Essent Group Ltd (ESNT) Q4 2020 Earnings Call Transcript

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Essent Group Ltd (ESNT 0.65%)
Q4 2020 Earnings Call
Feb 19, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the Essent Group Ltd. Fourth Quarter 2020 Earnings Call. [Operator Instructions]

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

Christopher G. Curran -- Senior Vice President-Investor Relations

Thank you, Justin. Good morning everyone and welcome to our call. Joining me today are Mark Casale, Chairman and CEO, and Larry McAlee, Chief Financial Officer. Our press release, which contains Essent's financial results for the fourth quarter and full year 2020 was issued earlier today and is available on our website at essentgroup.com. Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in Exhibit M of our press release. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially.

For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release. The risk factors included in our Form 10-K filed with the SEC on February 18, 2020 as subsequently updated through other reports and registration statements filed with the SEC, which are also available on our website.

Now, let me turn the call over to Mark.

Mark A. Casale -- Chairman, President & Chief Executive Officer

Thanks, Chris, and good morning everyone.

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

At the outset of the pandemic, it was clear that the U.S. economy and our business were going to be impacted. However, we had limited vision as to the extent of this impact. Now, with almost a year gone by and having more visibility, we believe that the impact of the COVID-19 defaults on our insured portfolio has been contained. As such, for new defaults reported during the fourth quarter, we have reverted to our pre-COVID reserve methodology and our view remains that the pandemic is an earnings event and not a capital event for Essent. Heading into 2021, our outlook on the economy and our business is increasingly optimistic. Unlike the great financial crisis when housing played a big role in the downturn, during the pandemic, housing has been a bright spot in the economy. Low mortgage rates and strong demand for single-family homes have been the primary drivers of robust mortgage volumes and we believe that this strength will continue into 2021.

On the business front, we continue to refine our risk-based pricing strategies and managing a profitable mortgage insurance portfolio. Since deployment, we view our pricing engine as a risk management tool and not a market share tool. In fact, the pandemic was a catalyst in demonstrating this as we quickly changed price in response to the weakening economic environment. Looking forward, we remain focused on enhancing our engine through more granular analytics and sophisticated use of data. It's our belief that with the evolving intersection of mortgage-finance and technology, we have just scratched the surface in our risk-based pricing capabilities.

We continue to be pleased with the high credit quality of our NIW, noting that since the onset of the pandemic, our credit profile has been strong. This is primarily due to the credit tightening by the GSEs and MIs in response to pandemic along with an increase in the amount of refi mortgages. For the fourth quarter, our NIW maintained an average FICO of 748 compared to 745 for the fourth quarter a year ago. At December 31, our balance sheet is strong as we had $3.9 billion of GAAP equity, robust liquidity and access to $2 billion of excess of loss reinsurance. All these are the result of our buy, manage and distribute operating model and other measures taken in 2020 to bolster our financial strength and flexibility.

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

From a PMIERs perspective, we remain well positioned at December 31. After applying the 0.3 factor for COVID-19 defaults, Essent Guaranty's PMIERs sufficiency ratio is strong at 173% with $1.2 billion in excess assets. Excluding the 0.3 factor, our PMIERs sufficiency ratio remained strong at 159% with $1.1 billion in excess assets. Note that the PMIERs excess does not include the $563 million in cash and investments at the holding company. Essent Guaranty remains the highest rated monoline in our industry at A by AM Best and A3 and BBB+ by Moody's and S&P, respectively.

Looking forward, our buy, manage and distribute operating model will continue to enhance our financial strength and flexibility in generating and deploying capital. We have always felt at strong capital levels we get opportunities. Given our long-term focus, we will continue to evaluate ways to optimize capital deployment. Immediate options include taking advantage of growth opportunities in our core primary MI and reinsurance businesses stemming from a favorable housing environment. Furthermore, we will also evaluate opportunities outside of our core. For example, we closely monitor the ongoing intersection of the housing finance, real estate insurance and technology sectors. We believe that there will be opportunities to take advantage of this changing landscape by leveraging our mortgage, technology and operational expertise. Finally, we will continue to evaluate capital distribution through increased dividends and buybacks.

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

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

Now, let me turn the call over to Larry.

Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer

Thanks, Mark. Good morning, everyone.

I will now discuss our results for the quarter in more detail. For the fourth quarter, we earned $1.10 per diluted share compared to $1.11 last quarter and $1.49 in the fourth quarter a year ago. Our weighted average diluted shares outstanding for the third and fourth quarters of 2020 was 112 million shares, up from 98 million shares in the fourth quarter of 2019 due to the impact of our equity offering in May. We ended the year with insurance in force of $199 billion, a 4% increase compared to $191 billion at September 30 and a 21% increase compared to $164 billion at December 31, 2019.

The growth in insurance in force during the fourth quarter was the result of $30 billion of new insurance written, partially offset by run-off as our persistency was 60%. Net earned premiums for the fourth quarter of 2020 was $222 million and includes $13.6 million of premiums earned by Essent Re on our third-party business. The average net premium rate for just the US mortgage insurance business in the fourth quarter was 43 basis points, down from 46 basis points in the third quarter of 2020. Contributing to this decrease was a 2 basis point increase in ceded premium due to our Radnor Re 2020-2 transaction and the ongoing quota share reinsurance transaction and 1 basis point decline in the single premium cancellation income. For the full year 2021, we are estimating that our net earned premium rate will be in the 40 basis points range.

The provision for losses and loss adjustment expenses in the fourth quarter was $62 million compared to $55 million last quarter and $176 million in the second quarter of 2020. During the fourth quarter, we received 8,745 new default notices which is down 31% compared to 12,614 defaults reported in the third quarter and down 77% compared to 37,357 defaults reported in the second quarter. At year end, our default rate decreased to 3.93% from 4.54% at September 30 and 5.19% at June 30. As Mark mentioned, we have reserved for new defaults reported in the fourth quarter using our pre-COVID-19 reserve methodology which incorporates an average 9% claim rate estimate for early stage defaults. As a reminder, for new defaults reported in the second and third quarters of 2020, we provided a reserve using a 7% claim rate assumption. This assumption was based on expectation that programs such as the federal stimulus, foreclosure moratoriums, and mortgage forbearance may extent traditional default to claim timelines and result in claim rates lower than our historical experience.

We have not adjusted these reserves previously recorded in the second and third quarters as they continue to represent our best estimate of the ultimate losses associated with these defaults. Other underwriting operating expenses in the fourth quarter remained consistent with the third quarter at $37 million. The expense ratio was 16.6% in the fourth quarter compared to 16.7% in the third quarter of 2020 and 19.9% in the fourth quarter a year ago. We estimate that other underwriting and operating expenses will be in the range of $170 million to $175 million for the full year 2021. The effective tax rate for 2020 was 15.7% and our guidance for 2021 is that our effective tax rate will be approximately 16%. The consolidated balance of cash and investments at December 31, 2020 was $4.8 billion. Essent Group Ltd. paid a quarterly cash dividend totaling $17.9 million to shareholders in December and maintains $563 million of cash and investments at the holding company at year-end.

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

Thanks, Larry.

With a strong housing backdrop and robust levels of high credit quality NIW in 2020, our business end of the year operating on all cylinders. Given the measures that we took in strengthening our financial and liquidity positions during the year, along with having 96% of our portfolio reinsured, the economic engine of our business is firmly in place. As we enter 2021, we are increasingly optimistic about our company's prospects. The COVID vaccine is key in getting our country's economy back on track while housing continues to be a bright spot. We believe that affordability, demographics, and the ongoing supply demand and balances should continue to fuel housing. As you know, our franchise is levered to the macroeconomic and housing environments.

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

Questions and Answers:

Operator

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

Phil Stefano -- Deutsche Bank -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

Hey, Phil. It's Mark. No, not at all. I mean, you're reading too much into it. I think it's -- 7% was for the second and third quarter. And again, we've kind of isolated those cohorts so to speak and we did not make any change to the 7%. The 9% for the fourth quarter is really just reverting to our normal methodology. And the thing really is you get -- you have to have the October, November and December and they seasoned a little bit. That's kind of how you get to the 12% that you see in the stat supplement. I think the key point there, Phil, and we mentioned in the script, I think it's important for investors as a takeaway is we believe the defaults are contained.

So, we feel like we're well reserved and adequately reserved at the end of the year and going into 2021, we don't expect any material changes to the provision based on new defaults, right. I mean defaults really came down. I think Larry said 31% in the fourth quarter. So, I wouldn't get -- and we can obviously take offline in terms of some of the details, but I think the key message is, I think -- looking forward, we feel really good about where losses are coming out.

Phil Stefano -- Deutsche Bank -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

Well, again, I think at some point, you have to get back to your normal reserving methodology. And I think that with the kind of the tsunami of defaults that we had in the second and third quarter, very similar to the hurricanes, right, in terms of like an isolated event, we thought it was prudent to kind of quarantine them so to speak, and really look at it that way.

I think in the fourth quarter, I think the message -- again, it's back to kind of business as usual, right. We're back to our normal reserve methodology, where the 9% has been money good for years and that'll just play out, Phil. So, with the forbearance, extension and home price appreciation actually helps lower that, that will come through the model, but you don't really want to run the company longer term, kind of on how we -- how we did those isolated reserve adjustments. The model has -- it's actuarially correct and factual for 10 years. And to me, this is a strong message that we're going back to the model. So again, I wouldn't get too caught up in whether it's too high or too low. It's adequate and the fact that we're back on the model, I think, is a really good thing.

Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer

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

Phil Stefano -- Deutsche Bank -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

Well, remember, the quota share is still -- it's still in place because the new business stopped getting ceded last year, but we'll still have a significant kind of ceded premium for 2021, which is kind of all baked in the premium guidance. And also, it was a little bit [Phonetic] reason why the expenses are lower too. So, I mean, there's a lot of moving parts there. I think for 2021 still, I think it remains to be seen. If you think about where the ILN market has really kind of come roaring back in terms of pricing, for us really, it's going to be best execution. So as we look at 2021, we will compare kind of ILN pricing to quota share. And quite frankly, last time we checked, the quota share pricing was a little wide, hasn't really come in. The reinsurers kind of pushing more of a hard market. That's not really where it is in the capital markets. So, again -- we'll look at it. So stay tuned, but I wouldn't -- in terms of just a ceding commission and premium, that's already kind of embedded in 2021 guidance.

Phil Stefano -- Deutsche Bank -- Analyst

Got it. Okay, thank you.

Mark A. Casale -- Chairman, President & Chief Executive Officer

Sure.

Operator

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

Mark DeVries -- Barclays -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

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

We also bring operational expertise around how to start a business early and grow it. I think we've done a pretty good job with that. I think our view on it is and it's why we have a longer term view. The valuations in some of those areas are a bit frothy right now. So, I think as we continue to look at it -- and investors' greatest strengths is time. And our view is, we own this business for the long term and we believe we will have the ability to put that capital to work to continue to expand the Essent franchise. We're not going to do it small. We're going to do things that we think really kind of move the needle, but again, it's something as an investor we'll continue to look at and we'll continue to update the market as we see things.

Mark DeVries -- Barclays -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

Yeah, I mean, again I think it's twofold, right. I think in terms of the business where we've tested in the fourth quarter and we'll roll out through this year kind of version 2.0 of EssentEDGE which is incorporating additional factors with that machine learning is now incorporated into that development. So, it gets really down to the loan level price that you give each borrower. I mean, we're telling lenders that we're going to give each borrower our best price. May not be the lowest price, right, and other MIs may have a different view, but it's our best price. And as we've talked about recently, as you get into these engines and you get down to the borrower, it really is best price wins. So, you don't want to go -- you don't want to go to a gun fight with a knife. So, you really have to invest in analytics and you better really understand what you're doing when you price that loan.

That takes time to develop and to deploy, but over time, I think, 75% of the market is kind of in the engine and we were close to 70% of our production in the engine through '20 -- in 2020 and there some of the card lenders will eventually get to the engine in my view, because I do think the engine is going to be the best way to give each and individual borrower the best price, which I think it's good for lenders. It's good for borrowers. And also then, that helps us as we deal with these vendors in that front end development of EssentEDGE market. That gives us ideas from the investment front. So again, as you think about the convergence of finance, housing and real estate, and you think there's something there, Essent's a good way to play that. I mean -- it's a nice call option to have. I mean when we first went public, we hadn't launched Essent Re. And our positioning of Essent Re was, it was a call option and we felt like we could eventually kind of exercise that option and we did.

Essent Re's been, I would say, very successful. It's allowed us to reinsure 25% of the core business. It had a very good year in 2020 in writing third-party business and also has an MGA, which is a little under-appreciated, which I think five different insurers where we have -- we tend to have the pen [Phonetic] and they leverage our models to write that risk. So again, as you think about all this stuff, as we learn this every day and this is -- Phil asked me one time, going back to Phil Stefano, like, what does Mark do day to day? Well, we spend a lot of time on this and kind of looking at opportunities and again if it's something -- we've always said, if you like housing back when we went public, we thought housing would be stronger than people think because of the demographics. We've got a ton of pushback from our analysts and investors alike back in 2014 when it was probably $1 trillion of originations. We felt like it would be a lot bigger, again, given the demographics that we studied and again we got pushed back. So, I would look at it here. If you really think as an investor or an analyst if, if you think there's opportunity -- I know you guys cover other parts of the space. If you think there's an opportunity, again, Essent's probably a nice call option around kind of fulfilling those opportunities over the next several years.

Mark DeVries -- Barclays -- Analyst

Okay, great. Thank you.

Operator

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

Doug Harter -- Credit Suisse -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

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

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

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

Doug Harter -- Credit Suisse -- Analyst

Great, thank you.

Operator

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

Jack Micenko -- SIG -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

Yeah, it's an important message and we want to -- we conveyed it on purpose, Jack. So, I do think it's a little bit of each, right. We started with the funds and I would expect us -- the next phase of it would be to make smaller investments directly into the companies. And then the third -- kind of the third evolution of it would be owning some of the companies and kind of changing or diversifying outside of MI to change the revenue profile. A lot of that depends on price, Jack. So, I mean it's not like we understand the businesses and depends on kind of where you want to play in that and we could end up not doing anything, right.

I mean we're not -- we're very good. We understand price value very well and then if we traded on a revenue basis, perhaps we'll be able to do more from a stock standpoint in terms of our currency, but I do think it's an important message. We read a lot of your research and other research. We know a lot of these companies well. I do think there's a nice opportunity for us, kind of over the next several years.

Jack Micenko -- SIG -- Analyst

Okay. Thanks for that. And then...

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

Jack Micenko -- SIG -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

We added -- you can come probably quantify the excess share we got in second and third quarter and what that addition was to insurance in force. But I would expect our share to normalize in 2021. A few of the MIs that kind of backed away have come back. But if you look at the results, Jack, it was successful for us, right. I mean we increased insurance in force 21%, which was I believe is higher than any of the other MIs in the industry by a pretty wide margin. And we did that with higher pricing and a lot of it was just because we're able to leverage the strength of our balance sheet. Now that the other MIs are kind of back in the game, it's competitive. So, we expect to go back to our normal on out of six, 15%, 16% share. It always ebbs and flows quarter to quarter, but -- and the market's so big, Jack. You're talking about over $600 billion market maybe last year and our estimate this year is probably in the $500 billion range. There's certainly plenty to go around and the unit economics of the business remain strong and I think that's another important message for investors to understand.

Jack Micenko -- SIG -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

Sure.

Operator

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

Bose George -- KBW -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

No. Again, those -- it's just kind of the engine part of the market, which is 75% and I wouldn't call it bulk. I would call it just folks and lenders that are still on a rate card. Some of them, they bid out, but it's a forward bid. So it's not so much in bulk. And then there's other guys that still do negotiated cards. Our view is again, we think the engine will eventually get closer to 100%. I mean, that's never get [Phonetic] quite there. I mean some of the lenders believe they get better execution through the cards. Other lenders, they just haven't been able to make the changes to their systems. As the analytics continue to get better at the borrower level with Essent and others, I'm sure the other MIs are evolving their engines too which I think is fantastic. It will get to that GEICO, Progressive part kind of analogy that I alluded to and the lenders that are on cards, my view is they're going to be at a disadvantage over time. So right now, they think they're getting better execution. It's simpler. That's how they think about it, but over time as we get -- you really dig into the borrower level and you're able to kind of pick off the best credits, the execution will be better than the cards and the lenders at some point will pick up on this.

Bose George -- KBW -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

Bose George -- KBW -- Analyst

Okay. Great. Makes sense. Thanks.

Operator

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

Rick Shane -- JPMorgan -- Analyst

Hey, good morning, everybody, and thanks for taking my question. Mark, I appreciate the comment about this not being a capital event, but really an earnings event I think it puts it in good context. When we think about that context going forward, one of the things -- one of the outcomes of what you've experienced over the last year is that you're entering 21 with a vintage skew that is very, very different than you would have anticipated, but for the events of the last year. And -- look, I guess, vintages are kind of like can't you love them all the same, but they're different. And I'm curious when you think about this long dimensions of credit, premium rate, persistency, what the changes in the book will be and how you think about the impact on sort of net profitability five years down the road?

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

I don't think we planned it, right, I mean I think with COVID, but I think from an industry standpoint, looking back and again given the credit -- the credit quality is actually better in '20 than it's ever been. And you're right. This could turn out to be a very kind of premium, no pun intended vintage and it's something that could really bolster the profitability down, for the next three years to five years.

Rick Shane -- JPMorgan -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

It was a great question. No, I agree.

Rick Shane -- JPMorgan -- Analyst

Thanks, guys. Have a great day.

Mark A. Casale -- Chairman, President & Chief Executive Officer

Sure. You too. Thanks.

Operator

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

Ryan Gilbert -- BTIG -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

Ryan Gilbert -- BTIG -- Analyst

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

Ryan Gilbert -- BTIG -- Analyst

Okay, great, thanks very much.

Mark A. Casale -- Chairman, President & Chief Executive Officer

You're welcome.

Operator

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

Mark A. Casale -- Chairman, President & Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Christopher G. Curran -- Senior Vice President-Investor Relations

Mark A. Casale -- Chairman, President & Chief Executive Officer

Lawrence E. McAlee -- Senior Vice President, Chief Financial Officer

Phil Stefano -- Deutsche Bank -- Analyst

Mark DeVries -- Barclays -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Jack Micenko -- SIG -- Analyst

Bose George -- KBW -- Analyst

Rick Shane -- JPMorgan -- Analyst

Ryan Gilbert -- BTIG -- Analyst

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