Essent Group Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the Essent Group Limited Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to Chris Kern, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Denise. Good morning, everyone, and welcome to our call. Joining me today are Mark Cassell, Chairman and CEO, and Larry McAlee, Chief Financial Officer. Our press release, which contains Essence financial results for the second quarter of 2020, was issued earlier today and is available on our website at EssenceGroup.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 FCC on February 18, 2020, and any other reports and registration statements filed with the FCC, which are also available on our website. Now, let me turn the call over to Mark.

Thanks, Chris. Good morning, everyone, and thank you for joining us. This morning, we released our second quarter results, which reflect the impact of COVID-19 on our insured portfolio. During the quarter, we experienced an increase in defaults, which resulted in a $176 million loss provision, compared to $8 million last quarter and $5 million for the second quarter a year ago. Our outlook on the economy remains cautious, But we are confident that our buy, manage, and distribute operating model is well suited to navigate this challenging environment. In response to the pandemic and the weakening economy, during the quarter we strengthened our balance sheet by raising $440 million of equity capital. We believe that raising equity was prudent as it strengthens our balance sheet and increases our liquidity. Now let me touch on our results. For the second quarter, we earned $15 million, or 15 cents per diluted share, compared to $136 million, or $1.39 per diluted share for the second quarter a year ago. Even though our results were impacted by increased defaults, we grew adjusted book value per share to $31.02, a 15% increase from June 30th, 2019. At June 30th, our default inventory increased to 38,000, of which 34,000 have been identified as COVID-19 related. We believe that programs such as the federal stimulus, foreclosure moratoriums, and mortgage forbearance may extend traditional default to claim timelines. Accordingly, we estimate that the COVID-19 claims will be modestly lower than our historical experience where borrowers did not have access to these type of programs. For our second quarter loss provision, we are using a 7% claim rate assumption on the COVID-19 defaults versus 9%, which was the estimate used in the first quarter for early-stage defaults. During the quarter, housing continued its resilience, with home prices being supported by limited inventory, increased demand, and low rates. Both new and existing home sales are being fueled by first-time homebuyers, such as the millennials, along with those moving out of densely populated areas in response to the pandemic. As a result, purchase and refi mortgage originations were robust during the quarter. Due to the strong housing environment, we grew insurance in force to $175 billion, which is a 14% increase compared to June of 2019. Our growth this quarter was driven by $28 billion of NIW, offset by runoff as our persistency was 68%. compared to 74 percent last quarter and 85 percent for the second quarter a year ago. On the competitor front, we increased rates on new business by approximately 10 percent in response to the pandemic. Also, the credit quality of our second quarter NIW was higher, with an average FICO of 749 compared to 744 a year ago. Much of this shift was the result of increased pricing on the lower credits, tighter GSE underwriting, and increased share of refi business. At June 30th, our balance sheet is strong, with over $3.6 billion in gap equity and a conservative debt-to-capital ratio of 10%. We also have access to $1.6 billion of excessive loss reinsurance. As validation of our financial strength during the quarter, AMBEST affirmed its A-rating investment guarantee and S&RE, and we continue to be rated A3 and BBB+, by Moody's and S&P, respectively. Essent remains the highest rated monoline in our industry. Our liquidity remains strong as we have $4.5 billion of cash and investments and generated $183 million in operating cash flow during the quarter. Including the net proceeds from our capital raise, we maintain $700 million in cash and investments at the holding company. Although there are no immediate capital needs in our operating businesses, we believe that maintaining this amount of capital at the holding company is prudent. Also, excess capital enables us to take advantage of any growth opportunities should they arise. From a PMIRES perspective, we are well positioned. At June 30th, we have applied the 0.3 factor to the PMIRES asset requirements for defaulted loans resulting from COVID-19, including those in forbearance. At June 30th, Essent guarantees PMIRES sufficiency ratio inclusive of the 0.3 factor is strong at 177%. with $1.1 billion in excess assets. Excluding the 0.3 factor, our PMIR sufficiency ratio would continue to be strong at 138% with approximately $700 million in excess assets. Note that these excess asset amounts do not include cash and investments at the holding company. Finally, in connection with our strong capital position and liquidity, our Board of Directors approved a quarterly dividend of $0.16 per share to be paid on September 10th. We will evaluate future dividends as we continue to navigate the COVID-19 economic environment. Our buy, manage, and distribute operating model provides us confidence in managing our business and generating cash, even though things could be challenging over the near term. Since the founding of Essent, we have built and managed this business for the long term and will continue to do so. Now let me turn the call over to Larith.