Essent Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.19.14 | About: Essent Group (ESNT)

Essent Group Ltd. (NYSE:ESNT)

Q4 2013 Earnings Conference Call

February 19, 2013 10:00 AM ET

Executives

Chris Curran – SVP, IR

Mark Casale – Chairman, President and CEO

Larry McAlee – SVP and CFO

Analysts

Bose George – KBW

Geoffrey Dunn – Dowling & Partners

Jack Micenko – SIG

Mark DeVries – Barclays

Eric Beardsley – Goldman Sachs

Sean Dargan – Macquarie

Rick Shane – JP Morgan

Christine Worley – JMP Securities

Chris Gamaitoni – Autonomous Research

Operator

Good morning, my name is Laurel [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited Fourth Quarter 2013 Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’ll now turn the call over to Chris Curran, Senior Vice President of Investor Relations. Please go ahead.

Chris Curran

Thank you, operator. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; Adolfo Marzol, Executive Vice President and Larry McAlee, Chief Financial Officer.

Our press release which contains Essent’s financial results for the fourth quarter in full year 2013 was issued earlier today and is available on our website at essentgroup.com in the Investor section. 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 our press release in Exhibit L.

Prior to getting started, I would like to remind participants that today’s discussions 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, please review the cautionary language regarding forward-looking statements in today’s press release. The risk factors included in our perspectives filed with the SEC on November 1st 2013 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

Thanks, Chris. Good morning, everyone, and thank you for joining us today. I’ve been looking forward to this call because it gives me the opportunity to update you on the solid progress that we are making and the momentum our franchise continues to build in the marketplace.

As I discussed during our IPO roadshow this past fall, we take a long-term view when ensuring mortgage credit risks. A key element of this approach is our risk management focus which starts with knowing our customers, maintaining prudent credit guidelines in pricing and monitoring our growing portfolio through proactive QA and analytics.

Because our business is ensuring low down payment borrowers, our risk management foundation is critical. Our goal at Essent continues to be simple – providing investment grade credit enhancement to all of our valued customers while building a high credit quality and profitable mortgage insurance portfolio that delivers predictable top line revenue growth while generating strong returns over the cycle.

Our outlook for the MI sector continues to be positive since our business is certainly levered to the improving fundamentals of the U.S. housing market and a growing demand for private mortgage insurance. We believe that we are well positioned heading into 2014 and are very excited about our prospects in continuing to grow our franchise and delivering high quality earnings growth to our shareholders.

Now, let me touch on some key imitators of our continued progress. 2013 was a milestone year. During the year, we achieved investment grade ratings from Moody’s and S&P, exceptionally completed our IPO and earned $65.4 million for the full year. We grew our top line revenue driver, insurance in force, 135%, that’s $32 billion as of year-end.

We generated $21.2 billion of NIW in 2013, an increase of 88% as compared to 2012. We estimate that our market share was approximately 12% for 2013. As you know, market share is an important metric that we look at in measuring the progress of our business and we continue to be very pleased with our market position.

Given both our market share and stacking more NIW layers on top of our insurance in force, our earned premium for the fourth quarter of 2013 was $40.3 million, an increase of 144% from the fourth quarter a year ago of $16.5 million. Our expense ratio for the fourth quarter of 2013 was 55.3% versus 100.2% for the fourth quarter of 2012. We expect this ratio will continue to decline in 2014.

The credit profile of our insurance portfolio is excellent, ending the year with only 159 loans in default, representing an 11-basis point default ratio. Our loss ratio in the fourth quarter of 2013 was 1.7%. Our financial profile, which is important to our counterparties, continues to be very strong. We ended the year with $722 million in consolidated GAAP equity versus $219 million as of year-end 2012. On a statutory basis, our combined risk to capital at the end of 2013 was 16.5 to 1.

And finally, our momentum in generating NIW for more customers and expanding the depth and breadth of our franchise continues. A number of active customers which represent customers generating NIW for us was 721 for 2013 compared to 463 for 2012. We expect to continue to increase in number of active customers in 2014.

Okay. Now let me touch upon some of the broader items relating to our business. During the second half of 2013, the mortgage industry saw a decline in overall originations due to increasing mortgage rates during the year and lower refinance side.

However, while the overall mortgage origination market declined during this time period, the ratio of purchase volume increased as compared to refinanced volume, which is favorable for our industry since mortgage insurance penetration rates are higher on purchase versus refinanced mortgages.

While we are expecting a smaller origination market in 2014, we are estimating industry NIW to be approximately $150 billion to $160 billion this year. Our current outlook for annual industry NIW over the next few years continues to be in the $150 billion to $200 billion range. This estimate reflects a combination of scenarios and estimates around both the size of the origination market and private mortgage insurance penetration rates.

From a regulatory perspective, the two biggest items during the fourth quarter was new leadership at FHFA and a delay in the new GFC eligibility standards. On the new leadership front, we certainly look forward to working with Director Watt and his team regarding private mortgage insurance and the benefits of our product within the housing finance system.

The other important item with FHFA in 2014 will be the finalization of new GFC eligibility requirements. We believe sound standards that are transparent and consistently in force strengthen our industry. In December, we were notified that the issuance of these standards will be delayed because FHFA wants to share them first with the state insurance regulators for comments prior to being shared with the mortgage insurance industry.

We are not quite sure as to the timing; however, we look forward to reviewing these new standards. Given our strong capital levels and high quality insurance portfolio, we believe that we are well positioned regarding potential impacts of these new standards.

Beyond this, there continues to be ongoing legislative efforts to reform the U.S. Housing finance system, some of which could have potentially gained traction. We monitor developments in Washington closely and continue to see the MI industry as well positioned for reform, given the policy direction toward a greater role for private capital.

Now, let me turn the call over to Larry to discuss our financials.

Larry McAlee

Thank you, Mark. Let me start with net income. As Mark mentioned, we earned $65.4 million for the full year of 2013. Note that our full year results included the $7.4 million tax benefit. In addition, we are $19 million in the fourth quarter which was net of a small tax provision of approximately $345,000.

As of year-end, the entire valuation allowance against our deferred tax asset was released and we’ve utilized all of our net operating losses. We will be in a full tax paying position in 2014 and expect our effective tax rate to be slightly above the federal statutory rate due to some non-deductible expenses incurred in our offshore companies.

Other underwriting and operating expenses were $22.3 million in the fourth quarter. This is up $5.8 million or 35% compared to the fourth quarter of 2012. In addition, the expense ratio increased from 53.2% in the third quarter of 2013 to 55.3% in the fourth quarter, principally as a result of increased compensation costs and other expenses associated with Essent becoming a public company.

For the full year 2013, total underwriting and operating expenses were $71.1 million. Tax In 2014, we expect an increase in the dollar amount of our expenses driven by higher stock compensation and other public company expenses.

The full year impact of employees hired in 2013 and other investments we intend to continue to make to grow our franchise. We do however expect that our expense ratio will decline in 2014 as the growth in our premiums will outpace the increase in our other underwriting and operating expenses.

The balance of cash and investments at December 31, 2013 was $810 million. The increase in this position during the fourth quarter is due to the net proceeds of the IPO of $314 million and net cash flow from operations of approximately $29 million. You should expect an increase in investment income in 2014 compared to 2013 as a result in increase in the average balance of our fixed income portfolio.

The combined risk to capital ratio of the U.S. mortgage insurance business was 16.5 to 1 at December 31, 2013. Combined statutory capital of the U.S. MI business was $416 million and reflects an increase during the fourth quarter of approximately $100 million resulting from both earnings of the business as well as the $75 million capital contribution from the proceeds of the IPO.

We intend to retain the balance of the proceeds from the offering at the holding company and contribute capital to support the growth of the U.S. insurance companies as needed. In addition, the amount of capital maintained in our insurance companies could be impacted by new mandates coming from the new GSE eligibility standards. As of December 31, 2013, the holding company cash and investment balance was $246 million. I should also point out that we currently have no debt.

Finally, diluted earnings per common share for the fourth quarter were $0.22. Note that our presentation was affected by our transition in the fourth quarter from the two class methods of presenting earnings per share to a more traditional method with the single common share of the company post IPO.

We have included the schedule in the financial supplement that provides detail with respect to the calculation of our earnings per share for the fourth quarter and the full year of 2013. I will now turn the call back over to Mark.

Mark Casale

Thanks, Larry. In closing, 2013 was a very exciting and productive year for our franchise and we look forward to continuing this progress in 2014. Our financial performance was very strong as we continue to grow a high credit quality and profitable book of business over the long term.

Our very seasoned business development team continues to build valued customer relationships and expanding the Essent franchise and we are beginning to see the financial benefits of leveraging our efficient operating platform.

Our capital position was further strengthened through our successful IPO during the fourth quarter and our counterparty strength was validated when Essent Guaranty achieved investment grade ratings from both S&P and Moody’s. With Moody’s further upgrading our rating after our IPO, we are confident as we enter 2014 and are very excited about our opportunities in the marketplace.

Now, let’s turn the call over to your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bose George of KBW. Your line is open.

Bose George – KBW

Hey guys, good morning. As you’ve mentioned the 12% market share for 2013, do you have a feel for where that number was in the fourth quarter?

Mark Casale

We don’t really – we talked about it before, Bose. We don’t have a handle yet because the IMF is not out. But I think we’re pretty much in the range of where we thought we would be for the fourth quarter and the full year, probably a little bit ahead of where we thought we’d be at this point in our life cycle.

Bose George – KBW

Okay, great. And then actually in terms of credit, I mean at the time of your IPO, you guys had dived into losses for 2014 I think in the $20 million range, I mean you guys had $692,000 of incurred this quarter, does it seem like a number that could be quite high for next year and we have to take that down?

Larry McAlee

Hey Bose, this is Larry McAlee. I don’t think we want to give you some guidance specifically as it relates to next year. It will depend a little bit in terms of timing of default. But I think our long-term expectation as we have talked about in the roadshow still makes sense.

Bose George – KBW

Okay, great and thanks and congratulations on your first quarter as a public company.

Larry McAlee

Thank you.

Operator

Your next question comes from the line of Geoffrey Dunn of Dowling & Partners. Please go ahead.

Geoffrey Dunn – Dowling & Partners

Thanks, good morning.

Mark Casale

Hey.

Geoffrey Dunn – Dowling & Partners

Obviously, still a young, growing company, can you try to frame where you think expenses might be going over the next year or two? Obviously, we saw that the new public company cost level this quarter, how should we think about the development as you continue to hire people and build out your business?

Mark Casale

Hi Geoff, this is Mark. I’ll start off and then I’ll turn it over to Larry if he has anything to add. I think the fourth quarter run rate is actually pretty good estimate for 2014. I would take that up a bit given that we’re continuing to invest in the side of the business – on the business development side and obviously continuing to invest in certain things. But I think that’s a pretty good run rate for 2014 and probably a moderate increase going forward.

Geoffrey Dunn – Dowling & Partners

Okay. And then Larry, just on the investment side, obviously, you have a big cash balance coming in from the IPO. Should we expect the majority of those proceeds to be invested and bump up your yield? Are you going to maintain a kind of an above average cash position until you know GSC rules [ph]?

Larry McAlee

No, I think – I’ll segment the question. As the insurance companies will have substantially all of the investments, this sustains [ph] all of our cash position invested. We are going to invest proceeds of the holding company. We’ll probably have them with a similar profile but we’ll maintain a little bit lower duration and probably a little bit higher cash position of the holding company.

Mark Casale

Yes. But, Geoff, this is Mark. No real change in our investment philosophy at this point, just a higher investment income just because of higher balances, but we’ll maintain a pretty conservative approach to the portfolio this time.

Geoffrey Dunn – Dowling & Partners

Okay. And then big picture question, you said Bermuda was not much of a focus when you’re executing your IPO. But following Archon’s [ph] approval for a quota share deal, obviously you guys standout because you’re the only other company in the industry that have that type of call option on a Bermuda structure. Can you provide some updated thoughts in terms of maybe using that opportunity from a tax efficiency standpoint as well as also may be looking at other product opportunities like the stock or deals as an alternative revenue source?

Mark Casale

Yes. As we said on the road show, we continue to view Bermuda opportunistically both in terms of revenue opportunities and capital efficiencies. So we have been looking at some other deals that’s pointed in the fourth quarter. So I would say we’re evaluating more than we probably did on the road show. But we continue to – and I will continue to guide you guys to look at this opportunistically. But as you mentioned it’s certainly a call option that we have at this time.

Geoffrey Dunn – Dowling & Partners

Is there any reason you wouldn’t look at a quota deal? Is there anything that doesn’t make sense about doing that?

Mark Casale

No. But really at this point, I mean anything that’s primarily related to U.S. Housing Finance and Mortgage, we would certainly take a look at.

Geoffrey Dunn – Dowling & Partners

Okay. Great. Thank you.

Operator

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

Jack Micenko – SIG

Hi. Good morning. Looking at the NIW in the press release, it’s interesting to see some of the migration down on FICO and obviously there’s a risk-based opportunity here on pricing. Is that an intentional migration over the past year? Is that just really just more of a maturation of the volume trends when it’s out there?

Mark Casale

Hey, Jack. It’s Mark. No. It’s not intentional. As the business shifts – and you can see it in our staff supplement, if the business shifts from refinance to purchase, generally, you’re going to see a little bit higher LTV, a little bit lower FICO on the purchase business. So it’s really just more of a migration. But it’s a good – you will see that the business is at the kind of 7.60 [ph] level that we’ve seen really since our inception and the rest of the industry has seen, as the business migrates to purchase mortgages you’ll see that FICO trend down to where you saw it in the fourth quarter.

Jack Micenko – SIG

Okay. Great. And then you had a 20 to one I think Freddie agreement that expired at the end of the year. Was that renewed or amended in any way? I’m just trying to think about as that gives you the insight of the eligibility rules that are out there coming?

Larry McAlee

No, Jack. That was part our initial – this is Larry, Jack. That was part of our initial approval by the GSEs and that expired and will not be applicable going forward.

Mark Casale

And we have no mortgage items to the GSE eligibility requirements than anyone else.

Jack Micenko – SIG

Yes. Okay. And then just one last sort of broader picture, we got some mixed housing data the last several weeks and months. Can you just talk qualitatively about maybe the 4Q purchase trends by month and then maybe anything January and qualitatively just in terms of demand environment, volume and that sort of thing?

Mark Casale

Jack, it’s Mark. I think we continue to look and in our opening comments, we tend to – since we started the business, really look at this over the long-term. We don’t get super caught up in month-to-month trends. We don’t really need to give how we’d stack NIW on top of our insurance in force. We continue to think that the business – the purchased business will continue to grow.

Those things has – they had stops and starts, it’s obviously seasonal. But we continue to be very optimistic about the longer-term trend of our business.

Jack Micenko – SIG

All right. Great. Thank you.

Mark Casale

Okay.

Operator

Your next question comes from the line of Mark DeVries of Barclays. Please go ahead.

Mark DeVries – Barclays

Yes, thanks. First question as a follow-up on the provisional [ph] loss ratio one. I understand you commented that the kind of guidance you provided during the IPO holds but I think you conservatively assumed at the time a gradual – it’s marched towards a more normalized loss ratio.

But it looks like the business as you written, since inception and then likely right over the next year, is coming at an extremely little loss ratio. Is there anything you’re seeing in that that would suggest this kind of delayed ceasing or is there optimistic belief that you could see materially lower than normal loss ratios on this business?

Mark Casale

Hey, Mark. It’s Mark. Again, I think one of the things to look at in the big picture is to look at the late ‘90s and where that book went and you saw loss ratios in that 1% to 3% range.

We tend to think it’s going to still be in the upper end of that range. Part of that book, the lower part of that book got refinanced out in the early 2000. So we’re still – we’re cautiously optimistic but loss ratios – takes a long time to season so I wouldn’t read too much into it, especially on a company like us in quarterly trends in terms of the number of claims and defaults.

I learned a long time ago to – you don’t get too excited when things are – when things look too good always so I wouldn’t – I think we’ll continue to be cautiously optimistic. But to be quite honest it’s too early to tell.

Mark DeVries – Barclays

Okay. Fair enough. Next question, how much cash buffer do you need to maintain at the holding company? Just trying to get a sense of this, you just distributed it all basis cash down to the – for the writing company now, what’s your risk to capital ratio would be.

Mark Casale

I think you can – the math is pretty simple. And if we down streamed it all today, we had – we finished the year with about 246 capital to hold so we’ll continue to contribute funds down into Essent Guaranty which is our flagship during 2014 and that really – that’s still – that’s our primary goal to keep funding at into the future.

We’ll obviously look at other opportunities outside of that as we discussed on the road show. But right now the primary focus of that is to put it into Essent Guaranty.

Mark DeVries – Barclays

Fair [ph]. Yes, and there’s clearly enough that the holding company to support a lot of growth financial year plus. Have you thought about how much capacity you have to issue debt of the holding company to support future growth once you kind of used up the capital from that deal?

Mark Casale

As we talked about on the road show, we believe the capital that we raised probably gets us through 2016, at which point we’re self-sustaining. That does not include as we, I would remind you, anything outside of the core franchise – it’s going to be Essent Re [ph], GSE ratio, other types of opportunities. At the time that we need new – additional sources of capital, we will certainly look to kind of to look at data as one of those in addition equity. But we have not – that’s not – we haven’t crossed that bridge yet.

Mark DeVries – Barclays

Okay. And then just finally – have you thought about what type of buffer you would want to hold relevant to whatever the new GSCLs [ph], what the requirements are from risk to capital?

Mark Casale

It’s hard for me to comment on that because I haven’t seen the risk of capital requirements. And I would just again point you back to the discussion that we had on the road show with that. We set our capital using a variety of stress test type models so we don’t have any one type model but we really do look at capital from an economic standpoint and we would certainly use that.

That’s really the basis of how we funded the company and capitalize the company to date, hence why we’re a little bit more conservative than the industry. But it’s certainly something we will monitor and look at the new GSCLs [ph] a bit, requirements and then compare it to where we think we should be holding capital.

Mark DeVries – Barclays

Okay. Thanks.

Operator

Your next question comes from the line of Eric Beardsley of Goldman Sachs. Your line is open.

Eric Beardsley – Goldman Sachs

Yes. Just one hour you stood and ramping up your sales force and how much of the market that you’re not addressing today still?

Mark Casale

Hey, Eric, it’s Mark. It’s a good question. We’re pretty – we’re not quite there in terms of building office sales force. We finished the year with approximately 60 business development folks. As we mentioned in the script we’re a little north of 700 active clients. I would say to size it for you, about 50% of where we want to be in terms of active clients.

And we’re about 75% of the market share coverage. When you think NIW just because obviously the larger lenders comprise more NIW, as you sign up the smaller lenders, there’s less there.

However we continue to want to build kind of breadth and depths to our franchise. So we’re not quite there but we’re well on our way to building out the team which from an expense standpoint I think helps us but we still have a way to go and continuing to sign up quality clients.

Eric Beardsley – Goldman Sachs

Great. And then just on your outlook for – I think it was industry NIW of 150 billion to 160 billion for 2014. I guess that seems a little bit conservative to us. I’m just wondering what your underlying assumptions behind that are?

Mark Casale

We look at a variety of factors. We look at MBA, we look at Fannie, we look at a lot of the street research. I would say kind of 1.1 to 1.2 trillion, kind of anywhere from 13%, 14% MI penetration rates. We have seen some continued migration from FHA to conventional. So the beauty is in the eye of the beholder, so that’s kind of what our best guess estimate is. It certainly could be higher than that.

Eric Beardsley – Goldman Sachs

Okay. Great. Thank you.

Operator

Your next question comes from the line of Sean Dargan from Macquarie. Please go ahead.

Sean Dargan – Macquarie

Thank you and good morning. Just to follow up in regards to the downward migration in FICO score and new business. Did that change the premium margin that you’re able to charge materially from what you’re talking about at the time of the IPO?

Mark Casale

I think when you migrate from 7.60 to 7.40 [ph], I don’t think it’s a material migration op [ph], but it certainly is as we then, we talked about on the roadshow, as you – a couple of things to caution you guys on as you move down FICO curve, premium will be higher, but losses will be higher as well as has been on the capital that you have to hold against that risk.

So I think we look more towards kind of where we want to be from our return basis. But certainly the premiums will tick a little bit higher as you move down the FICO curve.

Sean Dargan – Macquarie

Okay, thanks. And then your market strategy I think is around 12% which is maybe higher than where you thought you would be at this time, do you think it would be even higher if some competitors didn’t cut pricing by 5 basis points?

Mark Casale

I think we’re – so we don’t – I wouldn’t look at it that way. I think our view is we continue to sign up kind of quality lenders. We really focus on adding to our client base, making sure that we service our clients really well. We think we have an advantage around our capital and our ratings. Pricing comes and pricing goes.

So I think the pricing – our view on pricing right now is we think it’s pretty stable. And relative to the risk that we’re putting on the books, the capital that we’re holding against, that risk and in those terms, we’re actually pretty comfortable of the pricing today.

Sean Dargan – Macquarie

All right, great. Thank you.

Operator

Your next question comes from the line of Rick Shane of JP Morgan. Please go ahead.

Rick Shane – JP Morgan

Hi, good morning. Can you hear me?

Mark Casale

Yes.

Rick Shane – JP Morgan

Great. I just want to delve in the market a little bit deeper. You’ve made the comment that you’re addressing about 75% of the market with about 50% of the relationships that you hope to achieve long-term.

Obviously the market starts to get a lot more fragmented. How much potential is there for market share within your existing customer base? And I’m assuming one of the things that you’re pretty bifurcated there that a number of your – you have probably some of your legacy customers where you’re in the low 20s or high teens or given at how quickly you grew the relationships over the last year, I’m assuming that there are a lot of relationships that are low single digits.

Mark Casale

Yes, you really touched on two points, Rick, which is the activation of new clients and then the utilization of current clients. We obviously think we have some room on both of those.

But again, I’ll remind you that we don’t really think of market share as – we don’t have a goal around that. We believe we’re the only mortgage insurer that doesn’t pay commissions around going after it.

We look at market share really as the result of quality lender relationships, prudent guidelines, prudent pricing. You build all those things. The market share is the result of that. And I think that’s going to be our continued focus on building after the business.

We really want to – we look at – we worry about two things at Essent. We worry about Essent and we worry about our customers. And our view is we try to work with our customers, help them grow their business the right way. And if we can do that, the results will be good growth for Essent.

Rick Shane – JP Morgan

Got it, great. Mark, thank you very much.

Mark Casale

You’re welcome.

Operator

Your next question comes from the line of Christine Worley of JMP Securities. Please go ahead.

Christine Worley – JMP Securities

Hi, good morning

Mark Casale

Good morning.

Christine Worley – JMP Securities

Just looking at the persistency, I see it’s sort of have been ticking up through the year, how should we think about that going forward?

Larry McAlee

Yes. Hey, Christine, it’s Larry McAlee. Over the last five quarters as you’ll see in one of the schedules we included in the financial supplement, our persistency rate has been in the low and mid-80s. And that’s where we would expect it to remain over the near term.

Christine Worley – JMP Securities

So sort of – I mean if we look at the average over the year or if we take more of what we were seeing in the fourth quarter and use that going forward?

Mark Casale

Yes, I would look at average over the year. I would still think low to mid-80s. I know it picked up in fourth quarter. But I wouldn’t want you to kind of use that and run forward with it.

Christine Worley – JMP Securities

Okay, thank you.

Operator

Your next question comes from the line of Chris Gamaitoni from Autonomous Research. Please go ahead.

Chris Gamaitoni – Autonomous Research

Most of my questions have been answered. I think the one question I have is do you have an indication of your kind of long-term expense ratio target? You’re the first new company in about two decades. So we don’t have an idea of how cheaper your technology is versus legacy platforms that is pushing out. So those things of questions.

Mark Casale

Yes, I would say longer-term, we would expect to be within the industry average. I think our target is kind of in that 20% rates longer-term. And long-term is a long time. But I think we do have an efficient platform.

But it’s not just – and really what I would point to in terms of expense ratio in addition to that is just on nominal costs. And that’s really what we manage so we can control our nominal costs. We think we’ve done a pretty good job in doing that kind of building the company. And it certainly will be an emphasis as we continue to manage the company going forward.

Chris Gamaitoni – Autonomous Research

Thank you. And then I saw there was – on our new NIW, a 95 plus increase from 0.5%, 3%. I was wondering how the penetration works in that area where you see the opportunity is. And then [indiscernible] the regulators originally that bad. So if there’s any future penetration given, that’s where the FHA [indiscernible].

Mark Casale

Right. But also, keep in mind that Fannie and Freddie no longer purchase mortgages above 95.

Chris Gamaitoni – Autonomous Research

Right.

Mark Casale

So it did take up maybe abnormal lanes, people tried to close some of those loans in the later part of the year. But I would say that should be a relative small percentage of our portfolio moving forward.

Chris Gamaitoni – Autonomous Research

Okay. That makes sense. Thank you so much.

Mark Casale

You’re welcome.

Operator

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

Mark Casale

Thank you, operator. It’s Mark. We’d like to thank everyone for participating in our first call today. And enjoy the rest of your week. Thanks.

Operator

This concludes today’s conference call. You may now disconnect.

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