Blue Owl Capital Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essen Group's 2nd Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Conference.

Operator

After the speakers' remarks, there will be a question and answer session. Questions. Thank you. Phil Stefano, Vice President, Investor Relations, you may begin your conference.

Speaker 1

Thank you, Rob. 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 contains Essent's financial results for the 2nd quarter of 2023 was issued earlier today and is available on our website at essentgroup.com.

Speaker 1

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 ks with the SEC filed 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.

Speaker 2

Thanks, Phil, and good morning, everyone. Earlier today, we released our Q2 2023 financial results, which continue to benefit from our high quality insurance portfolio and favorable credit performance. Also, rising interest rates continue to drive higher investment income and elevated persistency, Which supports the growth of our in force portfolio despite pressure on new business volumes. Our long term outlook in housing remains constructive economy. We remain confident in our robust capital position and the strength of our buy, manage and distribute operating model.

Speaker 2

And now for our results. For the Q2 of 2023, we reported net income of $172,000,000 compared to $232,000,000 a year ago. As a reminder, our results last year were favorably impacted by the release of certain reserves associated with COVID related defaults. On a diluted per share basis, we earned $1.61 for the 2nd quarter compared to $2.16 a year ago, And our annualized return on average equity was 15%. As of June 30, our insurance in force was $236,000,000,000 A 9% increase compared to a year ago.

Speaker 2

Our 12 month persistency on June 30 was 86% And approximately 75% of our in force portfolio has a note rate of 5% or lower. We expect that the current level of rate should support elevated persistency through the back half of this year. 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 92%, embedded HPA continues to benefit our business As the mark to market on the in force portfolio mitigates the risk of claims, especially in light of the supply constraints in housing inventory. On the business front, our industry remains competitive, while the pricing environment remains constructive. We continue to focus on optimizing our unit economics and leveraging our proprietary scoring engine, EssentEdge, in selecting and pricing long tail mortgage credit risk.

Speaker 2

Overall, we remain pleased with the business we are writing and the related expected returns. We continue to execute upon our diversified and programmatic reinsurance strategy, while focusing on optimizing our cost to reinsurance. During the quarter, we successfully executed the tender of 2 seasoned ILN deals, which retired $637,000,000 of bonds that did selling $281,000,000 of bombs covering production from August of last year through the first half of twenty twenty three. Our belief remains that access to multiple sources of capital is a key element of our operating model, and we are pleased with the executions of both the tender and the latest ILN deal. As of June 30, Essen Re's 3rd party annual run revenue are approximately $80,000,000 While our 3rd party risk in force is approximately $2,000,000,000 during the quarter, Essen RE continue to capitalize on current environment to optimize returns and contribute to the profitability of our franchise.

Speaker 2

Cash and investments As of June 30, we're $5,400,000,000 and the annualized investment yield for the 2nd quarter was 3.5%, Up from 2.5% a year ago, our new money yield in the 2nd quarter approximated 5%, providing continued tailwinds for our investment portfolio. As a reminder, for every one point increase in the investment yield, there is a roughly one point increase in ROE. We continue to operate from a position of strength with $4,700,000,000 in GAAP equity, access to $1,400,000,000 in excess of loss reinsurance and over $1,000,000,000 of available holding company liquidity. With a trailing 12 month underwriting margin of 78% In operating cash flow of $697,000,000 our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. Our strong financial performance affords us the ability to take a balanced approach between capital deployment and distribution.

Speaker 2

This includes the approximately $93,000,000 associated with the title acquisition we completed at the start of the 3rd quarter. Similar to when Essen restarted, we view Tidal as a long term and attractive call option for the future growth of the Essen franchise. Year to date through July 31, we repurchased approximately 1,100,000 shares for $46,000,000 Further, I'm pleased to announce that our Board has approved a common dividend of $0.25 We continue to see our dividend as a meaningful demonstration of the confidence we have in the stability of our cash flows and the strength in 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 Q2, we earned $1.61 per diluted share compared to $1.59 last quarter $2.16 in the Q2 a year ago. As Mark previously mentioned, our Q2 2022 results benefited from the release of approximately $63,000,000 of reserves associated with COVID related defaults from 2020. Net premium earned for the Q2 of 2023 was $213,000,000 and included $17,700,000 of premiums earned by Essent Re on our 3rd party business.

Speaker 3

The average base premium rate for the U. S. Mortgage insurance business in the 2nd quarter was 40 basis points consistent with last quarter. The net average premium rate was 33 basis points in the Q2 of 2023, down 1 basis point from last quarter, due primarily to the net impact of the successful ILN tender Mark discussed. Ceded premium increased to $39,500,000 in the 2nd quarter Compared to $33,600,000 in the Q1 largely due to the tender.

Speaker 3

Net investment income increased $2,000,000 or 5% in the Q2 of 2023 compared to last quarter due primarily to higher yields on new investments and floating rate securities resetting the higher rates. Other income in the second quarter was $8,100,000 which includes a 2.7 $1,000,000 gain associated with the fair value of embedded derivatives in terms of our 3rd party reinsurance agreements. This gain was largely due to a decrease in our derivative liability resulting from the reduction in outstanding insurance like notes from the completed tender offer. This compares to a $368,000 decrease in the fair value of these embedded derivatives in the Q1 of 2023. The provision for loss and loss adjustment expense was $1,300,000 in the Q2 of 2023 compared to a benefit $180,000 in the Q1 of 2023 and a benefit of $76,200,000 in the Q2 a year ago.

Speaker 3

At June 30, the default rate was 1.52%, down 5 basis points from 1.57% at March 31, 2023. Other underwriting and operating expenses in the Q2 were $42,200,000 a decrease of $6,000,000 from the Q1. The Q1 included higher transaction costs associated with our title acquisition and higher payroll taxes associated with the vesting of shares and incentive payments, which historically occur in the Q1. The operating expense ratio was 20% this quarter, a decrease from 23% for the Q1. We continue to estimate that other underwriting and operating expenses will be approximately $175,000,000 for the full year 2023, Excluding expenses associated with the title acquisition and related transaction costs.

Speaker 3

Income tax expense in the Q2 of 2023 Includes $5,300,000 of net discrete tax expense associated with prior year tax returns. For the balance of 2023, we currently estimate income tax expense will be a 15.2% annualized effective tax rate. During the Q2, Essent Group paid a cash dividend totaling $26,500,000 to shareholders and we repurchased $29,500,000 of shares under the authorization approved by our Board in May 2022. As Mark noted, our holding company liquidity remains strong and includes $400,000,000 of undrawn revolver capacity under our committed credit facility. At June 30, we had 425,000,000 term loan outstanding with a weighted average interest rate of 6.87 percent, up from 6.52% at March 31.

Speaker 3

At June 30, 2023, our debt to capital ratio was 8%. During the Q2, Essent Guaranty paid a dividend of $90,000,000 to its U. S. Holding company. Based on unassigned surplus at June 30, the U.

Speaker 3

S. Mortgage insurance companies can pay additional ordinary dividends of $278,000,000 in 2023. At quarter end, the combined U. S. Mortgage insurance business statutory capital was $3,200,000,000 with a risk to capital ratio of 10.5:one.

Speaker 3

The statutory capital includes $2,200,000,000 of contingency reserves at June 30. Over the last 12 months, the U. S. Mortgage insurance business has grown free capital by $181,000,000 while at the same time paying $300,000,000 of dividends to our U. S.

Speaker 3

Holding company. As Mark noted, effective July 1, 2023, Essen US Holdings acquired all the outstanding shares of the capital stock of Aegis National Title And all of the membership interests of Boston National Title for $92,600,000 in cash. The acquisition was funded using existing cash and short term investments and the purchase price is subject to customary post closing adjustments. Now let me turn the call back over to Mark.

Speaker 2

Thanks, Dave. In closing, our capital position, liquidity and underlying results remain strong. The high quality of our portfolio and strong employment are driving credit performance, Well, our interest rates are benefiting the persistency of our in force book and investment income. This strong operational performance continues to generate excess capital, which we will deploy using a measured approach between investment in growing our franchise and distribution. We remain confident in our buy, manage and distribute operating model and believe a measured approach to our capital is in the best long term interest of Essent and our stakeholders.

Speaker 2

Now let's get to your questions. Operator?

Operator

And your first question comes from the line of Maher Bhatia from Bank of America. Your line is open.

Speaker 4

Hi, good morning and thank you for taking my questions. I wanted to start by asking about the reinsurance transaction. Are these the first of these debtors that you've done, did they have an impact on premiums in the quarter? I think one of your competitors talked about That a little bit having done them for the first time this quarter. Just wondering if you could maybe give us some color on that, just the economics of the transaction, how you expected to impact future quarter ceded premiums or premium rate.

Speaker 4

Thank you.

Speaker 2

Sure. Hey, Maher. Nice to hear your voice. A couple of things. Yes.

Speaker 2

On the tender, think about it, I think around $8,000,000 of it was additional ceded premium For this quarter, that's why you saw the jump. But longer term, we should see approximately $40,000,000 of savings. So all in kind of 30 ish, which you'll see a reduction in the CEDA premium in future years. And that's really Those are the 2 deals that really didn't give us a lot of either PMIERs Capital or Capital Economic Capital Credit. So we don't see us Tendering any other deals at this time, but we again, that was a unique circumstance because those deals got locked out With the COVID default, so they really didn't pay down.

Speaker 2

So it's a good opportunity. We talked about in past quarters optimizing That reinsurance costs, so this is a good example of us able to do that.

Speaker 4

Got it. Thank you. That is Quite helpful. And then just switching gears to the title business maybe now that the transaction is closed. Maybe talk a little bit about What your initial focus is going to be?

Speaker 4

How fast do you think the integration can go to the extent there is much integration to do? And just what should we be expecting in the near term from that business, even if it's just at a really high level from like a revenue standpoint or something? Thank you.

Speaker 2

Yes. I mean, again, we just closed it just a little over a month ago. So we're really just getting started on the integration. Here, it's 2 different companies. We'll run them as kind of 2 divisions within Essent Title.

Speaker 2

So the integration process is really going underway and it's probably it's quite extensive. Again, I would look at this, I said this back in February. This acquisition was more akin to us buying the Triad platform back in 2,009. With that, we got an operating platform. We got some really good people, but it was we were essentially a startup.

Speaker 2

And the title business that we acquired is It's not quite a startup, but it's more startup like. So we're going to approach it that way. We're going to build out the infrastructure, improvements to be made Around the system, there's going to be investments, and we're going to take a long term approach. So like I said, again, in the script, Think of it as a call option for the investors. There's 2% of our GAAP equity.

Speaker 2

This is a 3, 5, 10 year program. This is the chance for us to build another significant operating business, but they don't happen overnight. I mean, when we started Essen, We wrote our we started building it in 2009. We did our first loan in 2010. We didn't breakeven at 2012.

Speaker 2

So This is not going to be very material at all from a financial perspective. So I wouldn't model much at all for the next. I think it's going to take us Realistically 12 to 18 months just to stand it up to get it to where we can foresee kind of future growth both on the agency side and The lender services side, it's these are again, these are very these are smaller companies, and that's really what we wanted. We wanted this startup type platform To allow us to kind of build out, but again, near term financially from a modeling perspective here, I wouldn't put much in.

Speaker 4

Okay. Understood. Thank you. Thanks for the

Operator

And your next question comes from the line of Rick Shane from JPMorgan. Your line is

Speaker 5

open. Hey, guys. Thanks for taking my question this morning. Look, you guys have been consistently innovative both from an operational perspective, but also in terms of your use of technology. We are arguably on the cusp of maybe the next really significant technology evolution in terms of machine learning and AI.

Speaker 5

I am curious as a data heavy company, but also a midsized business, with midsized resources. How you will take advantage of this and how you're pursuing this and particularly anything you're seeing through your venture portfolio that's intriguing?

Speaker 2

Yes. Rick, I've taken a step back, just on the MI side, let me try to break it into pieces, right? On the MI side, We're pretty far in, in terms of the use of artificial intelligence and machine learning around the engine, And we have been for quite a while. It's all hosted in the cloud. Most of our operating platform now is in the cloud.

Speaker 2

So we've kind of shifted that into the cloud, which there's a big protection from a cyber perspective. We believe A lot of computing power up in the cloud,

Speaker 1

but there's a cost to

Speaker 2

it too. So you put out a good point. We're not we don't have endless resources. So you're really just like I talked about on the reinsurance side, you have to optimize kind of the IT costs. I would say we're in a really good spot On the Mi side, there's going to be some improvement that we're going to make.

Speaker 2

We're able to leverage the engine now around underwriting. So kind of like an automated underwriting system that will help us on the non delegated piece, again, from an efficiency standpoint. And we've continued to use over the years technology to lessen those costs. So less underwriter input, more underwriter analysis. So We constantly look at that.

Speaker 2

And we'll have, I would say, continued improvements on the Mi side, but it's a little bit of the law of diminishing returns, right? We only have 400 folks on the Mi side. So there's not a ton of efficiencies continue to be made other than you'll make the model better. On the title side, that's a different story, right? That's when you think about our business on the MI side, the 3 main risks are credit, regulatory and operational, kind of in that order.

Speaker 2

I think on the title side, operational risk is probably number 1. Regulatory is number 2, probably not as severe as on the MI side per se. And third is credit. They don't really have a lot of credit risk because they do the work so well. I mean, if you do the title search well and the curative work well, you shouldn't have a lot of claims.

Speaker 2

So there's a misnomer in the title business that they don't there's not a lot claims. There are not a lot of claims because they do a good job. That number one risk on the operational side is it's very people intensive. So there So technology, it's definitely a way to lessen the amount of input and people that you need on that side of the business, but it's not that simple. It's going to take a while.

Speaker 2

And I think the technology on that side is pretty we're pretty early in the process. That's we're going to have to Make investments on the title side around technology. The 2 big things on the title side, in order to scale. Longer term, are you going to need to have more control over your operating platform and more control over the data? And I think that's Smaller companies, they just use off the shelf software.

Speaker 2

They use the larger company's data. Longer term for Essent, Longer term, meaning 5, 10 years, Rick. You have to take control of that. I mean, we own that on the MI side. We could have never built out our pricing engine.

Speaker 2

If we had to rely on competitors for data or for access to the system, it's almost It wouldn't have been done. So you're going to have to have that same look on the title side. In terms of ventures, yes, we actually we're looking at some Funds that are dedicated to artificial intelligence and we're close on a couple. And there, they don't really do anything in financial Services. So there the key is what can you learn, what are they investing in that's applicable to the financial services side.

Speaker 2

So it's a little bit of a jump. We're seeing some in some of the portfolio companies, but I don't think I think we're just kind of scratching the surface. So again, that's Part of when we talk about ventures, it's really outsourced corporate development. We're looking for companies and funds Well, we can learn things that can now improve the core business. With Title now, we have 2 core businesses potentially to improve.

Speaker 2

So actually, the impact venture. It should be a little bit wider going forward.

Speaker 5

Got it. Mark, thank you for the answer.

Operator

And your next question comes from the line of Bose George from KBW. Your line is open.

Speaker 6

Hey, guys. Good morning. Actually, I wanted to ask just about the ILN transaction you did. How would you compare the execution in the ILN market with What you're seeing in the XOL, the traditional reinsurance market?

Speaker 2

Yes, both. We had pretty good execution On the island side, I think significantly better than we had last year and probably closer to the 2021 levels. I think the more important and you've heard me say this before, the more important aspect of reinsurance isn't so much quarter to quarter pricing. Yes, heck, we did. It was a nice job this quarter.

Speaker 2

There wasn't a lot of supply in the market. We hit the market at the right time, good for us. But that's not really the importance of it. The importance of it is really the sustainability and the duration of the reinsurance market. And because it's by manage and distribute operating model, but this is the So you're really looking for the continued availability.

Speaker 2

And Financial Services 101 is really multiple sources of capital. So We're feeling better, I would say, quarter by quarter as to the ultimate sustainability of the reinsurance market. It's been tested twice. It was tested during 2020 when clearly the market shut down for a little bit, but did open up in the Q4 and there was transactions. And I thought last year, to be honest, was the biggest test.

Speaker 2

You're talking about volatility and upward movement in rates During the year, which caught everyone by really whipsawed HPA at all time levels, media Crying that HPA is going to be up. They know it's going to crash. The MIs it's going to be hard for the MIs to do well. And yet, we did an XOL and ILN and a quarter. Sure.

Speaker 2

So the markets were open, albeit at higher prices. And now as we get into a year 12 months ago, the environment Completely different. Inflation has really subsided. HPA has flattened out, has grown a little bit in certain sectors. So there's a credit still remains strong, and I think investors realize that.

Speaker 2

So I think again, good I wouldn't be surprised if you See other entrants into the ILN market because I think that's it looks like it's a good time to be tapping that side of the market.

Speaker 6

Okay, great. That's helpful. Thank you. And a couple of little modeling questions. The other income line item was up, what was driving that?

Speaker 3

Yes, so it's a stable livestock. Other income, and there's a handful of things in there, but I would say probably the principal item of moving that up a little bit. So, yes, a couple of things, right? I mentioned that the derivative is in there. So that was really the big thing that We had derivative gain this quarter.

Speaker 3

And last quarter, we had a small unfavorable valuation. So that's really That's going to bounce around associated with the derivatives.

Speaker 6

Okay, great. And then actually just the share count was down a little bit as well. So just curious what drove that?

Speaker 2

Yes. We've repurchased I think we've done 1,100,000 shares repurchased through this year. We started in March, Bose, given a lot of that uncertainty with the KB index. So we felt like, again, purchasing shares in that 90% to 95% book value really, really is pretty accretive to book value per share growth. So Yes.

Speaker 2

That was really the that's really the mover.

Speaker 6

Okay, great. Thank you.

Speaker 3

Sure.

Operator

Your next question comes from the line of Doug Harter from Credit Suisse. Your line is open.

Speaker 7

Thanks. Mark, can you talk about the pricing dynamics you saw in the second quarter and kind of Whether that changed kind of over the course of the quarter?

Speaker 2

We think I think prices continue to move up. I mean, we were our average premium on new insurance written was probably up equally both in the first In 2nd quarters, I would say in the Q2, probably a little bit more pricing around the tails, less base increases. But I think we're at a good and we said it in the script. I mean, it's a pretty competitive it's always a competitive market, but it's I think the pricing from a normalized standpoint, right, and we say normalized at 2% to 3% claim rate. I think the pricing is the unit economics of the pricing Same claim rate.

Speaker 2

I think the pricing is the unit economics of the pricing are kind of within that 12% to 15% range. I think given the uncertainty though, Doug, right. I mean, we still think things will the recession should it's the long awaited recession. We're still believing it's in the 20 4 time period as the impact of higher rates kind of work their way through, Especially smaller businesses, the consumer has a lot of cash now and is still employed, but if Smaller businesses start to lay off. So you could start seeing that impact in 2024.

Speaker 2

So we're still there still is more price increases to be had. Again, from a market standpoint, we're always shooting to be in that mid Midstream share, market share. And to the extent that we can optimize pricing around that, I think we'll continue to do that. And I see that In the industry, we've said this from the get go, if you're number 1 in share, it's because you have the lowest price. It's It's almost all best execution across both the engine and card.

Speaker 2

So there's really no hiding that. So I think the game is, is how do you optimize Your premium and maintain that share. And I think the whole industry has done a good job with it. I mean, it's been nice to see. I've heard for years that The industry

Speaker 4

is

Speaker 2

it's not disciplined and I think that's the furthest thing from the truth. I think the key though It's really the advent of the pricing engines, right? Industry has changed under 3 primary methods from the last 10 years. 1, which People don't talk too much about and not enough about is just the credit quality of the book and that's really a result of both the GSEs, The improvements around their engines, the qualified mortgage, which kind of keeps a lot of that, I would say, poor quality business outside of the GSE. So the GSEs have really been a great guardrail.

Speaker 2

2nd has been reinsurance, which we talked about, our ability to offload that risk. And the third is the pricing engines itself, just the base engine, Forget our ability to optimize score, the Essent score. That's great. That's a little bit different when I'm talking about the engines itself And the ability to make changes on it, have really changed the industry. So we were able to react during COVID.

Speaker 2

The industry raised pricing in the face of this uncertainty. And then this past year, the ability to raise pricing in Across different MSAs, different tails, whatever appetite the MI industry any participant had, They were able to impact that change, which again, 5, 10 years ago, you couldn't do it. You couldn't institute a price increase every quarter with a rate It would have been virtually impossible with all the lenders out there having to change their system, needing regulatory approval. So this ability around the engine to make these, I would say, more micro changes, it's created pricing power for the mortgage insurance More so than people really realize. And I think that's the ability we've always had the discipline.

Speaker 2

We just didn't have the ability to affect that kind of pragmatically put that to someone to work day to day because of How the mechanism worked with rate cards. And I think the engine has been a real breakthrough for the industry and gives us a lot more of that flexibility That other industries enjoy in terms of pricing credit risk.

Speaker 7

All right. Appreciate the answer, Mark. Thank you. Sure. Your next question comes from the

Operator

line of Eric Hagen from BTIG. Your line is open.

Speaker 8

Hey, thanks. Good morning. Maybe kind of like a bigger picture question here. I mean, if loss rates across the industry stay this low into early 2024 or mid-twenty 24, How do you see that potentially changing the competitive dynamic like in the industry itself as we look into next year? Like the fact that everyone seems to be generating excess returns With loss rates being this low, I mean, how do you see that affecting pricing, competition, maybe even your own policy towards capital return as we look to next year?

Speaker 8

Thank you, guys.

Speaker 2

Yes. It's a good question. I would say I wouldn't think it would impact pricing, Eric, because remember, we're pricing for that normalized 2% to 3% credit. And part of how it Part of the results are impacted by the economy of which we have no control over, right? So if losses are better, that will then generate more excess Capital.

Speaker 2

And then there's choices, right? Again, there's choices to return that to shareholders via dividends or repurchases or to invest outside of the core business. And I think that will be the real result. I would be surprised if, again, just given the dynamics, If losses are lower, again, none of us really these are actuarial based models. So we don't price quarter to quarter and say, hey, losses are lower, let's go Lower the pricing on new production.

Speaker 2

And again, just given the competitive dynamics around pricing, if you lower price To again, bring in more business, it's easily matched, right? So there again, it's there is no there's a great that's where when we talk about Kind of the pushes and the pulls around pricing. And then just given the information that we all have, everyone can kind of see where the market is going. So it would be a short lived game and you really would just be giving away economics as opposed to saying, hey, we're going to price For normalized unit economics, 12% to 15% returns, the result of a lower provision is excess cash. How do we deploy that?

Speaker 2

And I think taking a step back, again, not quarter to quarter or even next year, Eric, my view is the winners and losers in MI and Not in that, it's not a binary, we could all be winners, is really how the different companies Employ that excess capital, right? And you can't charge that quarter by quarter. It's really going to be over the next 3 to 5 years. And I think it's Some that choose to return it all and shrink will have less choices. Others, we're in the other camp, right?

Speaker 2

We're in I can't speak to other strategy. Everyone has I mean, all the strategies seem to be pretty sound, and it's in the eye of the beholder. For us, We have a reinvest cash and grow mentality. We just happen to believe that longer term growing book value per share and We've grown at 19% per annum since we went public. It'll be harder as we get bigger, but that's the challenge.

Speaker 2

And it's going to force you to put capital to work And to continue to grow that book value per share, I think that's what we're focused on. And I think, again, a lower result On the provision would give us more cash to pursue that goal.

Speaker 8

Right on. Thank you guys very much.

Speaker 7

Sure.

Operator

Your next question comes from the line of Geoffrey Dunn from Dowling and Partners. Your line is open.

Speaker 9

Thanks. Good morning. I fell off for a minute, so I'm not sure if I missed this, but can you provide the dollar impact of the tender offers on ceded premium this quarter?

Speaker 2

$8,000,000 I think was an additional ceded premium. Got

Speaker 4

it. And then I wanted to

Speaker 9

follow-up on pricing. And so I understand your pricing For the longer term credit, normalized credit, how do the mechanics of investment yield And higher interest rates affecting cost of capital factor into that. Obviously, we're thinking forward to when, let's say, it's a soft landing and the economic expectations get better. I'm trying to understand kind of the puts and takes that might help sustain pricing at these improved levels versus what might be given back as economic expectations hopefully improve.

Speaker 2

Yes, good question. Again, I think on the yield, That's another factor where our yields historically have been kind of in that 2% to 3% range, putting new money to work That's a pretty significant increase both in nominal dollars, right, fall into the bottom line And certainly improves the unit economics. But however, we when pricing, we use probably a more normalized investment yield, kind of Closer to like a 3 ish percent. So we don't incorporate that into our pricing. It's really kind of the short answer.

Speaker 2

It's really driven around credit. We look at pricing on an unlevered basis. So we don't really look at the cost of debt. We don't have a lot of debt anyway for to make meaningful. I think again, Jeff, if you're looking If the economy brightens, I'm not sure that lowers pricing.

Speaker 2

I would find it hard to believe. In fact, I think it's nothing would surprise me. But again, when you're pricing for a normalized, just do the simple math, 2% to 3% claim rate, the capital that we hold, either or PMIERs, that normal ish expenses and investment income, that NIW should have a forehand on it. And if it does, you're probably going to have good economics. You start driving it down to where it was at the end of 2021 2022.

Speaker 2

There's just not good economics. And I don't we were pretty outspoken about it then. And that's one of the reasons to the earlier question With Eric, we're going to continue to look for other places to allocate capital because you don't want to be in that situation where you have to follow the market down. And I think that's we have to be careful of. 1 of our one of the 6 MIs is part of a much larger insurance company and they do a fantastic job of allocating capital so they can move in the market and out of the market.

Speaker 2

And I think that's when you look at Companies that you want to emulate. I think that's one we can't emulate their strategy because we don't have their experience on the P and C side. But Creating choices around allocating capital allows you that also affords you the ability to stay more disciplined.

Speaker 9

Okay. And then obviously, the risk to your statement is different views of what normalized credit Actually is. Is it 2% to 3% CUM or is it 1.5% to 2%. Where's your general sense or confidence that the industry is aligned with your assessment of Formless Credit.

Speaker 2

I don't know. I mean, I can't really speak to them. I don't I just Think about the big picture, 2 or 3 loans out of 100 going bad doesn't sound like super aggressive to me. It seems pretty normalized. So I think when you're saying 1 ish, I think that's where you're probably moving a little bit.

Speaker 2

That's a you only need a small bump before that number is way off. So I think that's Again, when the pricing drove down to that level, that's almost you had to believe that it was probably less than 1. So it was really hard to make the math work in my view. And I'm so I can't really comment on what others think. It's just I think our view, which has been there for a while and it's given The credit criteria of the book, which is a good book, but it's still a high LTV book.

Speaker 2

So I think again, I think that's a pretty I think it's a pretty pragmatic assumption on our part.

Speaker 9

Okay. Thank you.

Speaker 2

You're welcome.

Operator

And there are no further questions at this time. I will now turn the call back over to management for some final closing remarks.

Speaker 2

Thank you, operator, and thanks, everyone, for participating today, and have a great weekend.

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Earnings Conference Call
Blue Owl Capital Q2 2023
00:00 / 00:00
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