Essent Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

There are 9 speakers on the call.

Operator

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 speakers' remarks, there will be a question and answer session.

Operator

Followed by the number 1 on your telephone keypad. Thank you. I'd now like to turn the call over to Phil Stefano. Please go ahead.

Speaker 1

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 and A portion of the call is Chris Curran, President of Essent Guaranty. Our press release, which contains Essent's financial results for the Q3 of 2023, was issued earlier today and is available on our website atessentgroup.com.

Speaker 1

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 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 our 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 that are included in Form 10 ks 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.

Speaker 1

Now let me turn the call over to Mark.

Speaker 2

Thanks, Phil, and good morning, everyone. Earlier today, we released our Q3 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, 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.

Speaker 2

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 Q3 of On a diluted per share basis, we earned $1.66 for the 3rd quarter compared to $1.66 a year ago and our annualized return on average equity was 15%. As of September 30, our book value per share was $44.98 an increase of 13% from a year ago. As of September 30, our insurance in force was $239,000,000,000 a 7% increase versus a year ago.

Speaker 2

Our 12 month persistency on September 30 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 rate Housing Ecosystem. The credit quality of our insurance in force remains strong with a weighted average FICO of 7.46 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 book.

Speaker 2

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 31, 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 30, Essent Re third party year to date revenues were approximately $60,000,000 while third party risk in force was $2,200,000,000 Essent REIT continues to leverage our expertise in mortgage credit and the Bermuda platform to deliver complementary earnings to the Essent franchise.

Speaker 2

Our Title and Settlement Services operation incurred a pretax loss of approximately $4,000,000 in the 3rd quarter. As we continue to work through the Title integration, we will be taking a long approach to building out the business with a focus on risk controls and operational efficiency. Cash and investments as of September 30 were $5,400,000,000 Our new money yield in the 3rd quarter was over 5%, Our annualized investment yield was 3.6% for the 3rd quarter, up from 2.7% a year ago. Net investment income was $47,000,000 in the 3rd quarter, up approximately 44% from the same quarter last year. Higher investment income is another way that our business is levered to higher rates.

Speaker 2

Our balance sheet remains strong with $4,800,000,000 in GAAP equity, access to $1,600,000,000 in excess of loss reinsurance and over $1,000,000,000 of available holding company liquidity. During the Q3, we closed on our 9th Radnor Re ION transaction. The utilization of programmatic reinsurance helps to diversify our capital resources while seeding a meaningful portion of our mezzanine credit risk. With a trailing 12 month operating cash flow of $720,000,000 and a mortgage insurance underwriting 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.

Speaker 2

Year to date through October 31, we repurchased approximately 1,400,000 shares for $57,000,000 I am pleased to announce that our Board has authorized a new 2 stability of our cash flows, the strength of our capital position. Now let me turn the call over to Dave.

Speaker 3

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the Q3, we earned $1.66 per diluted share compared to $1.61 last quarter and $1.66 in the Q3 a year ago. Net premium earned for the Q3 of 2023 was $247,000,000 and included 16 $900,000 of premiums earned by Essent Re on our 3rd party business and $20,600,000 of premiums earned by the title operations acquired on July 1. The average base premium rate for the U.

Speaker 3

S. Mortgage insurance portfolio in the 3rd 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 Q3 of 2023, up two basis points from last quarter due primarily to the net impact of the successful ILN tender in the 2nd quarter.

Speaker 3

Ceded premium decreased to $30,300,000 in the 3rd quarter compared to $39,500,000 in the 2nd quarter due to expenses incurred last quarter related to the tender and lower outstanding insurance linked notes during the 3rd quarter. Net investment income increased $1,800,000 or 4% in the Q3 of 2023 compared to last quarter due primarily to higher yields on new investments and floating rate securities resetting to higher rates. Other income in the 3rd quarter was $5,600,000 compared to $8,100,000 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 Q3, we recorded an $898,000 decrease in the fair value of these embedded derivatives compared to a $2,700,000 increase recorded last quarter.

Speaker 3

The provision for loss and loss adjustment expense was $10,800,000 in the Q3 of 2023 compared to $1,300,000 in the Q2 of 2023 $4,300,000 in the Q3 a year ago. At September 30, the default rate on the U. S. Mortgage insurance portfolio was 1.62%, up 10 basis points from 1.5 2% at June 30, 2023. Other underwriting and operating expenses in the 3rd quarter were $54,800,000 and include $13,500,000 of title expenses.

Speaker 3

Expenses for the Q3 also include title premiums retained by agents of $13,200,000 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 to GAAP may be found in Exhibit O of our press release. As a reminder, our consolidated expense ratio was 20% for both the Q2 and Q3 a year ago.

Speaker 3

As Mark noted, our holding company liquidity remains strong and includes $400,000,000 of undrawn revolver capacity under our committed credit facility. At September 30, we had $425,000,000 of term loan outstanding with a weighted average interest rate of 7.07 percent, up from 6.87 percent at June 30. At September 30, 2023, our debt to capital ratio was 8%. During the Q3, Essent Guaranty paid a dividend of $60,000,000 to its U. S.

Speaker 3

Holding company. Based on unassigned surplus at September 30, The U. S. Mortgage insurance companies can pay additional ordinary dividends of $290,000,000 in 2023. At quarter end, The combined U.

Speaker 3

S. Mortgage insurance business statutory capital was $3,300,000,000 with a risk to capital ratio of 10.3:one. Note that statutory capital includes $2,300,000,000 of contingency reserves at September 30. Over the last 12 months, the U. S.

Speaker 3

Mortgage insurance business has grown statutory capital by $181,000,000 while at the same time paying $300,000,000 of dividends to its U. S. Holding company. During the Q3, Essent Group paid a cash dividend totaling $26,500,000 to shareholders and we repurchased 102,000 shares for $5,000,000 under the authorization approved by our Board in May 2022. Now let me turn the call back over to Mark.

Speaker 2

Thanks, Dave. In closing, Essent continues to generate high quality earnings while our balance sheet and liquidity remains strong. Higher interest rates to turn over 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 Essent's initial public offering on the New York Stock Exchange. Since our IPO, Essent's book value per share has grown at a compound annual growth rate of approximately 19%, and Essent shares have delivered an annualized total return of approximately 12%.

Speaker 2

I want to thank our team for their dedication and contribution to Essent's 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 Essent's mission to promote and serve affordable and sustainable homeownership. Now let's get to your questions. Operator?

Operator

Your first question comes from the line of Bose George with KBW. Your line is open.

Speaker 4

Hey, Ed. Good morning. Actually, I wanted to ask just about buybacks. Has your sort of tone or view on buybacks Changed over the last year, just could we see being a little more active here? Just any thoughts there would be great.

Speaker 4

Yes.

Speaker 2

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 generally, you've heard me say this in the 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.

Speaker 2

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. So and the way to do that is obviously increase The numerator, I think given our capital position and growth, there's clearly some excess capital in the system. And part of that, The way we manage ROEs is primarily the dividend, right?

Speaker 2

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 really strong. And I think on repurchases there, I think we've it has become a little bit more dynamic. So I think we've changed a little bit over the past Kind of a year, Bose. We bought back $250,000,000 back in 2021 over 11 months.

Speaker 2

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?

Speaker 2

So you always want to have capital around PMIERs and other Potential capital needs. And then finally, where's the stock trading, right? So I think our view is we're all about growth in book value per share. And 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 when it trades up. So I think that depends.

Speaker 2

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 the world's always uncertain, probably a little bit more 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. 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.

Speaker 4

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 any color there would be great.

Speaker 2

Well, it's pretty early, right? I mean, we've seen potential changes come and go over the past 10 years. So 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 Essent, but again stay tuned for more.

Speaker 4

Okay, great. Thanks.

Operator

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

Speaker 5

Good morning. Thank you for taking my questions. Maybe to start with on pricing, obviously, always a big topic for investors. Just how would you characterize the current pricing environment? Anything's changed quarter over quarter there?

Speaker 2

No, I think it's been pretty consistent Really over the last 6 to 12 months in terms of just where it is in terms of where we see it in 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 I think the unit economics of the business are good. In terms of pricing, again, I'd like to take Step back and just try to give investors a little bit more context because I'm not sure it's the change in pricing has really as appreciated by the investor community. So we always talk about 3 changes to the business model since the GFC, right? You have Reinsurance, which has is out the mezz risk, which we think is important.

Speaker 2

There's the regulatory changes that are substantial, right? Qualified mortgage, The strength of the GSE 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 and 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.

Speaker 2

And I think that, again, it's not appreciated just how The pricing was really brought to the consumer 5 years ago. In order for a price change to be made in the Sure. You had to refile in all 50 rates. You had to change your card, one card. You had to usually take it to 2 or 3 of the top Banks in the country and really they decided where that because they didn't have this there was a system The inability of their systems to program in like 6 different cards, so they could only program in 1 card.

Speaker 2

What's going to happen to me here? They're going to program in the lowest card. So they're going to get 6 cards and whoever had the lowest, everyone was forced to that. So 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 You're right in terms of when you put 6 guys up against 1 lender, the lender had the pricing power in the industry.

Speaker 2

And I think with the engines, That's changed significantly now. We all file a range of rates. 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.

Speaker 2

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, Mihir, we must have raised pricing 12 times, different times Like in different places, maybe a tail here and 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.

Speaker 2

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 take this pick the spots where they want to be in much more much similar to how other insurance companies operate.

Speaker 5

Got it. Thank you. I really appreciate that. So to take a step back. Thank you.

Speaker 5

On the maybe switching gears a little bit to the title side, look, I understand you're building that business. It's a long term Clearly for you, it's not about a quarter or something like that. But as we 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 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 2, 4 quarters even as you look at the long term?

Speaker 2

Yes. No, it's fair enough, right? I mean, I think that you did hit the nail on the head. It is going to be a longer term build, Very much like Essent, and I think I alluded to it on maybe the February call, but the acquisition of Title was not dissimilar to us buying the Triad platform back in 2,009. It kind of gave us that base to back in 2009.

Speaker 2

It kind of 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, That really laid the foundation for building of Essent. Here that was in 2,009 and I was probably 18, Almost 24 months from starting to raise the money. So and that's 2,009.

Speaker 2

We didn't break even in 2012. So when we became Public in 2013, 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.

Speaker 2

We bought a 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 Essent's infrastructure, we're going to have to invest. We're very risk and control oriented.

Speaker 2

I mean, you're talking this is a company where we hired our Head of Internal Audit before we hired our 1st salesperson. So 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 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.

Speaker 2

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 that build Essent. And taking a step back here again, think about it, right?

Speaker 2

This is a company $150,000,000 a quarter, we're earning cash flows $600,000,000 $700,000,000 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.

Speaker 5

Great. Thank you. Thank you for taking my questions.

Operator

Your next question comes from the line of Rick Shane with JPMorgan. Your line is open.

Speaker 6

Hey, good morning, guys. Two questions on 2 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 depository building depository franchise, One of the things that they emphasized was that scale was not or efficiency was not a function of being on 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?

Speaker 6

Do you want to be a national Title insurance company or is the plan to be really concentrated regionally as you build the business?

Speaker 2

Yes. I think the answer is both. And the reason why Rick, really it's the business and as we acquired 2 separate businesses. So we're in the process of putting it into one kind of functional organization, Essent Title. So we'll have the agency services channel, which will service title agents and that will be focused on large states, right?

Speaker 2

I mean, it's pretty obvious where The premiums are coming from Florida, Texas, within the Southeast, parts of the Southwest and Northeast. And there are 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 scale that MI, right?

Speaker 2

You go and you hire Salespeople, salespeople go on call and title agents and again, doesn't happen overnight, right? This took us a long time on the on my 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 It's a lot more geared, it's centralized refinance. So it's a lot more geared to lenders.

Speaker 2

So that is national by so it's So 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. Sure. We will offer that out to our key lenders. We're not at that step, that phase right now.

Speaker 2

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 3 chat 2 channels, agency services, lender services. It will 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.

Speaker 6

Got it. Okay. Thank you. That's helpful. And then, the other question, and we've been asking this in Few different ways, but 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.

Speaker 6

And there tend to be some subsidies there in terms of buy downs. Curious how you're approaching that, in particular, the risk Associated with buydowns, whether they are short term or permanent?

Speaker 2

Yes. I mean, I think with buydowns, 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 got similar we've had similar questions around student loans, same thing with student loans, right?

Speaker 2

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 big concentration issues or things like that. I think it's really One of the things we've gotten asked this question too is just there's not enough supply in the country.

Speaker 2

So the fact that homebuilders are Putting supply out, I think longer term that's good, very good for the homebuilders. And clearly, in most of these are obviously first time homebuyers. So it's good for MI, But certainly, it's the concentration, certainly something you have to look at, but it's not something we're concerned about at this time. And Chris has a few words on this too.

Speaker 7

Yes. Hey, good morning, Rick. 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.

Speaker 6

Got it. Okay. Thank you, guys. Hey, and Mark, I think on a personal level, there's some congratulations in order as well.

Speaker 2

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.

Speaker 2

But yes, thank you, Rick.

Operator

Your next question comes from the line of Eric Hagen with BTIG. Your line is open.

Speaker 8

Hey, thanks. Congratulations, Mark. Hey, a quick modeling question upfront. You feel like the ceded premium of 5 basis points is a good way to think about modeling that going into next year?

Speaker 7

Yes. Hey, good morning. It's Chris. Yes, I think that's a reasonable range. I mean, really when you look at Certainly, our history would have been in that range.

Speaker 7

So that's reasonable from a modeling perspective.

Speaker 8

Okay, great. There's always Kind of 2 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.

Speaker 2

I think it's a good question. 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 could not pay and then you have severity issues. So I think we're more focused Because you can't control that.

Speaker 2

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 HPA and clearly we talked about the persistency angle helping us. And I think also so for newer originations clearly, right? I mean it's going to be higher DTI, it's obvious with 7%, 8% mortgages, so you're much more focused. You're not going to have and certainly not going to have that HPA growth.

Speaker 2

It's going to be in our view probably more flattish over the next 3 to 4 years. So I think it's a little bit No more on the borrower risk on that side.

Speaker 8

Okay. That's really helpful. Thank you, guys.

Operator

I will now turn the call back over to management for closing remarks.

Speaker 2

I'd like everyone to

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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