Essent Group Ltd. (NYSE:ESNT) Q4 2022 Earnings Call Transcript

Mark Casale: I think that €“ I don’t know that I wouldn’t necessarily say they are going to turn up. But in terms of have they bottomed, we feel like they are getting pretty close to the bottom, if they haven’t already bottomed. So yes, that base premium rate of around 40, when you think about the business on the new insurance written, we’re getting pretty close. So there is €“ there is – and then obviously, then it does have the chance to go up from there. But I think Mihir, the other point of this is, it’s just the value of the pricing engines, right and in terms of our ability and the industry’s ability to kind of price adequately for the risk. So we saw in COVID where things were unclear and the industry was able to kind of pivot and change the pricing.

And then clearly, the pricing, in our view, kind of bottomed out last year and that probably first quarter, maybe near the end of it and that was reflected in our share as we talked about this on the call. We started increasing pricing. Others have increased pricing and that continues today. And in short, there’s a couple of reasons for that. There I was a few reasons for that, a little bit of there insurance cost that we alluded to in my answer to Rick. 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? So this is below 1% default rate, our view is all the time, it’s been more like 2% to 3% and if you’re going to have adequate returns at a 2% to 3% claim rate, the pricing needs to come up.

And we are obviously not the only ones to see that. So it’s come up. We think it could continue to rise, we’ll raise pricing. We’re expecting to raise pricing again in the first quarter of ’23. And if it keeps going up, you’re going to see new premium levels that you haven’t seen since 2018. I mean €“ so it’s really moving in the right direction. But 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. So I think from a pricing to the borrower, it’s very efficient and actually helps our counterparties and our stakeholders because you have to adequately price for this long tail risk. And our view is we’re doing it. Clearly, our competitors are doing it.

And I think that’s probably one of the more important points for investors to grasp out of this quarter is kind of not just a stabilization of pricing, but 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 five years ago, four years ago, when we started the engine that it was more of a risk tool than a market share tool and I really think that’s starting to play out across the industry.