have experience in that and developing LP at one of the GSEs. So we use raw credit data, which, again, the only folks who use real predicate or the GSEs.

So we use that to deliver and then run through, I believe, it's over 400 factors now. And actually did the development of the model, that was done all in-house. The deployment part of the model is actually interesting. We can now deliver that back to the loan officer in right around 3 seconds. So again, think of that, it's all in the AWS cloud. So again, this has been the in development and deployment -- development over the last again, 1.5 years, probably 1.5 years. So 1.5 years, 2 years, as we've seriously done it. And we tested it in the fourth quarter of last year and we rolled it out to the market in the first quarter this year. It's going to take time. It's actually available today through Ellie Mae.

So if the loan officer is pricing through Ellie Mae Encompass, they can access this price. And we have direct integrations with a couple of the larger banks. And we'll continue to kind of roll that into the market. It's a difficult market to do it. I mean, when some folks are just using bit cards, they're not -- it's hard for them to say we're going to use an engine, right? So we have -- so we -- about 70% of the industry is using engines and that's really what will morph those into EssentEDGE 2.0 probably over the next 12 to 15 months. There's a few bigger ones. Again, if more users -- I think 50% of our production is through Ellie Mae, but it's not that simple. Because some of the loan officers priced through Ellie Mae, some use Optimal Blue. We'll eventually work our way into Optimal Blue.

So we're excited about it. So yes, everything can be replicated. So when I say proprietary, meaning we build it in-house, we can go hire a consultant to do it, a lot of the skills here. But I do think it's a clue here and I'll give you an example, Phil. We've made, again, 10 different fund investments over the last 3 years. I think we have 4 East Coast funds, 3 Midwest funds and 3 West Coast funds. And like you've heard me say over the years, I'm out visiting clients. So I'm also out visiting these funds and some of the companies within the fund. So we came across a company a couple of years ago that was using like 1,000 factors. And this was probably -- I think it had to be in 2018 or '19. And I walked out of that meeting with that company going.

The technology exists. It's never existed in this industry before. Remember, we were just pricing through rate cards. And one provider had an engine and kudos to them for being first to the market on that. But we looked at it and saying, how can we exponentially get better than the kind of the 4, 10 or 12 factors. And there was clear evidence that this company could do it. So we knew the technology existed. So again, a lot of it is just spending the time on it, continuing to develop that. It's a proprietary score. So it's an Essent risk score. It's not a FICO score.

FICO was developed back in 1989, Phil, it's never been approved and it's just not a great indicator of a person's ability to pay their mortgage. So again, I would expect the industry is probably all working all things like this. So again, this is something we've gotten and maybe their models already have it for all I know. But I mean, we're focused on what we can do. And we think it's leverageable and that's the thing. We're learning stuff now around consumers' ability to pay. And we're focused right now on deploying it within Essent. But you never know if there's opportunities down the road for other things.

Okay. Great. I look forward to those other things, Mark.

There are no further questions at this time. Now I'll turn the call back over to management.

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

This concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.