Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Essent Group Ltd.'s Q3 and full year 2021 results 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 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. I would now like to turn the call over to Phil Stefano, Vice President of Investor Relations. You may now begin your conference.
Thank you, Julianne. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO, and Larry McAlee, 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 Q4 and full year 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 twenty-sixth, two thousand twenty-one, 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, Phil, and good morning, everyone. Earlier today, we released our Q4 and full year 2021 financial results, which reflect the strength of our buy, manage, and distribute operating model. Our focus remains on optimizing our unit economics and generating high-quality earnings and strong returns while continuing to fortify our balance sheet, reduce through the cycle earnings volatility, and take a measured approach to capital management. Our outlook for our business remains positive as several trends continue to support housing's resiliency. Demand outweighing supply should continue to support home price appreciation, albeit at a more moderate pace, while low unemployment with rising income should continue to benefit credit. In addition, purchase demand remains elevated as a result of demographic trends, which is positive for our franchise since we are levered to first-time home buyers. Now for our results.
For the Q4, we reported net income of $181 million as compared to $124 million a year ago. On a diluted per share basis, we earned $1.64 for the Q4 compared to $1.10 a year ago. For the full year, we earned $682 million or $6.11 per diluted share, while our return on average equity was 17%. At December 31, our insurance in force was $207 billion, a 4% increase compared to $199 billion at the end of 2020. The credit quality of our insurance in force remains strong with an average weighted FICO of 745 and an average LTV of 92%.
Following our November ILN transaction, we have reinsurance coverage on 90% of the portfolio as of December 31. During the quarter, we successfully rolled out the next generation of our risk-based pricing engine, EssentEDGE. We believe Edge has a competitive advantage given the number of data points that we analyze when pricing credit risk through machine learning and cloud-based technology. Given these advantages, our team will continue to strive for broader adoption of Edge technology away from static rate cards. We believe this continued evolution of pricing is mutually beneficial, delivering our best price to borrowers while optimizing our unit economics. Our Bermuda-based reinsurance company, Essent Re, had a strong year in writing high quality and profitable GSE risk share business and continuing to provide fee-based MGA services to our reinsurer clients.
Essent Re ended the year with $1.8 billion of risk in force compared to $1.4 billion at the end of 2020. We believe there is a continued opportunity for Essent Re to capitalize on the growth in the GSE risk share market. Our Essent Ventures unit was formed to make investments which are intended to give us access to information to improve our core business, enhance financial returns, and increase our book value per share. We closely monitor the ongoing intersection of the housing finance, real estate, insurance, and technology sectors and believe there will continue to be opportunities to take advantage of this changing landscape by leveraging our mortgage technology, credit, and operational expertise.
As of December 31, we are in a position of strength with $4.2 billion in GAAP equity, access to $2.7 billion in excess of loss reinsurance, and over $1 billion of available liquidity. With a full year 2021 operating margin of 80% and operating cash flow of $709 million, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. As evidence of this, 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. The strength of our model also enables a measured approach to capital distribution. In 2021, we returned over one-third of our earnings to shareholders in the form of dividends and share repurchases.
We remain committed to managing capital for the long term, exhibiting patience in our capital planning to maintain strength in our balance sheet. As of December 31, our book value per share was $38.73. Since going public in 2013, our annualized growth rate in book value per share is 21%, and we continue to believe that success in our business is measured by growth in book value per share. Finally, given our financial performance during the Q4, I am pleased to announce that our board has approved a $0.01 per share increase in our dividend to $0.20. This is the fourth consecutive quarterly increase and represents a 25% increase from a year ago, which we believe is a meaningful demonstration of stability in our earnings and cash flow. Now, let me turn the call over to Larry.
Thanks, Mark, and good morning, everyone. I will now discuss our results for the quarter in more detail. For the Q4, we earned $1.64 per diluted share compared to $1.84 last quarter, and $1.10 in the Q4 a year ago. We ended 2021 with insurance in force of $207 billion, a decrease of $1 billion from September 30 and an increase of $8 billion or 4% compared to $199 billion at December 31, 2020. Persistency at December 31, 2021 increased to 65.4% compared to 62.2% at the end of the Q3, and 58.3% at June 30, 2021.
Net earned premium for the Q4 of 2021 was $217 million and included $11.4 million of premiums earned by Essent Re on our third-party business. The average net premium rate for the U.S. mortgage insurance business in the Q4 was unchanged from the Q3 at 40 basis points. For the full year 2021, our net earned premium rate was 41 basis points. Income from other invested assets in the Q4 was $15 million, including $12 million of net unrealized gains, compared to $41 million, including $39.5 million of unrealized gains recorded in the Q3 of 2021. Other invested assets are principally comprised of limited partnership interest in venture capital, private equity, and real estate funds, which are carried at fair value.
The provision for losses and loss adjustment expenses was a benefit of $3.4 million in the Q4 of 2021 compared to a benefit of $7.5 million in the Q3. The benefit for losses recorded in both the third and Q4s was impacted by the continued cure activity in our default portfolio. At December 31, the default rate is 2.16%, down from 2.47% at September 30, 2021, and down from 3.93% at year-end 2020. Since the Q4 of 2020, we have reserved for defaults reported using our pre-COVID-19 reserve methodology. As a reminder, for new defaults reported in the second and Q3s of 2020, we provided reserves using a 7% claim rate assumption.
This assumption was based on the expectation that programs such as the federal stimulus, foreclosure moratoriums, and mortgage forbearance may extend 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 Q3s of 2020, which total $243 million as they continue to represent our best estimate of the ultimate losses associated with these defaults. Other underwriting and operating expenses were $41 million in the Q4, down $1 million from the Q3. The expense ratio was 19% for the full year 2021, which we believe is the lowest in the industry and compares to 18% in 2020.
We estimate that other underwriting and operating expenses will be in the range of $175 million-$180 million for the full year 2022. The effective tax rate for the full year 2021, including discrete income tax items, was 17%. For 2022, we estimate that the annual effective tax rate will be 16%, excluding the impact of any discrete items. During the Q4, Essent Group Ltd. paid a cash dividend totaling $20.8 million to shareholders and repurchased $68.6 million of stock. Through December 31, 2021, we have repurchased approximately 3.5 million shares for a total of $158 million. During the Q4, Essent Guaranty paid a dividend of $100 million to its U.S. holding company.
On November 10, we closed the Radnor Re 2021-2 insurance-linked note transaction, which provides $439 million of fully collateralized excess of loss reinsurance protection on approximately $12.4 billion of risk in force on mortgage insurance policies written from April 2021 through September 2021. Additionally, in December, the company completed an amendment to our credit facility, which included the issuance of an additional $100 million term loan and an increase in the revolving component of the facility to $400 million. As of December 31, 2021, no amounts have been drawn under the revolver. The amended credit facility matures in December 2026. After applying the 0.3 factor to the PMIERs required asset amount for COVID-19 defaults, Essent Guaranty's PMIER sufficiency ratio is 177%, with $1.4 billion in excess available assets.
Excluding the 0.3 factor, the PMIER sufficiency ratio remains strong at 165% with $1.2 billion in excess available assets. Now, let me turn the call back over to Mark.
Thanks, Larry. In closing, we are pleased with our Q4 and full year 2021 financial results, which reflect our continued focus on optimizing our unit economics and generating high-quality earnings and strong returns. Our solid operating performance in 2021 also generated excess capital, which we continue to deploy in a balanced manner between reinvestment in our franchise and distribution to shareholders. Looking forward, we will continue to manage our franchise to grow book value per share and believe that our approach is in the best long-term interest of our employees, policyholders, and shareholders. Now let's get to your questions. Operator?
Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile a Q&A roster. Our first question comes from Mark DeVries from Deutsche Bank. Please go ahead. Your line is open.
Yeah, thanks. Mark was hoping you could just comment on what you're seeing in a competitive environment around pricing.
Yeah, Mark, nothing really different than we've seen in last quarters. Again, with the engines, it's a little bit more opaque in terms of what you see. I would. You know, our pricing was very consistent in the Q4. So in terms of share which we always say is ebbs and flows. We may have lost a little bit in the quarter, but again, I think we've remained relatively consistent. And that's primarily driven by the engine now, Mark. I mean, it's agnostic to market share. We're really looking at kind of almost the intrinsic value of each loan. So there's going to be higher FICOs that we shy away from, or price better or lower FICOs that we price a little bit better.
Remember, we just rolled it out in the Q4, so we're doing a lot of different testing around price elasticity, which we'll continue to do throughout this year. Again, long term it's around we'll grow where the market grows. In terms of competitiveness, yeah, you've seen you know, you can see you can see some guys reaching in a little bit and some guys pulling back, but that's been the story every quarter. Again, I think from a longer-term standpoint this is really going to be about credit selection, and I think that's where we have the advantage in terms of pricing. We feel like we're getting our fair share, but we're getting it at the unit economics that we're comfortable with.
Okay, great. I would be interested in hearing your latest thoughts on potential for consolidation in the industry.
Yeah, I mean, I don't think much has changed. I still believe there needs to be a catalyst. I don't really believe the GSEs are a hurdle to it. In my view whether they say more or less, this kind of points to less, though, Mark, in terms of scale, right? I mean, do you really need six sales forces running around and talking to lenders, which we believe will continue to consolidate. In terms of kind of the revenue, since it's all price-driven, this idea of lost market share is really kind of an old adage, to be quite honest. You would say when you combine companies, scale is actually going to matter to deliver better pricing to borrowers, especially with technology.
Longer term I still think it makes sense, but there needs to be a catalyst. You know, I can't really speak to that. I haven't seen any catalyst. I think the catalyst, my gut is there's going to be credit. If there's an event where the companies kind of differ in terms of capitalization, leverage, expense management, and there's a credit event that probably could trigger consolidation more so than the environment we're in today, where credit's relatively benign and all of the companies are doing, I think, very well.
Okay, great. Appreciate it.
Our next question comes from Rick Shane from JP Morgan. Please go ahead. Your line is open.
Hey, good morning, everybody, and thanks for taking my question. We're entering or we're in the midst of a really interesting competitive environment for originators with the market shrinking. As we've seen in the past, there are a lot of behaviors that occur in terms of pricing, in terms of potentially starting to weaken credit standards a little bit. The final factor that we're going to be facing is that there has been so much home price appreciation, and so a lot of the refi activity that we would expect in the near term will be cash out refi. All of these potentially change the credit profile for you. I'm curious how you think about managing credit risk in an environment where there's probably a little bit more aggressive behavior on behalf of the originators.
Yeah. Hey, Rick, it's Mark. Excellent question. We've given some thought to it, to be quite honest, and talked a lot about it over the past few weeks. Think of it two ways. You know, big picture, we do have the hedging around the reinsurance, right? So we're kind of, I don't want to say we're capped out, but we have laid off a lot of the mezzanine risk. So if there's a credit kind of hiccup I do think we've taken a lot of the volatility out of the model. That's again, things investors haven't quite realized. We're not going to probably realize it until there's an event.
The second thing, which is probably more answering your question in a better manner is, again, the engine that we have on the front end. It's kind of built for this, Rick, right? I mean, think about rate cards that are out there today. Some in the industry still, whether it's lenders or mortgage insurers, still like the rate cards because it's a simpler way to get share, but our engine's not a market share tool, it's a risk management tool. Again, let's play out your scenario. Credit gets a little looser, right? Cash out refis, I can't argue. Lenders are always gonna reach. That's what they try to do. Do we really wanna be pricing every 760, 90 LTV across the country the same? I don't think so. That's what rate cards do.
I think with the engine, and again, how we're not really relying on FICO 'cause we're relying on the raw credit bureau information, which has mortgage payments and all those other factors besides a FICO, which is really looking more at an unsecured type performance. We're also building out. We haven't done this yet. We're in the process of building out a better severity portion to the model. We can then pick and choose that we like loans that we like. I think that's gonna become more important when the environment gets a little rougher in terms of credit. Also there could be some differentiation amongst MSAs in terms of HPA, right? We're seeing certain MSAs where the HPA has really spiked.
I think it spiked a little bit more than you would think from a supply and demand standpoint. I don't think you wanna price those borrowers as well as you wanna do it in an environment where the HPA has been a little bit more moderate. Again, this is gonna play out over time, but we feel like we really have the tool and the information to make better decisions going forward. It doesn't matter in a market like this where everything's good and you can lower price or reduce price across the board, which is actually not a bad strategy, when credit's benign, but it's probably not a great strategy when things get a little rougher.
Okay. That's great, Mark. Thank you so much.
Sure.
Our next question comes from from KBW. Please go ahead, your line is open.
Hey, guys. Good morning. Thanks for taking my question. First one that I wanna ask about is the expenses. They came in a little bit below the full year guide of $170 million-$175 million this year. I wanted to see if there are any drivers of that. Then when you think about next year, looks like you're modeling about 5%-8% growth in operating expenses. Could you talk about some of the puts and takes there in terms of what you guys are investing in and kinda what you think can drive that slight increase?
You know, we'll continue to invest. I think in Mark's comments, we talked about investment in technology and people. People are really the primary driver of our expense base. It's about two-thirds of our expense costs. So that really would be the driver for next year. In terms of this year, we were just slightly below our range, and I think it's probably just good expense management.
Okay, great. On a different topic. The dividend has now been raised for consecutive quarters now. Could you remind us how you think about the dividend versus buyback analysis? Are you targeting a certain yield or combined payout ratio with that?
Yeah, it's a good question, Tommy. I would say we returned a third of the capital in 2021. I wouldn't say that's a good rule of thumb going forward, but it's something to keep in mind. We generally favor we take a measured approach to it, so we like both. I think when we take a look at it's not just kinda what the payout ratio is, it's really a matter of managing ROEs, right? As the business continues to grow, ROEs are important. You're generating excess capital. We kinda break it out. You know, dividends and repurchases both reduce the denominator in that calculation.
As we think about new investments, outside of the core, right outside of the core, I would the ventures unit that we have, also Essent Re, you can kinda lump into that. Those are ways to increase the numerator. And then we have a balanced approach to it, 'cause over time, that's really your goal. We don't wanna get too far ahead of ourselves in kind of increasing the payout and then we're a little short when we think there's an interesting opportunity to grow the business or there's a credit event, right? Again, that's kinda how we think about it. All in, we favor dividends. That was our first approach to it. We think putting cash back in investors' hands is a very tangible demonstration of kind of the.
Our confidence in the sustainability of our cash flows. I think we feather that we layer in repurchases around that. I think it's a pretty balanced approach to it, and I would expect that to continue going forward.
appreciate the thoughts, Mark.
You're welcome.
As a reminder to ask a question, please press star followed by the number 1 on your telephone keypad. Our next question comes from Mihir Bhatia from Bank of America. Please go ahead, your line is open.
Hi, thank you for taking my questions. Maybe I want to start with just the NIW. I understand the pricing and you don't worry about market share, and the pricing was fine. I just wanted to make sure I'm understanding this correctly. Was it really just a function of the business that was coming through the market? You know, the mix of the business coming through the market was such that it was maybe weighted a little bit more this quarter towards pockets that are not as exciting for you from a return profile standpoint, and that's really what drove the quarter-over-quarter. Or was there some change you'd made as you adjusted your models to where you maybe pulled back in certain pockets or certain geographies or something like that?
Yeah. I mean, there's a little bit of both in there. The model is new and it's not based on FICO, so it's fully implemented. I think 91% of the model is now kinda credit based. There's still some of the lenders still rely on kind of the first version of it because we're not getting those additional data pieces. Again, we're in that testing period. I would say just to take a step back, Mihir, our average premium rate didn't really change.
Mm-hmm.
You can read into that what you want. Our average premium rate on NIW didn't change. We didn't really adjust overall pricing up or down. There might've been pockets-
Right
of up or down, but overall, so you can kind of read into it that others probably are leaning in, right? I mean, it's clear then when you can see how the numbers have come out just with the four MIs. You know, some NIW declined and some didn't. You know, I'm like a broken record here, but you know, if your share is up a lot, it's not because you did anything better, it's because you had a lower price. I mean, that's what it is. And again, sometimes they lean in, and sometimes they back out. But that's the difference I think between us. You know, we really look at the engine more as a risk management tool.
I think it can be used as a market share tool because it's harder to you can go in and change the pricing and gain share for a period of time. I think again, our average premium rate or stayed the same, and we believe the share dropped. Again, you can read into that what you want.
Sure. No, no, that's helpful. Then just I wanted to ask maybe a big picture question. On slide 10, you highlighted some of the key milestones in Essent evolution. When we look at this slide next year, what are we gonna see as for 2022? What is the big thing you're working on this year that that we should be thinking about from a strategic standpoint that maybe gets added next year?
That's a good question. I wouldn't say we have something up our sleeve every year. I mean, it's still long-term business. I don't wanna hold out hope that we're gonna innovate something new. I would say longer term, right? I mean, in the longer term here, take a step back, and this is kind of how we think about it. The core business, we believe continues to drive really good returns. You know, we can get caught up in the unit economics. Are they as good as they were a few years ago? No, they're not. The pricing's come down, like, significantly. So they're not as good as they were. They're still pretty good. You have to balance that with the market's been a lot bigger.
The general cash flow that's coming out of our business now is quite large. It's quite large. You're talking about really 80% operating margin, $700 million of operating cash flow. That's pretty good. You can talk about it in basis points, but or you could talk about it in cash. We like the business. We also think, again, we do believe housing is still relatively strong. Again, in the longer term, let's take 3-5 years, the core demand around millennials is still there. I mean, you've done the work before. You've seen it. You know, you have 4-5 million new kind of potential homeowners coming online over the next again, 4+ years. That's pretty good.
We think kind of the intrinsic or core demand will continue. You know, that'll ebb and flow a little bit, right? If rates go up that'll cause those home buyers to pause. We saw that a lot in the Q4 of 2018. I think you'll see it again, especially if rates go over four. You know, keep in mind, in 2018, we're talking about rates going to five. It's all relative. I think longer term, the core demand is there. Another thing that's probably not that well appreciated is just how our book is situated. You have 75% of the book that was originated in the last two years with an average rate of just a little bit above 3%.
You know, I think the other 25% is before that, and the rate there is kind of north of 4%. If you do get this spike in rates, which again is gonna hurt new originations, mostly refinance, versus kind of core purchase demand, I think you have a chance for the book to extend, which I think is underappreciated. When you think of that, then just again, in terms of the core business again, that's part of the reason. You know, trying to put this all in context for investors. You know, chris kind of moved over to be the head of the mortgage insurance business. A lot of Chris' focus is just gonna continue to focus on those every individual item around those unit economics, right?
We talk about it. That's kind of how we think about it. If you think about premium and losses, kind of that net underwriting income that's really EssentEDGE. And we're gonna continue to try to improve EssentEDGE. I alluded to it earlier. I think one of our goals this year is to improve it around severity and to start modeling out kind of HPA impacts at a much more granular level than we have today. Again, those are signs for improvement. The other thing we're working on is levering EssentEDGE for other parts of the business. To use some of that information to improve our underwriting or to actually make our underwriting more efficient.
We've made investments in technology around customer service, a lot of what we call self-service, right? It's easier for a customer to get into our system and get their answer versus they call their account manager, who calls our call center, who gives the answer. I mean, that's kind of how it was done. If you think about just how employees are, right? Every employee is a consumer. The ease of use of a consumer outside of work with iPhones and iPads is so much more streamlined. They wanna come into work and have the same experience. I think we have that in mind, and we're gonna try to do that experience because ease of use is a big deal for our customers.
Again, now that we've moved to the cloud, hey, the cloud has a lot of great things. There's a lot of things about the cloud that you wanna make sure you have a really strong infrastructure around that and make sure that it doesn't break. So it's different than when you had data centers, you had hot backup and warm backup. These are different issues that we're working with. Again, we have all the benefits of the cloud, but you have to manage some of the risks of the cloud too. Again, I think having chris do that day-to-day and spending the time on it with me. You know, I'm still involved obviously, but also frees me up to think about longer term what other engines can we create.
The core engine always gonna be tough to beat, but we have Essent Re, which we said continues to grow, albeit at a much smaller pace. We like it and I've heard it from you before, Mihir, directly. Like, geez how is Essent going to get into a new business, right? they've they've never done it, and competitors haven't been able to do it. Look at Essent Re, Mihir. We started that back in 2014. It was a new business. It wasn't a business we were in and actually writes business that we don't do. It's an extension, and it's analogous to our core business, which is kind of how we think about some of these newer businesses and I think it's been a big success, right?
I mean, you look at it's done two things. It's allowed us to write reinsure 35% of the core business over to Bermuda, which improves unit economics. They're writing third-party business both mainly with the GSEs, and they have an MGA, which is, I think, seven insurers now that provides, I would think a third of their income is fee. That's a business again, that's has been if it was a separate company, and there's like six folks over there. What they do is, but they leverage our underwriting expertise, they leverage our modeling expertise. Again, as we think of new businesses or ventures, which again is our kind of our third potentially growing engine, that's kinda how we think about it.
I'm gonna spend more of my time thinking through how we can kinda create and grow that engine.
Got it. Thank you so much for that. Very comprehensive. Thanks.
Sure.
Our next question comes from Douglas Harter from Credit Suisse. Please go ahead. Your line is open.
Thanks. Mark, can you just talk about home price appreciation, kind of how obviously a net positive for the existing book, but you know, kind of how you think about that from an affordability standpoint on NIW today, and just kind of if you put it all together kind of the outlook for how that plays out over the next couple of years?
Yeah. I mean, Doug, I would break it into two things. I do think affordability in certain markets is gonna become an issue, right? I mean, given the rise in HPA, and we think it could rise another 7, 8-ish% even this year. I do think you have to look at it on a regional basis. As I alluded to earlier higher rates could actually help kinda stem the tide in terms of HPA growth, although it doesn't quite help affordability. I think it could potentially slow down and have that kind of pause on some of the purchases. Although again, longer term, I don't think it impacts the demand.
When I say pause, what happens 'cause we've talked to borrowers and you talk to loan officers when you first go in and the price is higher or rates are higher, you have to almost readjust your expectation. You're going in thinking the rate was gonna be 3 and now it's 4. Do you wait to save more money for a down payment? Do you use mortgage insurance? Which obviously we would like to see. I do think people at some point, these are life decisions that aren't generally driven by the numbers per se. I do think it takes time for people to readjust.
Getting back to Essent, again, I think this is from our EssentEDGE. You're gonna make different decisions around a borrower and you're gonna incorporate some of that affordability into your front-end decisions, right? If HPA was up we'll pick an MSA, right? There are certain MSAs in the Southwest that are up like 45% over the year. It's pretty heated. Someone there is more likely to be stretching for the home. You're probably gonna price that differently again than another market where the HPA has been more moderate.
I think it's just like in the last recession, Doug, which you know I actually do remember 'cause I unfortunately lived through it even though it was 15 years ago and folks tend to have short memories. It was the sand states that brought down a lot of things. That's where the most of the damage was done.
Part of when we say credit selection's key you can almost identify they're not the same markets as they were last time, but kind of dodging some of the bullets there and maybe over-allocating capital to lesser, or more more markets where again, the intrinsic value is holding up, I think will be a little bit of a differentiator again, if there's a dislocation in the market.
Got it. Is that kind of the basis behind what you were saying of spending time on the engine for severity?
Yes.
Okay. Makes sense. Thank you, Mark.
Yep.
Our last question will come from Ryan Gilbert from BTIG. Please go ahead. Your line is open.
Hi. Thanks. Good morning, guys. I wanted to go back to the comments you made around lending standards and I guess from a practical perspective so far, and granted it's only been a month in 2022, but in practice, are you seeing lenders actually loosen their standards in so far this year? As we look out to the rest of the year with the expectation for Federal Reserve rate hikes. How do you think lending standards evolve and your own thoughts around pricing going forward? Pricing and underwriting, I guess, going forward.
Sure. A really good question, Ryan. I would say, remember, keep in mind when you talk about loosening standards, there's a lot of guardrails, right? We've talked about this for a long time. QM is a guardrail, and the GSE is doing an excellent job. Or DU/LP have come a long way, and I would say our EssentEDGE is kind of applicable to there. So it's in terms of how we access data and how we look at it. A lender can wanna loosen credit all they want. It's not gonna get past the GSEs. So, and so I think that's something for, from an MI investor perspective, keep focused on, right? 'Cause again, that's we have that guardrail.
You know, we have our upfront pricing, which we help. We can delineate between some of the goods and the bads, and we have that backstop of the GSEs not letting it get through. I think the loosening credit, the thing to be on the watch for, Ryan, is they're gonna the lenders maybe try to go more to the PLS market, right? That's not. I'm gonna say that's the Wild West, but that's not guided by the GSEs. A lot of smart investors, you have the rating agencies, but they don't have the modeling and kind of that first line of defense that GSEs have. If the pricing in a higher yield market, does it help there? Do more loans go PLS?
If lenders can try to get another source of liquidity, they're gonna do it. We don't really play in that market per se. We haven't played in that market in 15 years. Is there an opportunity for us to play in? Potentially if the rating agencies come on board, but then again, you really wanna have, credit selection is gonna be key there 'cause you don't have that kind of backstop that you have with the GSEs. Again, we feel pretty comfortable around the credit now that 'cause it's going to the GSEs. I think again, we take a lot of comfort just in the GSEs, in their protocols, in their engines, in their QC abilities.
Once it gets to the PLS market, if it does, and there's a chance for us to play I think there we're gonna have to do a little bit more work. You know, some of these loans could go to bank balance sheets, but in general, a lot of the banks we deal with on the regional and the national side are very conservative. So usually they're gonna do like a non-QM issue. It's gonna be more kind of on the jumbo side. Those loans that we've had over the past 10 years have performed extremely well.
Okay, got it. Last quarter, we talked about flat base premiums in 2022. Do you still feel good about that target?
Yeah, I mean, I think it's the base premium. You have to break it down. The base premium rate is really a function of a pricing on new insurance. Again, some of the pricing's lower over the past couple of years or over the past three years. As we said, that's been kinda 75% of our portfolio. That's working its way. I could see the base premium rate lightening up a bit this year. Then if you think about kind of the all-in premium, a lot of drivers there, Ryan. You know, we're looking at probably a reduction in singles cancellation income. I mean, we only did 2% singles in the Q4. The whole portfolio is less than 10% now.
Even if you look at our unearned premium reserve, there's only so much you can get from that. It's hard to predict again where it is today in terms of where it's going. The ceded premiums line, we would expect that to grow. We are in the market currently for a quota share. We did not do a quota share in 2021. We like the aspect of it again, so we're back in the market. We wanna diversify kind of our sources of reinsurance, and that's actually a bigger hit to premium rate. However, it also lowers losses and lowers expenses.
It kind of comes out in the wash, but if you just focus on premium rate, you probably come to the wrong conclusion. Again, just in terms of the yield, it's still, you know. I think we exited the year at kind of in the 40-ish% range. Again, for it to decline over the course of the year because some of those factors it wouldn't surprise me.
Okay, got it. Thanks very much.
Sure.
We have a question from Geoffrey Dunn from Dowling & Partners. Please go ahead. Your line is open.
Thanks. Good morning. Mark, I just wanted to follow up on what you just said about the QSR. How do you think about a committed QSR when you price new business? Do you factor the return leverage into your pricing, or do you still do it on a, I guess, a naked basis?
I mean, we look at it both ways. We clearly look at it unlevered. I still think that's the purest way to look at it 'cause you can't see. You can kind of fool yourself, Jeff. You say, "Hey, we have a little bit of leverage over here, and we used a little debt." You can kind of rationalize lower pricing. I do think it. We clearly look at it. There's a lift to it. There's no doubt about it. When we think about kind of as we price, it's still the unlevered basis. That's really the difference. When we say unit economics we're still kind of in that 12-15 range, depending on kind of what's going in the market.
Clearly closer to 12-ish now, given kind of where pricing is. You know, with leverage and some of those things, you can get to that kind of mid-teens return, and that's kind of what we're seeing, what we're printing through the P&L, right? Obviously through the P&L, you're gonna get the benefits of those things along with the tax rate. We still like the discipline of looking at it unlevered.
Great. All right. Thank you.
You're welcome.
We have no further questions. I'd like to turn the call back over to management for any closing remarks.
No. Thanks, everyone, for your participation today, and have a great weekend.
This concludes today's conference call. Thank you for your participation. You may now disconnect.