Essent Group Ltd. Common Shares

turn the conference over to Phil Stefano. You may begin.

Thank you, Abby. 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 2024, was issued earlier today and is available on our website at EssentGroup.com. Our press release includes non-GAAP financial measures that may be discussed during today's call. A complete description of these measures and the reconciliation to GAAP 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 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 included in our Form 10-K filed with the SEC on February 16, 2024, 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, Bill, and good morning, everyone. Earlier today, we released our third quarter 2024 financial results, which continue to benefit from our high-quality portfolio and the impact of higher interest rates on persistency and investment income. While higher mortgage interest rates have reduced overall mortgage originations, as a portfolio business, we are less reliant on transaction activity than other sectors of the housing ecosystem. As such, our results for the quarter continue to demonstrate the strength of our business model in generating high-quality earnings. Our long-term outlook for housing remains constructive, as the supply-demand imbalance and favorable demographic trends should provide foundational support to home prices. At the same time, the U.S. labor market and consumers continue to exhibit resilience, which has supported economic growth and credit performance. And now for our results. For the third quarter of 2024, we reported net income of $176 million, compared to $178 million a year ago. On a diluted per share basis, we earned $1.65 for the third quarter compared to $1.66 a year ago. On an annualized basis, our return on average equity was 13% in the third quarter. As of September 30th, our U.S. mortgage insurance and force was $243 billion, a 2% increase from a year ago. our 12-month persistency was approximately 87%, relatively flat compared to last quarter, with nearly 65% of our enforced portfolio having a note rate of 5.5% or lower. While persistency has likely peaked, we expect that the current level of mortgage rates should continue to support elevated levels. The credit quality of our insurance and force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 93%. Credit performance in the third quarter reflected both the aging of our portfolio and the typical seasonality of default behavior. Our 2021 and prior vintages represent about half our portfolio, and home price appreciation should continue to mitigate ultimate claim experience for those cohorts. Newer vintages continue to perform in line with our expectations. On the business front, we are monitoring the potential fallout from Hurricanes Helene and Milton that impacted the southeast region of the country. Like Hurricanes Harvey and Irma in the second half of 2017, these storms have the potential to cause an uptick in delinquencies for the affected areas. While delinquencies may be higher, we remind you that mortgage insurance policies have an exclusion for claims if property damage is the principal cause for borrower default, and therefore the ultimate P&L impact may be mute. During the third quarter, we closed our 10th Radnor Re ILN transaction, providing us with $363 million of fully collateralized excess of loss coverage. We were pleased with the execution and continue to be encouraged by the strong demand from investors in our program. We remain committed to a programmatic reinsurance strategy, which helps to diversify our capital resources while ceding a meaningful portion of our mezzanine credit risk. Cash-in investments as of September 30th were $6.4 billion, and our new money yield in the third quarter was nearly 5%. The annualized yield for investments available for sale in the third quarter was 3.8%. up from 3.6% a year ago, and we'd note that higher yields and a growing investment portfolio generate incremental revenues for our business model. We continue to operate from a position of strength with $5.6 billion in gap equity, access to $1.7 billion in excess of loss reinsurance, and a PMIR sufficiency ratio of 186%. Given our strong financial performance and capital position, we continue to take a measured approach to capital management. Our objectives remain the same relative to maintaining a conservative balance sheet, preserving optionality for strategic growth opportunities, and optimizing shareholder returns over the longer term. Now let me turn the call over to Dave.

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 $1.65 per diluted share compared to $1.91 last quarter and $1.66 in the third quarter a year ago. Our U.S. mortgage insurance portfolio ended September 30, 2024, with insurance in force of $243 billion, up $2.3 billion compared to June 30, and 2% higher compared to the third quarter a year ago. Persistency at September 30 was 86.6%, largely unchanged from 86.7% last quarter. The premiums earned for the third quarter were $249 million, and included $17.1 million of premiums earned by Essent Re on our third-party business, and $17.7 million of premiums earned by the title operations. The base average premium rate for the U.S. mortgage insurance portfolio for the third quarter was 41 basis points, consistent with last quarter. And the net average premium rate was 35 basis points for the third quarter, down one basis point from last quarter. That investment income increased $1.3 million, or 2%, to $57.3 million in the third quarter of 2024 compared to last quarter, due primarily to higher balances. Other income in the third quarter was $7.4 million compared to $6.5 million last quarter. The increase in other income includes higher title settlement services income, partially offset by a decrease in the change in fair value of embedded derivatives in certain of our third-party reinsurance agreements. In the third quarter, we recorded a $1.2 million decrease in the fair value of these embedded derivatives compared to a $732,000 increase recorded last quarter. In the third quarter, we recorded a provision for losses and loss adjustment expense of $30.7 million compared to a benefit of $334,000 in the second quarter of 2024 and a provision of $10.8 million in the third quarter a year ago. At September 30th, default rate on the U.S. mortgage insurance portfolio was 1.95%, up 24 basis points from 1.71% at June 30, 2024. Other underwriting and operating expenses in the third quarter were $57.3 million and include $14.8 million of title expenses. Expenses for the third quarter also include title premiums retained by agents of $9.6 million, which were reported separately on our consolidated income statement. Our consolidated expense ratio was 27% this quarter. Our expense ratio excluding title, which is a non-GAAP measure, was 18% this quarter. A description of our expense ratio excluding title and the reconciliation to GAAP can be found in Exhibit O of our press release. For the nine months ended September 30, 2024, other underwriting and operating expenses excluding our title operations totaled approximately $131 million. We are revising our guidance for this metric from $185 million previously to approximately $180 million for the full year 2024 as a result of disciplined expense management, along with higher seating commissions from quota share reinsurance transactions. As Mark noted, our holding company liquidity remains strong. As we discussed last quarter, on July 1st, we issued $500 million of senior unsecured notes with an annual interest rate of 6.25%, than mature on July 1, 2029. Approximately $425 million of the proceeds were used to pay off the term loan outstanding as of June 30. An interest expense in the third quarter includes $3.2 million of expense associated with this repayment. At September 30, 2024, our debt-to-capital ratio was 8.1%. Additionally, effective July 1, we entered into a five-year $500 million unsecured revolving credit facility, amending and replacing our previous $400 million secured revolving credit facility. Combined, these transactions provide Essendon with access to approximately $1 billion in capital. No amounts were outstanding under the revolving credit facility at September 30, 2024. At September 30, Essendon guarantees PMIR's efficiency ratio, excluding the 0.3 COVID factor, remains strong at 186%. with $1.7 billion in excess available assets. During the quarter, Essendon Guarantee paid a dividend of $58 million to its U.S. holding company. The U.S. mortgage insurance companies can pay additional ordinary dividends of $267 million in 2024. At quarter end, the combined U.S. mortgage insurance business statutory capital was $3.6 billion, with a risk-to-capital ratio of 9.7 to 1. Note that statutory capital includes $2.5 billion of contingency reserves at September 30th. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $275 million, while at the same time paying $220.5 million of dividends to our U.S. holding company. During the third quarter, S&RE paid a dividend of $87.5 million to S&Group. Also in the quarter, Essendon Group paid cash dividends totaling $29.5 million to shareholders, and we repurchased 170,000 shares for $9.6 million under the authorization approved by our board in October 2023. Now let me turn the call back over to Mark.

Thanks, Dave. Our performance this quarter reflects the strength and resilience of our franchise. Our team continues to focus on executing our long-term strategy, which includes expanding our lender network, maintaining financial discipline, and evaluating potential growth opportunities. Looking forward, we remain committed to the buy, manage, and distribute operating model and believe that Essent remains well-positioned in the current economic environment to deliver strong operating returns to our shareholders. Now, let's get to your questions. Operator?

Thank you. And we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is star one if you would like to join the queue. And your first question comes from the line of Terry Ma with Barclays. Your line is open.

Hi, thank you, good morning. I think you addressed it a bit in your prepared remarks, but was there any quantifiable impact on the default rate or new notices this quarter from just hurricanes?

Hey, Terry, it's Mark. There was a little bit, but it was pretty minimal, mostly coming from Burrell, not from the newer ones. We should definitely see some noise in the fourth quarter on those.

Okay, got it. So if I look at the rate of increase year-over-year in new notices, it's kind of accelerated each of the last three quarters. Are we starting to see the effects of kind of vintage seasoning from some of the larger post-COVID vintages materialize more? And I guess going forward, how should we kind of think about how that kind of rate or trajectory evolves?

Yeah, I mean, I would look at it. We said this before. The portfolio is definitely seasoning, right? The average age is 32 months versus historically was 18 months. There's a little bit of seasonality in the third and the fourth quarter. And you also have to mix in, Terry, just, again, the noise around forbearance. That probably exasperated both the number of new defaults and the cures, right? People coming in and out of forbearance. The rule changed last week. November, December. So I think we're starting to see a little bit of a normalization of that. Looking forward, it's hard to tell. Again, we're still levered mostly to unemployment and a pretty strong portfolio. Here's an interesting fact for you, though, just when you kind of think through the provision, whether the fall's starting to grow. One, they're right around 16,000 defaults at the end of the quarter. We were roughly 15,000 at the end of last year. It's gone up, and I know you're talking about the ins and outs, but also take a step back with our defaults. I would say approximately 70% of the defaults, Terry, are 21 vintage and prior. The mark to market on those defaults is 61%. So even if they were to go to claim, the probability of us pushing cash out the door is It's pretty low. So I just try to put it in context of the whole portfolio and try to take a step back from the movement. Again, we should see seasoning. You may see increasing defaults, but the probability of claim, which is when cash leaves the door, again, I think is probably pretty low.

Okay. Got it. That's helpful. Thank you. Sure.

And your next question comes from the line of Doug Harder with UBS. Your line is open.

Thanks, Mark. Just to touch on that last comment you made around probability of claim, you know, did you make any changes in kind of the claim rate assumptions in the quarter? Because, you know, by our calculations, you know, kind of the current year loss over the NODs, that rate seemed to be higher. So just trying to understand that.

No, no real change in the claim rate assumptions for the quarter.

Okay. And, you know, in that, you know, where you said 70% of defaults were 21 vintage or older, you know, any change in kind of the new notices in that mix, or has that been relatively consistent?

It's been pretty consistent, Doug.

Okay. Thanks, Mark. Sure.

And as a reminder, it is star one if you would like to ask a question. And your next question comes from the line of Bose George with KBW. Your line is open.

Hey, everyone. Good morning. Actually, just to follow up on Doug's question on the new notices, are the loan sizes getting bigger in terms of just, you know, because the provision for new notice, the way, you know, will be calibrated went up as well. So just curious how much loan size is impacting that.

Yeah, Bose, clearly the loan sizes, you know, just in general with what we're doing in our insurance and force, the average, you know, with the GSEs raising, you know, what's eligible, definitely our loan sizes have grown. And so, you know, a lot of what you're seeing, you know, and you can see this in our supplement, we're still reserving at about the same amount for early notices. as we always have been. But, you know, clearly what's going to impact that is the size of the loan when you're looking at a provision dollar number.

Yeah, I mean, just to give you a sense of that, Bo, the average loan size for our insurance and force right now is, you know, right around $290,000, when historically it was probably $226,000. And you're also seeing that on the front end, right? And we talk about the insurance and force portfolio has been relatively, you know, flattish over the past years. You know, a lot of it caused by low, you know, low originations. But the loan size of our portfolio has continued to grow. So new originations, NIW back in, say, 2017-18 was like $240,000. You know, this past year, it's probably $380,000. So When you think about growth in a portfolio and just look at units, right, we probably did about 130,000 units last year. We'll do less than that this year. That's really reflective of the environment, you know, kind of that whole transactional part of the business. You know, we originated, you know, I think between 2017 and 18, so well before COVID. kind of normalized housing, you know, we were right around between those two years, we averaged 190,000 units of NIW. So when you think about future growth in the portfolio, it has the potential for renewed growth. So it works both ways, right? So you're going to see it in the losses, but eventually you'll start seeing it around, you know, kind of the growth in the portfolio.

So great. That's helpful. Thanks. And then just in terms of the commentary you made on, you know, we might see some noise around the storms in Fort Q for those those notices, do you provision for that since they will should be excluded from, you know, from the losses?

We may. We haven't decided yet. We'll have to wait to see the numbers come in. We did, just to give you guys some color, remember back in 2017 when we had the last storms, we did kind of set that aside, and I think 99% of them cured. So, again, we'll have to wait and let the defaults come in, and then we'll assess it from there.

Okay, great. Thanks.

And your next question comes from the line of Mihir Bhatia with Bank of America. Your line is open.

Hi. Good morning, and thank you for taking my question. I want to start on the claims on the default inventory. And I appreciate what you're saying, Mark, about them normalizing, increasing, but just quarter over quarter, right? I mean, you're up almost 2,000 in the default inventory. That's a bigger jump than we've seen. And I'm just trying to understand, was there anything this quarter unusual? Like, well, I guess maybe give us some view on like 25 or like just as things normalize, what should the default rate you think normalize to?

Here, our inventory default jumped 1500 from September of 23 to December of 23. So it's, again, I think, you know, again, I can't do your jobs for you. I do think, I think there's a lot of noise with the ins and the outs because of forbearance. So what you're really seeing is you're not seeing some of the cure activity come through because it's kind of worked its way through forbearance. So it's more of a normalization of that. But I would say, yeah, given the environment and the seasoning, just again, 32 months, it wouldn't surprise me to see the defaults increase significantly. But again, from a mark-to-market, I think we're relatively in a good position from claims. I think our loss provision for the quarter was 12%. So again, taking a step back, we never thought we'd run the business recession-free. I don't think we're in a recession or anything close to it yet. So again, I think it's just normalization of the default inventory.

And I would just add, I think this is really normal seasonality. I mean, here, if you look pre-COVID... generally what we would see is an increase in defaults in the second half of the year, starting in the third and fourth quarters, kind of peaking out maybe in January and then kind of falling back in the first two quarters of the year. People catch back up. They get their tax refunds and become more current on their defaults. And I think this is just kind of you know, we have had a lot of disruption from COVID and the normal trends. I think this is starting to come back to normal seasonality.

Got it. And then maybe just switching just real quickly on the investment side, it looks like the investments in corporate bonds, corporate debt securities has been increasing. Is that, I know from a,

reading standpoint it's still pretty similar but is there hasn't been any change in philosophy any like what's driving that now no there's not i think what we're there the change is really getting back to our normal mix uh during kind of 22 when short rates uh really increased it was we thought it was a good risk return in treasuries and we kind of kept the portfolio relatively short and in those securities and now what we've done over the past you know, quarter pluses kind of get back into our normal mix of the portfolio. We've lengthened out the duration a little bit too, but it's really more normal course of business, nothing special driving it.

Got it. Okay. Thank you for taking my question.

Sure.

Again, it is star one if you would like to ask a question. And your next question comes from the line of Melissa Waddell with JP Morgan. Your line is open.

Good morning. I'm Melissa on for today. I don't think I might have missed this, Mark. Did you elaborate or specifically quantify the risk and force in the Helene and Milton hit areas?

No, we have not. We haven't really seen many defaults from that yet. We'll probably see some. We most likely will see some in the fourth quarter, and we'll update everyone in February.

Okay. Okay. Appreciate that. And then as we think through, just going back to your comments on credit and not seeing some cure activity come through because of forbearance, Can you help us think about the timeline around the forbearance process and how that might, just the timing of it, might roll through and impact those numbers?

This is for Melissa. This is Chris. And your question pertains to the hurricanes. Just to clarify the forbearance. Are you referring to the COVID forbearance that ended last November? Just trying to get a sense.

I thought your earlier comments were related to the COVID forbearance in particular.

Right. So I think Mark's point from earlier is that the forbearance process for the COVID defaults ended last November. And when you think about the term, you know, we're about a year out. So at this point in time, there will be no more COVID forbearance. But over the last several years, you certainly have had, I'll call it favorable development because of some of the forbearance associated with the COVID loans.

Yeah, Melissa, it's Mark. It just made it easier because the way the forbearance worked, there's really no friction. You could just tell your servicer that you wanted forbearance and you could do it. Now there's obviously a lot there you have to share. You have to have right party contact. You have to talk to the borrower. So what we think we're going to see is less people go into forbearance just because they can and probably more require it. And as that works its way through the pipe, so to speak, you're seeing less cures, too. So, again, it's more of the normalization. We used to see just a lot of noise. I think you're going to see less of it. And to our point earlier, more normalization around kind of defaults and cures.

Okay. Thanks for clarifying.

Sure.

And we have no further questions at this time. I would like to turn the call back over to management for any additional or closing remarks.

I'd like to thank everyone for joining today and have a great weekend.

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.