Essent Group - Q4 2022

Transcript

Operator (participant)

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Essent Group fourth quarter and year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Phil Stefano, Vice President, Investor Relations, you may begin your conference.

Phil Stefano (VP of Investor Relations)

Thank you, Rob. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO, and David Weinstock, Interim Chief Financial Officer. Also on hand for the Q&A portion of the call is Chris Curran, President of Essent Guaranty. Our press release, which contains Essent's financial results for the fourth quarter and full year 2022, 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 16th, 2022, and any other reports and registration statements filed with the SEC, which are also available on our website. Now let me turn the call over to Mark.

Mark Casale (Chairman and CEO)

Thanks, Phil, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2022 financial results. Our strong performance, which reflects the earnings power of our business, benefited from better-than-expected credit performance along with increased persistency and investment income as a result of higher rates. These results demonstrate the strength of our economic engine in generating high-quality earnings. Heading into 2023, we remain confident in our buy, manage, and distribute operating model despite some economic uncertainty. While our franchise is levered to the economy and housing, we continue to manage the business considering a range of scenarios. As for the economy, the consumer has shown resilience and unemployment has been relatively stable. With regards to housing, we remain constructive over the longer term as we continue to believe that low inventory and demographic-driven demand should support home prices. Now for our results.

For the fourth quarter of 2022, we reported net income of $147 million as compared to $181 million a year ago. On a diluted per share basis, we earned $1.37 for the fourth quarter compared to $1.64 a year ago. For the full year, we earned $831 million or $7.72 per diluted share, while our return on average equity was 19%. At December 31st, our insurance in force was $227 billion, a 10% increase compared to a year ago. Our 12-month persistency on December 31st was 82%, and the weighted average note rate of our book is approximately 3.8%.

While there has been some relief to affordability pressures since rates peaked last November, recent mortgage rates should continue to translate to an elevated level of persistency. At the same time, the credit quality of our insurance in force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 92%. On the business front, we activated 150 new customers in 2022 as we continue to drive lender penetration and growing the Essent franchise. Based on expected credit normalization, we increased rates during the year. Our pricing engine, EssentEDGE, enables us to efficiently raise rates in targeting adequate risk-adjusted returns in pricing long-tail mortgage credit risk. We believe that EDGE is mutually beneficial, delivering our best price to borrowers while helping to optimize our unit economics.

Our Bermuda-based reinsurance entity, Essent Re, had another strong year of performance, writing high quality and profitable GSE risk share business and continuing to provide fee-based MGA services to our reinsurer clients. As mentioned last quarter, the current environment is providing Essent Re with improved pricing and opportunities to move up in the structure to optimize returns. Essent Re ended the year with third-party annual revenues of approximately $69 million and third-party risk in force of approximately $2 billion. Since 2014, Essent Re has earned over $275 million of net income from its third-party business. Essent Ventures, our strategic investment unit, was formed to enhance financial returns while gaining insights to improve our core business. Ever to date, these investments have created $85 million of value, of which $64 million have been returned as realized proceeds.

As of December 31st, the carrying value of other invested assets is $258 million. It was through these efforts in Essent Ventures that we identified our planned title transaction. Title insurance is a natural complement to our mortgage insurance business with relatively stable underwriting performance and efficient capital requirements. This acquisition adds a team of seasoned title professionals to Essent and provides a platform to leverage our capital position, lender network, and operational expertise in a well-established adjacent sector. Cash and investments as of December 31st were over $5 billion, and the annualized investment yield for the fourth quarter was 3%. For the full year of 2022, our investment yield was 2.6% compared to 2% in 2021.

As a reminder, for every one point increase in the investment yield, there is a roughly one point increase in ROE. As of December 31st, we are in a position of strength with $4.5 billion in GAAP equity, access to $2.5 billion in excess of loss reinsurance, and over $1 billion of available holding company liquidity. With a full year 2022 operating cash flow of $589 million, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. At year-end 2022, approximately 98% of our portfolio is reinsured. In the fourth quarter, we closed a quota share transaction with a panel of highly rated reinsurers to provide forward protection for our 2023 business.

We will look to continue executing upon our diversified and programmatic reinsurance strategy that mitigates earnings volatility from economic cycles and provides capital relief. In 2022, we returned nearly one quarter of our earnings to shareholders in the form of dividends and share repurchases. We remain committed to a balanced approach between capital distribution and capital deployment, including investing $100 million for our planned title acquisition that I previously mentioned. Further, given our strong financial performance during the year, I am pleased to announce that our board has approved a $0.02 per share increase in our common dividend to $0.25. Moving forward, we will review our common dividend annually as we continue to believe that maintaining and steadily increasing dividends is a meaningful demonstration of the confidence we have in the stability of our cash flows and the strength of our operating model.

Now let me turn the call over to Dave.

David Weinstock (Interim CFO)

Thanks, Mark. Good morning, everyone. Let me review our results for the quarter in a little more detail. For the fourth quarter, we earned $1.37 per diluted share compared to $1.66 last quarter and $1.64 in the fourth quarter a year ago. We ended 2022 with insurance in force of $227.1 billion, an increase of $4.5 billion from September 30th, and an increase of $19.9 billion or 10% compared to $207.2 billion at December 31st, 2021. Persistency at December 31st, 2022 increased to 82.1% compared to 77.9% at the end of the third quarter.

Net premium earned for the fourth quarter of 2022 was $207 million and included $14.6 million of premiums earned by Essent Re on our third-party business. For full year 2022, our net earned premium rate for the U.S. mortgage insurance business was 37 basis points. The average net premium rate in the fourth quarter was 34 basis points, a decrease of 1 basis point from the third quarter. We expect that the net earned premium rate for the full year 2023 will be largely unchanged from the fourth quarter rate of 34 basis points. Net investment income increased $5.2 million or 16% in the fourth quarter of 2022 compared to last quarter, due primarily to yields on new investments and floating rate securities resetting to higher rates.

Other income in the fourth quarter includes a $6.5 million loss due to a decrease in the fair value of embedded derivatives in certain of our third-party reinsurance agreements, which compares to a $5.2 million gain on the valuation of embedded derivatives last quarter. The provision for loss and loss adjustment expenses was $4.1 million in the fourth quarter of 2022 compared to Excuse me, $4.3 million in the third quarter and a benefit of $3.4 million in the fourth quarter a year ago. At December 31st, the default rate was 1.66%, up 11 basis points from 1.55% at September 30th, largely due to traditional default seasonality.

For the full year 2022, we recorded a net benefit of approximately $175 million, due largely to cure activity on defaults reported in the second and third quarters of 2020. Other underwriting and operating expenses in the fourth quarter were $46.9 million, up $4.8 million from the third quarter, largely due to an increase in professional fees. The expense ratio was 20% for the full year 2022 and compares to 19% in 2021. We estimate that the other underwriting and operating expenses will be approximately $175 million for the full year 2023, excluding any expenses associated with the announced title business acquisition and related transaction costs. The effective tax rate for full year 2022, including discrete items, was 15.9%.

For 2023, we estimate that the annual effective tax rate will be approximately 15.5%, excluding the impact of any discrete items. During the fourth quarter, Essent Group paid a cash dividend totaling $24.6 million to shareholders. In the quarter, Essent Guaranty paid a dividend of $55 million, and Essent Guaranty of PA paid a dividend of $5 million to the U.S. holding company. As of January first, 2023, the U.S. mortgage insurance companies can pay ordinary dividends of $318 million in 2023. As of quarter end, the combined U.S. mortgage insurance business statutory capital was $3.2 billion with a risk to capital ratio of 10.2 to 1. Note that statutory capital includes $2.1 billion of contingency reserves as of December 31st, 2022.

Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $226 million while at the same time paying $320 million of dividends to our U.S. holding company. As a reminder, Essent has a credit facility with committed capacity of $825 million. Borrowings under the credit facility accrue interest at a floating rate tied to a short-term index. As of December 31st, we had $425 million of term loan outstanding with a weighted average interest rate of 6.02%, up from 4.39% at September 30th. Our credit facility also has $400 million of undrawn revolver capacity that provides an additional source of liquidity for the company. At December 31st, our debt-to-capital ratio was 8.7%.

Also at December 31st, Essent Guaranty's PMIER sufficiency ratio was strong at 174% with $1.4 billion in excess available assets. Excluding the 0.3 COVID factor, the PMIER sufficiency ratio remains strong at 155% with $1.3 billion in excess available assets. Now let me turn the call back over to Mark.

Mark Casale (Chairman and CEO)

Thanks, Dave. In closing, we are pleased with our fourth quarter and full year 2022 financial results, which reflect our focus on optimizing unit economics to generate high-quality earnings and strong returns. Looking through the one-time tailwind of COVID reserve development on earnings, the underlying results for 2022 were solid. The high credit quality of our portfolio and strong employment drove credit performance, and higher interest rates benefited the persistency of our in-force book and investment income. Our strong operating performance continues to generate excess capital, which we will deploy in a balanced manner between investment in growing our franchise and distribution to our shareholders. We believe this measured approach is in the best long-term interest of Essent and our stakeholders. Now let's get to your questions. Operator?

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Mark DeVries from Barclays. Your line is open.

Mark DeVries (Director)

Thanks. Was hoping to get some color, if you can provide any on the title acquisition, kind of what your expectations are for earnings contribution and how you think about investing in that business and growing it from here.

Mark Casale (Chairman and CEO)

Yeah, Mark, I would take a step back. I think shorter term, I'm not going to project any kind of earnings around this over a period of time. We'll obviously update everyone every quarter. We look at this very similar to the platform we bought off of Triad back in 2009. It really, it was like our ticket into the mortgage insurance business. We see similar parallels with the acquisition of both BNT and ANTIC. They're good platforms, really strong, talented people, relatively small, obviously, in terms of the industry.

We look at, you know, first off, we're gonna invest, continue to invest in the infrastructure in both, put more capital into the underwriter, try to improve the ratings, invest in people, and then look for ways where we can provide some synergies. Clearly, a lot of synergies just in terms of, you know, back office, right? In terms of finance and legal and some of those things which we're, you know, we have a pretty good handle on. Over time, in terms of our technology platform and digging in on the operational side, to look for ways to grow. It's, it's that old Walter Wriston saying, "Control, profitability, growth." We're gonna look at it. This is like a three, five, 10-year plan, Mark.

It's not something we're gonna, you know, come out of the gate with earnings. It's a new industry for us. It's an industry we understand well because it's an adjacent sector, but we're gonna take our time. We're gonna continue to, you know, apply, you know, kind of that hard work and operational expertise to it. I think over time, we'll be able to grow it. It's definitely, from our standpoint, you know, big picture, it's complementary to the MI business. The MI business has, you know, credit risk, regulatory risk, operational risk. You know, title's more operational risk, regulatory risk, and kinda capital and credit are on the lower end. Longer term, we think it's very complementary.

There's clearly some overlap with lenders, but as we look to grow Essent, right? You've heard me say over the years, we wanna grow Essent. We love the mortgage insurance business and we've grown it, we think we can continue to grow it as housing grows, but the pond is only so deep. When you look at title with annualized revenues in the $20 billion-$25 billion, you know, kind of range, it's a big market. And our view is it's something for us to, as we look at that next phase of Essent and building other operating engines, we thought this was a good pond to go into.

Mark DeVries (Director)

Okay. That's helpful. I know, I think in the past, Mark, you've also expressed interest as you thought about diversification in consumer credit-related businesses. Is that something that's still kind of on the table, or are you gonna be really focused on both continuing to execute within the MI business and building out, this new title venture?

Mark Casale (Chairman and CEO)

Yeah. I would say for the foreseeable future, we're gonna be digging into title a lot. Not that that's off the table. Remember, you know, we really have, when you think about the core business, we have Essent Re, which continues to grow. You know, title is kind of our third, kind of area. I would say around the consumer credit, and analytics, you know, most likely, if we were to make an investment there, it would be via the Ventures group, right? That's, that's kind of teed up to do direct investments. I would say for the foreseeable future, we're gonna be pretty focused on the title.

Mark DeVries (Director)

Okay. Makes sense. Thanks.

Operator (participant)

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

Rick Shane (Equity Research Analyst)

Thanks for taking my question this morning. just really one thing. you recently completed the negotiation of your 2023 quota share

Agreement. I'm curious in your conversations with the panel of reinsurers, how investors in the space are looking at the outlook for 2023. Do you think that it is coherent with your views or you know, in line with your views? How do you feel about pricing?

Mark Casale (Chairman and CEO)

Yeah, I mean, I think in speaking with the reinsurers, we actually had, you know, one of the large brokers in the office, you know, I think in the last, you know, three or four weeks to kind of give us a deep dive just on that market, or at least an update on that. We feel pretty good about the market. I would say it's all about the sustainability of reinsurance, Rick, both with reinsurers and with the capital markets. The pricing is gonna ebb and flow, right? We've paid a little bit higher pricing on both over the past 12 months, if you think of the three or four years before that, we've had excellent pricing. It's really the sustainability and are those markets gonna remain open. I think we feel pretty confident on both.

You know, the reinsurer market is really now, even though they've had hardening on different parts of the business, you know, they clearly look at mortgage is kind of countercyclical to that and good diversification. What happens with these reinsurers, they continue to invest in teams. It becomes like another business line. We believe it's pretty sustainable. Again, the pricing is gonna go up and down depending on the market or their views on credit, you know, just like we have our views on the front end. Again, I think the pricing is adequate. Sustainability is very good. Just to throw in there, you know, on the Essent Re side, we've been able to capitalize on that increased pricing.

We wrote the most business that we've had ever in 2022, and we're able to move up the capital structure, so we're able to get more premium for less risk, which is always a nice, a nice trade-off to get. Just finally, just in terms of reinsurance, Rick, I just think if you think we're five years into this programmatic reinsurance and it's still around. It paused a little bit during COVID, but it came back. You know, last year, tons of uncertainty around where rates were in the economy. There's still uncertainty, but I would say it's not as heightened as it was in that October and November timeframe when inflation was kind of running rampant. We still got reinsurance done. Let's work backwards.

Say we're here five years from now we're 10 years into programmatic reinsurance. I think it sends a strong signal, I've been saying this for a while, that reinsurance has fundamentally changed the mortgage insurance business. It was always a buy and hold kind of model where Essent and others, we had an uncapped liability on our balance sheet, that is no more. You know, 98% of the book is reinsured. Sure, we paid for it, we've taken that capital volatility away from the business. I know we're viewed in the market more like a specialty finance company, kind of boom and bust. I think over time, I think that's gonna change.

I think we're gonna be viewed more like a specialty insurance company, where our specialty just happens to be mortgage and housing, and not having that. Of course, those specialty insurance businesses have ebbs and flows, but they're valued a lot higher than specialty finance companies because of the sustainability of their cash flows. Again, we have to prove it out. We're five years into it. We're not going anywhere. We'll continue to do it. We'll continue to grow the business and, you know, we'll let the chips fall where they may. We feel pretty good around how that's kinda starting to shape up.

Rick Shane (Equity Research Analyst)

Got it. Well, as a specialty finance analyst who's enjoyed covering your company, the market can do what it wants, but I'm gonna still continue to look at you as a specialty finance company. There obviously is a real-time feedback loop with pricing in that market, and it's not just Essent who's participating, and you have alluded to a harder market. Again, I'm assuming that you are seeing that that is weaving its way through into the competitive environment in terms of pricing for you and that there is continued pricing power.

Mark Casale (Chairman and CEO)

Yeah. I mean, I guess if you look at just the reinsurance side, just to put it in context, Rick, in general, we pay 4-5 basis points of our premium for reinsurance. In the last year, it's gone up one point, maybe a little bit more, right? We've raised pricing on the front end more than that. Again, if you think about, again, just the sustainability of the reinsurance and put it in context of the premium we charge, we still think it's a pretty good value.

Rick Shane (Equity Research Analyst)

Got it. Thank you very much.

Mark Casale (Chairman and CEO)

Sure.

Operator (participant)

Your next question comes from the line of Mihir Bhatia from Bank of America. Your line is open.

Mihir Bhatia (Senior Consumer Finance Analyst)

Good morning. Thank you for taking my questions. I wanted to start on the insurance side, first, right? Just I understand your net premium rate guidance is flat, but I did wanna ask about the in-force yield or the base premium rates, you know, that you report on slide 16. There seems to be a real stabilization there. Some of your competitors have talked about increasing premiums on new business. Should we expect that base premium rate to maybe start blending higher, and then it's like really insurance costs that are driving the net premium rate to be flat?

Mark Casale (Chairman and CEO)

I think that's. I don't know that I would necessarily say they're gonna turn up. In terms of have they bottomed, we feel like they're getting pretty close to the bottom if they haven't already bottomed. Yeah, that base premium rate of around 40, when you think about the business on the new insurance written, we're getting pretty close. There's. Obviously then it does, you know, have the chance to go up from there. I think, I mean, here, the other point of this is just the value of the pricing engines, right? There's just, you know, in terms of our ability and the industry's ability to kind of price adequately for the risk.

We saw in COVID, where, you know, things were unclear, and the industry was able to kind of pivot and change the pricing. You know, clearly the pricing, in our view, kind of bottomed out last year in that probably first quarter, maybe near the end of it, and that was reflected in our share. As we talked about this on the calls. You know, we started increasing pricing, others have increased pricing, that continues today. There's a couple reasons for that. Well, there's a few reasons for that. A little bit of the reinsurance cost that we alluded to in my answer to Rick. You know, second clearly is kind of some of the clouds forming around the economy. I will say most importantly, though, Mihir, it's the normalization of credit, right?

This, you know, this below 1% default rate, our view is all the time it's been more like 2%-3%. If you're gonna have adequate returns, at a 2%-3% claim rate, the pricing needs to come up. We're obviously not the only ones to see that. It's come up, we think it could continue to rise. We'll, you know, we'll raise pricing. We're expecting to raise pricing again in the first quarter of 2023. You know, if it keeps going up, you're gonna see new premium levels that you haven't seen since 2018. I mean, it's really moving in the right direction. In, in the context of the borrower, it's still very efficient, right?

I mean, you're talking about we charge almost less than half of where the GSEs charge. I think from a pricing to the borrower, it's very efficient and it actually helps, you know, our counterparties and our stakeholders because you have to adequately price for this long tail risk. Our view is, you know, we're doing it, clearly our competitors are doing it. I think that's probably one of the more important points for investors to grasp out of this quarter is kind of not just the stabilization of pricing, but, you know, kind of where pricing has the potential to go, but also just the ease of using the engines and the way it's able to kind of help us target adequate returns.

It's something we said, you know, five years ago, four years ago when we started the engine, that it was more of a risk tool than a market share tool. I really think that's starting to play out across the industry.

Mihir Bhatia (Senior Consumer Finance Analyst)

Right. Got it. That makes sense, and thank you for that. We would agree about that. You know, the premium conversations have certainly been quite encouraging this quarter. Maybe just turning to the deal, and I understand you don't wanna talk about, you know, short term, like one, two years, what you're seeing in terms of like, you know, financial benefits or targets or anything at this early stage. Maybe like, you know, you mentioned, you know, this is a long-term play for you, three years, five years down the line. How are you going to be judging success of the deal from a financial standpoint? Do you think it's like, you know, 20%, 30%, 40% of total profits for, you know, the combined Essent Group?

Is it a much slower, longer tail than that, where there's like, you know, it takes a while to just build up that kind of momentum? Like, how are you thinking about like, you know? Give us at least a long-term something about how you're thinking about judging the success of this acquisition.

Mark Casale (Chairman and CEO)

Yeah. I mean, it's a fair question, right? I would say again. We're gonna be disclosing this separately, right? I mean, just given, you know, the revenues of the title business relative to the revenues of the MI business, it would most likely be a separate segment. This is gonna play out for everyone. As you know, we're gonna be pretty transparent. I would say we really look at returns at the end of the day. We have these core return targets of 12%-15% in the core business. We have it with Essent Re. I would remind you when Essent Re, we break it out, I think folks are gonna be pleasantly surprised as to kind of the returns of the business.

Just you saw it, and it's in the script. I mean, if you're looking at, you know, almost $70 million of revenues, and, you know, there's expenses assigned to that for sure, but there's also investment income. It's a good business. It's right within that 12%-15% return profile. The Ventures, which is not really a business, but it certainly is a unit that we manage separately that also has return targets. We've had, you know, pretty good return on that initial investment. I believe, the IRR since inception is 17%, so it's right again within that 12%-15% target. I think with Title, you know, it's gonna be the same thing. It's a little bit capital light, so the returns should be higher.

In terms of the growth, I mean, here we're gonna have. It's gonna be, you know, business is an iterative process, so we're gonna get in there. We have two. These are really two businesses, right? You have the ANTIC business, which is almost like a wholesale. You know, it's an underwriter, but it attracts title agents. It's relatively small. You know, 200 title agents that they have. So we're going to, as we look at ANTIC, it's gonna be how can we grow their base of title agents? You know, how can we activate new agents, right? How can we build out a larger sales force? How can we scale some of those things?

How can we use our capital to make, you know, from a ratings perspective, to make it more attractive for salespeople to come work for us and for agents to wanna use us, right? What offerings can we invest in to make that attractive? On the BNT side, I mean, they're really, you know, they're a top 10 player with lenders really around centralized refinancings, which, clearly, been down. Again, can we sign up new lenders, leveraging our lender network? We'll see. We believe we can. Can we help strengthen their operations so they can take on more business, right? I mean, it's not just signing lenders up. We really took a step back building the MI business and made sure the operations were very crisp, so we could take on business.

When, you know, in MI, we were competing with, you know, very large and established competitors. When we first signed up lenders, we had to make sure they had a really good experience or they wouldn't come back. This is all before you guys saw us in the public market. This will play out a little bit publicly, but it's the same game plan. You know, we're gonna go in and take this kind of a step at a time and build it brick by brick. We're, we're fortunate here that the platforms are a little bit more established, right? We didn't have any sales people. I think when we first started, we had approximately 0 lenders signed up. They're obviously further ahead, and we believe that, you know. It's almost like a partnership.

We love, you know, kind of the experience and the talent that we're getting in both organizations and combining that with Essent, you know, can we help scale that? Longer term, we never thought Essent would be this big. you know, when we first started, the business and wrote the business plan, you know, we thought if we could get to 10% share, we would do really well. That was in a much smaller market. Some of it's gonna depend on the size of the market, the size of house prices. As house prices go up, you know, title insurance premiums go up. we know we're, you know, I think ANTIC is the 15th largest, you know, so we're, you know, far maybe half a point a share. It's timing.

You know, we're gonna get in there and, you know, again, it's three, five, 10 years. I don't wanna put a number on it, but we certainly would expect supplemental income. We don't do things not to make money. So you know, whether, you know, where that, you know, where that ends up over the long term, we'll find out. We're just trying to caution people in the short term that we're not trying to come out of the gate to show you know, earnings. We'll always sacrifice early on investment. Certainly don't wanna lose money, but, you know, I think the prize is longer term in growing the business.

Mihir Bhatia (Senior Consumer Finance Analyst)

Got it. great. I think we look forward to hearing more as you finally close the acquisition and, you know, start providing more details.

Mark Casale (Chairman and CEO)

Yeah.

Mihir Bhatia (Senior Consumer Finance Analyst)

Thank you.

Mark Casale (Chairman and CEO)

You're welcome.

Operator (participant)

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Bose George from Keefe, Bruyette & Woods. Your line is open.

Bose George (Managing Director)

Yes, good morning. Actually just one more on the title. You know, when you think about sort of the long-term growth trajectory, do you think it's more driven by M&A or organic or, you know, just how is the combination there?

Mark Casale (Chairman and CEO)

Yes. It's too early to tell. I think we're always gonna favor organic growth, Bose. That's how we build Essent. The title industry has different dynamics, however. We're well aware of both. There is an opportunity to use our balance sheet. I would say from a, you know, we have a pretty large capital position, but we're not gonna be in the business of just buying title agents left and right. I think we could eventually get to the point where we're acquisitive, but we really wanna understand the operations of both and the potential to grow them organically. There's gonna be a limit to that, but it's kind of baby steps, you know. First, you know, get, you know, close on the transaction, right?

That's probably not gonna be till the third quarter, and then really think through how do we strengthen the infrastructure of both businesses, and then look for ways to grow organically. My guess is we'll end up doing both. You'll grow organically, and you'll complement that, you know, with acquisitions, but that's down the road.

Bose George (Managing Director)

Okay, great. Thanks. Then just in terms of, you know, financing it, can you use cash at the insurance company, you know, for, you know, for buying title insurers?

Mark Casale (Chairman and CEO)

I'm sorry, could you repeat that?

Bose George (Managing Director)

Just like, is this funded with holdco cash or, I mean, is it possible to, you know, to buy title insurers at the, you know, at the insurance company itself?

Mark Casale (Chairman and CEO)

Oh, good question. The acquisition will be out of Essent US Holdings. Just to remind everyone, Essent US Holdings is a sub of Essent Group, and Essent Guaranty is under Essent US Holdings. This will be a sister company to Essent Guaranty. Different pots of capital for sure.

Bose George (Managing Director)

Okay, great. Thanks. Just one last one. On the expenses for next year, I didn't know if you said that, but did you give guidance for, you know, what we should expect for OpEx for next year?

Mark Casale (Chairman and CEO)

Yeah, we're right around $175 million. That does not include title. It's just for the MI business, and obviously, we'll include title upon the close, and we'll add to that. It's pretty much business as usual in terms of expenses.

Bose George (Managing Director)

Okay.

Mark Casale (Chairman and CEO)

A little noise in the fourth quarter, due to the deal, and there'll be a little noise with some of the transaction costs. In terms of the core business, you know, we feel pretty good about that number.

Bose George (Managing Director)

Okay, great. Thanks.

Operator (participant)

Your next question comes from the line of Geoffrey Dunn from Dowling & Partners. Your line is open.

Geoffrey Dunn (Equity Analyst and Partner)

Thanks. Good morning.

Mark Casale (Chairman and CEO)

Good morning.

Geoffrey Dunn (Equity Analyst and Partner)

Wanted to look at the credit this quarter a little bit in terms of the current period provision, so X, the development. The average provision there is up a bit. I was just curious, did you change your claim rate at all? Is that just seasoning of the OSH delinquencies? Can you provide a little bit more detail?

David Weinstock (Interim CFO)

Yeah, Jeff. It's Dave Weinstock. You know, on the whole, we haven't really made any significant changes. You know, we have a model, an actuarial model that we feel really good about. I think we've talked about in the past, that our expectations on early claims is somewhere in that 8%-9% range. If you look at where our reserves are at December 31st, you know, we're at 8% for those early delinquencies. Really, nothing significant there, as it relates to, you know, what came in the fourth quarter.

Geoffrey Dunn (Equity Analyst and Partner)

Probably more just geography and average loan size?

David Weinstock (Interim CFO)

Yeah, I think that's fair. Yeah, I think that's fair, a fair assessment.

Geoffrey Dunn (Equity Analyst and Partner)

Okay. Then, Mark, you brought up the cash flow for 2022 in your prepared remarks, and obviously, one of the things that's helping that is the industry doesn't really have any paid claims. I was expecting out of COVID, once forbearance plans started ending, you'd have a jump in paid claims as you could proceed with those. But it seems like that hasn't been happening. Is that something that we're just waiting for the spike to happen, or has the embedded equity really taken that spike out of the recovery and this is just gonna gradually phase up as the notice inventory continues to build out?

Mark Casale (Chairman and CEO)

I think that's actually a good assessment of it, Jeff. I mean, just one, most of the guys in forbearance originally in COVID cured. A lot of times they cured because they sold the house. I mean, we can see that now. I mean, with the technology, you can see when one of your defaulted loans is listing, and we could see like where it was at, where we have it, you know, marked at, and where they're selling it at. In that market, they were able to kind of get out of that, which we had assumed was gonna be part of it. I think it's the same thing here, just the embedded equity in the mark to market that we have on the book has really helped that.

Then in terms of just, you know, I'm not sure, and this is longer term, but the forbearance and the tool that it is with the GSEs, I actually think that's gonna be a common occurrence around events. Clearly, it happens with hurricanes, it happens, happened with COVID. Other significant recessions, I would not be surprised. It's a very effective tool of keeping borrowers in their homes, and allowing to work it out, right? You know, in the post-crisis, we had HAMP and HARP, but there the milk was kind of already spilled on the floor and it was a way to help, you know, mitigate that. With COVID, like right out of the gate, the GSEs were extremely responsive. It was just, it was really a smart move.

I mean, it hurt us, right? Because we had to, we had to post reserves for it. In terms of, you know, people were defaulting because they were allowed to. Longer term, keeping borrowers in their home is really good for everyone, except maybe for those who, you know, live in a default type world and things like that. I think it's a common tool, and I think it's a real benefit to the industry that is maybe a little bit underappreciated.

Geoffrey Dunn (Equity Analyst and Partner)

Okay, great. Thank you.

Mark Casale (Chairman and CEO)

You're welcome.

Operator (participant)

There are no further questions at this time. I will turn the call back over to management for some final closing remarks.

Mark Casale (Chairman and CEO)

I'd like to thank everyone for calling in today and their interest in Essent, and have a great weekend.

Operator (participant)

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