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spk05: Thank you for standing by. My name is Adam and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Essent Group Limited third quarter earnings 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to Phil Stefano. Please go ahead.
spk01: Thank you, Adam. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO, and David Weinstock, Chief Financial Officer. Also on hand for the Q&A portion of the call is Chris Curran, President of Essent Guarantee. Our press release, which contains Essent's financial results for the third quarter of 2023, was issued earlier today and is available on our website at EssentGroup.com. Our press release this quarter includes non-GAAP financial measures that may be discussed during today's call. A complete description of these measures and the reconciliation to GATT may be found in Exhibit O 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 our actual results to differ materially. For discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, the risk factors that are included in Form 10-K filed with the SEC on February 17, 2023, 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.
spk07: Thanks, Phil, and good morning, everyone. Earlier today, we released our third quarter 2023 financial results, which continue to benefit from both favorable credit performance and the current interest rate environment. As mentioned last quarter, rising interest rates continue to drive higher investment income and elevated persistency, which has supported our revenue growth this year. As we look ahead, we remain encouraged by the resilience of the housing and labor markets. The housing supply and demand imbalance and favorable demographic trends are expected to provide foundational support to home prices over the longer term. While economic uncertainty remains, we continue to believe the strength of our balance sheet and our buy, manage, and distribute operating model should position us well to be prepared for a range of economic scenarios. And now for our results. For the third quarter of 2023, we reported net income of $178 million compared to $178 million a year ago. On a diluted per share basis, we earned $1.66 for the third quarter compared to $1.66 a year ago, and our annualized return on average equity was 15%. As of September 30th, our book value per share was $44.98, an increase of 13% from a year ago. As of September 30th, our insurance and force was $239 billion, a 7% increase versus a year ago. Our 12-month persistency on September 30th was 87%, and approximately 70% of our in-force portfolio has a note rate of 5% or lower. We expect that the current level of rates should support elevated persistency through the end of this year. As a portfolio business, mortgage insurance is less beholden to transaction activity than other sectors of the housing ecosystem. The credit quality of our insurance in-force remains strong. with a weighted average FICO of 746 and a weighted average original LTV of 93%. Regulatory guardrails, including the qualified mortgage rule and prudential GSE underwriting guidelines, has significantly improved industry credit quality and performance since the global financial crisis. In addition, credit performance should continue to be supported by embedded home price appreciation, and implied mark-to-market values, particularly for the 2021 and prior vintages, which represent approximately 60% of the overall bulk. On the business front, while mortgage lenders remain challenged given the interest rate environment, we continue to focus on activating new accounts. We believe it is very important to identify and activate new customers while also continuing to support our current customers. Year-to-date through October 31st, we activated 95 new customers. We take a long-term approach in managing Essent and best positioning our franchise, especially during times like now as the lender landscape continues to shift and evolve. As of September 30th, Essent REIT third-party year-to-date revenues were approximately $60 million, while third-party risk and force was $2.2 billion. Essent REIT continues to leverage our expertise in mortgage credit and the Bermuda platform to deliver complementary earnings to the Essent franchise. Our title and settlement services operation incurred a pre-tax loss of approximately $4 million in the third quarter. As we continue to work through the title integration, we will be taking a long-term approach to building out the business with a focus on risk controls and operational efficiency. Cash and investments as of September 30th were $5.4 billion. Our new money yield in the third quarter was over 5%, while our annualized investment yield was 3.6% for the third quarter, up from 2.7% a year ago. Net investment income was $47 million in the third quarter, up approximately 44% from the same quarter last year. Higher investment income is another way that our business is levered to higher rates. Our balance sheet remains strong with $4.8 billion in gap equity, access to $1.6 billion in excess of loss reinsurance, and over $1 billion of available holding company liquidity. During the third quarter, we closed on our ninth Radnor Re ION transaction. The utilization of programmatic reinsurance helps to diversify our capital resources while ceding a meaningful portion of our mezzanine credit risk. With a trailing 12-month operating cash flow of $720 million and a mortgage insurance underrating margin of 75%, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. Our strong financial performance and capital position enable us to take a balanced approach between capital deployment and distribution. Year to date through October 31st, we were purchased approximately 1.4 million shares for $57 million. I am pleased to announce that our board has authorized a new $250 million share repurchase program and has approved a common dividend of 25 cents. We continue to see our dividend as a meaningful demonstration of the confidence we have in the stability of our cash flows, the strength of our capital position. Now, let me turn the call over to Dave.
spk08: Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the third quarter, we earned $1.66 per diluted share compared to $1.61 last quarter and $1.66 in the third quarter a year ago. Net premium earned for the third quarter of 2023 was $247 million, and included $16.9 million of premiums earned by Essent Re on our third-party business, and $20.6 million of premiums earned by the title operations acquired on July 1st. The average base premium rate for the U.S. mortgage insurance portfolio in the third quarter was 40 basis points, consistent with last quarter. The net average premium rate on the U.S. mortgage insurance portfolio was 35 basis points in the third quarter of 2023, up two basis points from last quarter, due primarily to the net impact of the successful ILN tender in the second quarter. Ceded premium decreased to $30.3 million in the third quarter compared to $39.5 million in the second quarter due to expenses incurred last quarter related to the tender and lower outstanding insurance-linked notes during the third quarter. Then investment income increased $1.8 million or 4% in the third quarter of 2023 compared to last quarter due primarily to higher yields on new investments and floating rate securities resetting to higher rates. Our income in the third quarter was $5.6 million compared to $8.1 million last quarter. The largest component of the decrease was the change in the fair value of embedded derivatives in certain of our third-party reinsurance agreements. In the third quarter, we recorded an $898,000 decrease in the fair value of these embedded derivatives, compared to a $2.7 million increase recorded last quarter. The provision for loss and loss adjustment expense was $10.8 million in the third quarter of 2023 compared to $1.3 million in the second quarter of 2023 and $4.3 million in the third quarter a year ago. At September 30th, the default rate on the U.S. mortgage insurance portfolio was 1.62%, up 10 basis points from 1.52% at June 30th, 2023. Other underwriting and operating expenses in the third quarter were $54.8 million and include $13.5 million of title expenses. Expenses for the third quarter also include title premiums retained by agents of $13.2 million, which we are reporting separately in our income statement. Our consolidated expense ratio was 27% this quarter. Our consolidated expense ratio excluding title, which is a non-GAAP measure, was 18% this quarter. A description of our consolidated expense ratio excluding title and the reconciliation gap may be found in Exhibit O of our press release. As a reminder, our consolidated expense ratio was 20% for both the second quarter and third quarter a year ago. As Mark noted, our holding company liquidity remains strong and includes $400 million of undrawn revolver capacity under our committed credit facility. At September 30th, we had $425 million of term loan outstanding with the weighted average interest rate of 7.07%, up from 6.87% at June 30th. At September 30th, 2023, our debt-to-capital ratio was 8%. During the third quarter, Essing Guarantee paid a dividend of $60 million to its U.S. holding company. Based on unassigned surplus at September 30th, the U.S. mortgage insurance companies can pay additional ordinary dividends of $290 million in 2023. At quarter end, The combined U.S. mortgage insurance business statutory capital was $3.3 billion, with a risk-to-capital ratio of 10.3 to 1. Note that statutory capital includes $2.3 billion of contingency reserves at September 30th. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $181 million, while at the same time paying $300 million of dividends to its U.S. holding company. During the third quarter, Essent Group paid a cash dividend totaling $26.5 million to shareholders, and we repurchased 102,000 shares for $5 million under the authorization approved by our board in May 2022. Now let me turn the call back over to Mark.
spk07: Thanks, Dave. In closing, Essent continues to generate high-quality earnings while our balance sheet and liquidity remains strong. Higher interest rates, the turnover of our investment portfolio, and robust operating cash flows have contributed to strong net investment income growth this year, supporting our revenues and operating returns. Earlier this week, we celebrated the 10th anniversary of Essence's initial public offering on the New York Stock Exchange. Since our IPO, Essence's book value per share has grown at a compound annual growth rate of approximately 19%, and Essence shares have delivered an annualized total return of approximately 12%. I want to thank our team for their dedication and contribution to Essence achievement and growth over the last decade. I'd also like to thank our customers and shareholders for your continued support, enabling us to fulfill Essence's mission to promote and serve affordable and sustainable home ownership. Now let's get to your questions. Operator?
spk05: At this time, I'd like to remind everyone to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Bose George with KBW. Your line is open.
spk00: Hey, guys. Good morning. Actually, I wanted to ask just about buybacks. Has your sort of, you know, tone or view on buybacks changed over the last year? Just could we see you being a little more active here? Just, yeah, any thoughts there would be great.
spk07: Yeah. Hey, Bose. It's Mark. I think you have to think about buybacks within kind of the context of how we manage capital in totality. So, you know, generally, you've heard me say this in the past, past, we're kind of a retain and invest type mentality. So always we're going to look from our capital position to invest in the core business. We've continued to invest in REIT over the years. We've obviously invested in title this year. And in terms of also looking to manage ROEs over the longer term. And the way to do that is obviously increase the numerator. I think given our capital position and growth, you know, there's clearly, you know, some excess capital in the system. And part of that, you know, the way we manage ROEs is primarily the dividend, right? And we're pretty committed to the dividend. We think that's a good kind of tangible evidence to our shareholders of the cash generation of the business, which is, you know, is really strong. And I think on repurchases there, I think it has become a little bit more dynamic. So I think we've changed a little bit over the past kind of year, Bo, is we bought back $250 million back in 2021 over 11 months. And in my view, that was a little fast. And I think now we're going to, in a little bit more dynamic, we're going to look at it. And we have a 10B5 plan out there, but we look at it every quarter. And then we're looking and saying, where are the growth opportunities in the core businesses now? what's the outlook for losses, right? Where do we see the portfolio going, right? So you always want to have, you know, capital around P. Myers and other potential, you know, capital needs. And then finally, where's the stock trading? So I think our view is, you know, we're all about growth and book value per share. And if we can buy, you know, if we can buy our shares around book value or below book value, we're probably going to be a little greedy there and probably a little less so, you know, when it trades up. So, I think that depends. So hopefully that gives you a little bit more context. So it's not kind of a mechanical, let's just remove shares, share count. I think we're going to be a lot more thoughtful about it. And again, it's just our view. Capital begets opportunities. And given, you know, the world's always uncertain, probably a little bit more uncertain over the next 12 to 18 months with what's going on in the world, where rates are. We have an election coming up in less than 12 months. So, you know, it's served us well in the past. to maintain a strong capital position because you never know where the opportunities are going to come from.
spk00: Okay, great. That's very helpful. Thanks. And then just switching, I wanted to just ask about the proposed changes to the Bermuda tax code. Is that something that could impact you? Just, you know, any color, that would be great.
spk07: Well, it's pretty early, right? I mean, we've seen potential changes come and go over the past 10 years. So, you know, it's too early to, I would say it's too early to tell. There could be some impact to us, but I don't think it's really, it's not really material longer term to kind of the growth of ESSIM. But again, stay tuned for more.
spk00: Okay, great. Thanks.
spk05: Your next question comes from the line of Mihir Bhatia with the Bank of America. Your line is open.
spk03: Good morning. Thank you for taking my questions.
spk04: Maybe to start with on pricing, obviously always a big topic for investors. How would you characterize the current pricing environment? Anything's changed quarter over quarter there?
spk07: No, I think it's been pretty consistent really over the last six to 12 months in terms of just where it is in terms of where we see it in terms of our earned premium yield. Like we had mentioned a while ago here that we wanted to see new pricing for us get closer to where the base premium yield, and we're there now. So, you know, I think the union economics of the business are good. In terms of pricing, though, again, I'd like to take a step back and just, you know, try to give investors a little bit more context because I'm not sure it's the change in pricing has really – is appreciated by the investor community. So we always talk about three changes to the business model since the GFC, right? You have reinsurance, which has the MES risk, which we think is important. There's the regulatory changes that are substantial, right? Qualified mortgage, the strength of the GFC systems, forbearance, all those things have really helped the business. I think the pricing engines have been a significant change to the industry. And the reason is, it's given all of the MIs a lot more flexibility in how they can bring price to the consumer. And I think because of that, I think in the past, investors have said, well, there's not a lot of discipline in the industry. And I think that, again, it's not appreciated just how the pricing was really brought to the consumer. Five years ago, You know, in order for a price change to be made in the industry, you had to refile in all 50 rates. You had to change your card, one card. You had to usually take it to two or three of the top banks in the country. And really, they decided where that because they didn't have this. There was a system, you know, the inability of their systems to program in like six different cards. So they could only program in one card. what's going to happen here? They're going to program in the lowest card. So they're going to get six cards and whoever had the lowest, everyone was forced to that. So you didn't have a lot of flexibility. So people confuse that with a lack of discipline per se, but it's really just kind of, it's a little bit of game theory, right? In terms of when you put six guys up against, you know, one lender, the lender had the pricing power in the industry. And I think with the engines, you know, that's changed significantly. Now we all file a range of rates and We can change rates much more frequently. It's really become what we said it was going to be, which is a risk management tool. It allows all the MIs to pick their spots, right? People have different geographical preferences, different parts of the capital structure, FICO. I think that's great. The lenders win and the borrowers win. But just again, give you more evidence. Over the last 12 months we're here, we must have raised pricing 12 times, different times, like in different places, maybe a tail here, an MSA there, once in a while across the board. If that was under the old card system, we would have had one shot at raising pricing. And whatever shot we had would have been mitigated by the competitive factors. And again, I think it's underappreciated. I think there's a form of pricing power with the mortgage insurers now, and again, if you just look at our, and it's still good economics for the borrower. The borrower wins, the lenders win, and I think MIs now have the chance to kind of shape their portfolios and pick the spots where they want to be in, much similar to how other insurance companies operate.
spk03: Got it. Thank you. I really appreciate that answer. Take a step back. Thank you.
spk04: On the maybe switching gears a little bit to the title side. And look, I understand you're building that business. It's a long-term play for you. It's not about a quarter or something like that. But as you position that business for long-term success, is the idea here in the near term, the focus, hey, we need to build out the infrastructure. So for the next few quarters, a little bit of an investment period before we start really driving revenue growth. Maybe just talk about what you expect, how you're looking at that business for the next two, four quarters.
spk07: even as you look at the long build. Fair enough. I think that you did hit the nail on the head. It is going to be a longer-term build, very much like Essen. I think I alluded to it on maybe the February call, but the acquisition of Tidal was not dissimilar to us buying the Triad platform back in 2009. It gave us that base To build off, we inherited some exceptional employees. And when you kind of married the platform and the folks from Triad that came over to Essent with the existing Essent folks, you know, that really laid the foundation for building of Essent. I mean, here, that was in 2009. And I was probably 18, almost 24 months from starting to raise the money. And that's 2009. We didn't break even in 2012. So when we became... public in 2013, you know, we were already fully formed and that's what investors got to view. This is going to play out differently, right? Because it's going to play out in public. We're going to be very transparent. But in order to build out these type of businesses, it's going to take time. We bought a, you know, we acquired a platform. We got some really good folks, right? Really good team. But in order for us to build it and have it to like essence, you infrastructure, we're going to have to invest. We're very, you know, risk and control oriented. I mean, you're talking, this is a company where we hired our head of internal audit before we hired our first salesperson. So, you know, we're very much control oriented. And there's a lot of risk in title in terms of the search process, the curative process, the closing and funding. It's, you know, it's, you know, I think from the 30,000 feet, people think there's not risk in title. And it's entirely bad premise. There's risk. And we have to understand it. So we're going to build it from the inside out. And we're going to take our time. It's going to play out. I'm going to be transparent. But we're not going to skimp on investments in order to show quarterly results. So we have to report every quarter. We will report every quarter. We'll talk to you about it. But we're not going to change the approach immediately. that build us. And in taking a step back here again, think about it, right? This is a company, 150 million a quarter we're earning, cash flows, six, $700 million a year. For us to take a few bucks to invest in a business that has the potential of, in the title side, I think it's a really good risk return trade-off, risk reward trade-off for shareholders. So again, that's how we'll continue to look at it. And we'll certainly, we'll let you know how the journey goes every 90 days.
spk04: Great. Thank you. Thank you for taking my questions.
spk05: Again, if you'd like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Rick Shane with JP Morgan. Your line is open.
spk09: Hey, good morning, guys. Two questions on two pretty different topics. Mark, one of the things in terms of the title insurance business, and I'm going to draw an analogy here, 20 years ago when Capital One got into the building and depository franchise, one of the things that they emphasized was that scale was not, or efficiency was not a function of having a national footprint, but being concentrated in particular regions where they could generate substantial market share. How do you guys look at the title expansion? Do you want to be a national title insurance company, or is the plan to be really concentrated regionally as you build the business?
spk07: Yeah, I think the answer is both, and the reason why, Rick, really it's the business And as we acquire two separate businesses, so we're in the process of putting it into, you know, one kind of functional organization, S and title. So we'll have the agency services channel, which will service, you know, title agents. And that will be focused on large states, right? I mean, it's pretty obvious where the premiums are coming from. Florida, Texas, within the southeast, parts of the southwest and northeast. And so we'll focus around that and build around that. And the agency services has 200 agents that they service today, so it's really tiny. We'll grow that out and we'll scale that out very similar to how we scaled out MI. You go and you hire good salespeople, salespeople go and call on title agents. And again, it doesn't happen overnight. This took us a long time on the MI side, but we're slow and steady wins the race. So we'll attack it on the agency services that way. The lender services channel is actually more is a lot more geared, it's centralized refinance. So it's a lot more geared to lenders. So that is national. So it's a 50-state title and settlement services business. It's quite a valuable platform. And I think as we continue to invest in the infrastructure there, we will offer that out to our key lenders. We're not at that step, that phase right now. I mean, they do work with lenders, but I think we want to we really want to make sure it's kind of firing on all cylinders. So we'll have kind of two channels, agency services, lender services. It'll be supported by an operational group. But you can see there, it's going to be regional. It's almost the agency services will be much more regionally targeted, where the lender services will be more of a national footprint. Got it.
spk09: OK. Thank you. That's helpful. And then the other question, and we've been asking this in a few different ways, Very unique time, volumes particularly concentrated in purchase, given the limited supply of existing home stock for sale, particularly concentrated in new home sales. That drives mortgage originations, particularly through builder channels, and there tend to be some subsidies there in terms of buydowns. I'm curious how you're approaching that, in particular the risk associated with buy-downs, whether they are short-term or permanent.
spk07: Yeah, I mean, I think with buy-downs, one, taking a step back, Rick, it's probably 3% or 4% of our originations has buy-downs in it, so it's not super material. And remember, we underwrite that at full rate. And we've had similar questions around student loans. Same thing with student loans, right? We underwrite those assuming they're going to pay back the loan. So there's some concentration, I think, around builders because clearly they're not building a lot in the northeast because there's not a lot of land. So it's always going to be more southwest, southeast, a little bit on the west. But we don't see any. you know, big concentration issues or things like that. I think it's really, you know, one of the things, you know, we've gotten asked this question too, is just, you know, there's not enough supply in the country. So the fact that home builders are, you know, putting supply out, I think longer term, that's good, very good for the home builders. And clearly in most of these are obviously first time home buyers. So it's good for MI, but certainly it's the concentration, you know, certainly something to look at, but it's not something we're concerned about at this time. And Chris has a few words on this, too.
spk06: Yeah, hey, good morning, Rick. You know, when you look at the buy-down product that certainly we're insuring from the builders, the majority of those buy-downs are permanent. So in a way, it is beneficial to, I'll call it, the financial makeup of the borrowers, certainly having additional cash flow for them. So that is one, certainly, a benefit of the permanent nature of these buy-downs, and certainly by extension, That will benefit the credit performance as well.
spk09: Got it. Okay. Thank you, guys. Hey, and Mark, I think on a personal level, there's some congratulations in order as well.
spk07: Thank you. Yes, that's why we're having the call on Thursday because my daughter is getting married on Saturday. I have the rehearsal dinner tonight, so I was not allowed to have the call tomorrow, so that's why. I appreciate some of our competitors. They were very gracious in moving their times, but yes, thank you.
spk05: Your next question comes from the line of Eric Hagan with BTIG. Your line is open.
spk02: Hey, thanks. Congratulations, Mark. Hey, a quick modeling question up front. You feel like the seeded premium of five basis points is a good way to think about modeling that, you know, going into next year?
spk06: Yeah, hey, good morning. It's Chris. Yeah, I think that's a reasonable range. I mean, really, when you look at certainly our history within that range, so that's reasonable from a modeling perspective.
spk02: Okay, great. Hey, you know, there's always kinds of kind of two dimensions of risk to think about, right? There's the borrower risk and then there's the asset level risk. Like which one would you say you're maybe more sensitive to right now and whether you think, like how you adjust for that and how it factors into the risk adjusted return that you think you're picking up right now?
spk07: I think it's a really good question. I think on the portfolio, it's clearly around the asset risk, right? So you've already underwritten the mortgage. Home prices can fluctuate. Borrowers cannot pay. And then you have severity issues. So I think we're more focused because you can't control that. So I think we're more focused there on the asset risk. We feel pretty good with that, Mike, because we have 75% mark to market. We have a lot of embedded assets. HPA. And clearly, you know, we talked about the, you know, the persistency angle helping us. And I think also, you know, so for newer originations, clearly, right? I mean, it's going to be higher DTI. It's obvious with, you know, 7%, 8% mortgages. So you're much more focused. You're not going to have, and certainly not going to have that HPA growth. It's going to be, in our view, probably more flattish over the next three to four years. So I think it's a little bit more you know, more on the borrower risk on that side.
spk02: Okay, that's really helpful. Thank you, guys.
spk05: I will now turn the call back over to management for closing remarks.
spk07: I'd like everyone to thank everyone for joining us and have a great day.
spk05: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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