Essent Group Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 1, 2024

There are 10 speakers on the call.

Operator

At this time, I would 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. And after the speakers' remarks, there will be a question and answer Thank you.

Operator

And I would now like to turn the conference over to Phil Stefano. You may begin.

Speaker 1

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 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 2024 which is issued earlier today and is available on our website atessentgroup.com.

Speaker 1

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 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 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.

Speaker 1

Now let me turn the call over to Mark.

Speaker 2

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

Speaker 2

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 Q3 of 2024, we reported net income of $176,000,000 compared to $178,000,000 a year ago.

Speaker 2

On a diluted per share basis, we earned $1.65 for the 3rd quarter compared to $1.66 a year ago. On an annualized basis, our return on average equity was 13% in the 3rd quarter. As of September 30, our U. S. Mortgage insurance in force was $243,000,000,000 a 2% increase from a year ago.

Speaker 2

Our 12 month persistency was approximately 87%, relatively flat compared to last quarter with nearly 65% of our in force 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 in force remains strong with a weighted average FICO of 7.46% and a weighted average original LTV of 93%. Credit performance in the 3rd 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.

Speaker 2

Newer vintages continue to perform in line with our expectations. On the business front, we are monitoring the potential fallout from Hurricanes Saline 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 and L impact may be muted. During the Q3, we closed our Kent Ratner Re ILN transaction providing us with $363,000,000 of fully collateralized excess of loss coverage.

Speaker 2

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 seeding a meaningful portion of our mezzanine credit risk. Cash and investments as of September 30 were $6,400,000,000 and our new money yield in the 3rd quarter was nearly 5%. The annualized yield for investments available for sale in the 3rd 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 $5,600,000,000 in GAAP equity, access to $1,700,000,000 in excess of loss reinsurance and a PMIER sufficiency ratio of 186%.

Speaker 2

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.

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 $1.65 per diluted share compared to $1.91 last quarter and $1.66 in the Q3 a year ago. Our U. S.

Speaker 3

Mortgage insurance portfolio ended September 30, 2024 with insurance in force of $243,000,000,000 up $2,300,000,000 compared to June 30 and 2% higher compared to the Q3 a year ago. Persistency at September 30 was 86.6%, largely unchanged from 86.7% last quarter. Net premiums earned for the Q3 were $249,000,000 and included $17,100,000 of premiums earned by Essent Re on our 3rd party business and $17,700,000 of premiums earned by the title operations. The base average premium rate for the U. S.

Speaker 3

Mortgage insurance portfolio for the Q3 was 41 basis points consistent with last quarter. And the net average premium rate was 35 basis points for the 3rd quarter, down 1 basis point from last quarter. Net investment income increased $1,300,000 or 2 percent to $57,300,000 in the Q3 of 2024 compared to last quarter due primarily to higher balances. Other income in the Q3 was $7,400,000 compared to $6,500,000 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 3rd party reinsurance agreements.

Speaker 3

In the Q3, we recorded a $1,200,000 decrease in the fair value of these embedded derivatives compared to a $732,000 increase recorded last quarter. In the 3rd quarter, we recorded a provision for losses and loss adjustment expense of $30,700,000 compared to a benefit of $334,000 in the Q2 of 2024 and a provision of $10,800,000 in the Q3 a year ago. At September 30, the default rate on the U. S. Mortgage insurance portfolio was 1.95%, up 24 basis points from 1.71 percent at June 30, 2024.

Speaker 3

Other underwriting and operating expenses in the 3rd quarter were $57,300,000 and include $14,800,000 of title expenses. Expenses for the Q3 also include title premiums retained by agents of $9,600,000 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.

Speaker 3

For the 9 months ended September 30, 2024, other underwriting and operating expenses excluding our title operations totaled approximately $131,000,000 We are revising our guidance for this metric from $185,000,000 previously to approximately $180,000,000 for the full year 2024 as a result of disciplined expense management along with higher ceding commissions from quota share reinsurance transactions. As Mark noted, our holding company liquidity remains strong. As we discussed last quarter, on July 1, we issued $500,000,000 of senior unsecured notes with an annual interest rate of 6.25% that mature on July 1, 2029. Approximately $425,000,000 of the proceeds were used to pay off the term loan outstanding as of June 30. And interest expense in the 3rd quarter includes $3,200,000 of expense associated with this repayment.

Speaker 3

At September 30, 2024, our debt to capital ratio was 8.1%. Additionally, effective July 1, we entered into a 5 year $500,000,000 unsecured revolving credit facility, amending and replacing our previous $400,000,000 secured revolving credit facility. Combined, these transactions provide Essent with access to approximately $1,000,000,000 in capital. No amounts were outstanding under the revolving credit facility at September 30, 2024. At September 30, Essent Guaranty's PMIER's efficiency ratio excluding the 0.3 COVID factor remained strong at 186 percent with $1,700,000,000 in excess available assets.

Speaker 3

During the quarter, Essent Guaranty paid a dividend of $58,000,000 to its U. S. Holding company. The U. S.

Speaker 3

Mortgage insurance companies can pay additional ordinary dividends of $267,000,000 in 2024. At quarter end, the combined U. S. Mortgage insurance business statutory capital was $3,600,000,000 with a risk to capital ratio of 9.7:one. Note that statutory capital includes $2,500,000,000 of contingency reserves at September 30.

Speaker 3

Over the last 12 months, the U. S. Mortgage insurance business has grown statutory capital by $275,000,000 while at the same time paying $220,500,000 of dividends to our U. S. Holding company.

Speaker 3

During the Q3, Essent Re paid a dividend of $87,500,000 to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $29,500,000 to shareholders and we repurchased 170,000 shares for $9,600,000 under the authorization approved by our Board in October 2023. Now let me turn the call back over to Mark.

Speaker 2

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.

Speaker 2

Operator?

Operator

Thank you. And we'll now begin the question and answer session. And your first question comes from the line of Terry Ma with Barclays. Your line is open.

Speaker 4

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?

Speaker 2

Terry, it's Mark. There was a little bit, but it was pretty minimal, mostly coming from barrel, not from the newer ones. We should see we should definitely see some noise in the Q4 on those.

Speaker 4

Okay. Got it. So if I look at the rate of increase year over year new notices, it's kind of accelerated each of the last three quarters. Are we starting to see the effects of kind of vintage seasonings 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?

Speaker 2

Yes. 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 3rd and the 4th quarter.

Speaker 2

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 November, December. So I think we're starting to see a little bit of a normalization of that.

Speaker 2

Looking forward, it's hard to tell. Again, we're still levered mostly to unemployment and pretty strong portfolio. Here's an interesting fact for you though, just when you kind of think through the provision or the defaults starting to grow. 1, they're right around 16,000 defaults at the end of the quarter. We were roughly 15,000 at the end of last year.

Speaker 2

So it's gone up, but 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 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.

Speaker 2

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.

Speaker 5

Okay, got it. That's helpful. Thank you.

Speaker 2

Sure.

Operator

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

Speaker 6

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

Speaker 2

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

Speaker 6

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

Speaker 2

It's been pretty consistent, Doug.

Speaker 3

Okay. Thanks, Mark. Sure.

Operator

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

Speaker 7

Hey, good morning. Actually just a follow-up on Doug's question on the new notices. Are the loan sizes getting bigger? I mean in terms of just because the provision for new notice the way will be calculated went up as well. So just curious how much loan size is impacting that?

Speaker 3

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

Speaker 2

Yes. I mean just to give you a sense of that Bose, the average loan size for our insurance in force right now is right around 290,000 dollars when historically it was probably 226. And you're also seeing that on the front end, right? And then we talk about the insurance and Forest portfolio has been relatively flattish over the past years. So a lot of it caused by low originations.

Speaker 2

But the loan size of our portfolio has continued to grow. So new originations, NIW back in, say, 2017, 2018 was like 200 and 40,000. This past year, it's probably 380,000. So when you think about growth in the portfolio and just look at units, right, we probably did about 130,000 units last year. We'll do less than that this year.

Speaker 2

That's really reflective of the environment, kind of that whole transactional part of the business. We originated, I think between 2017 2018, so well before COVID, kind of normalized housing, we were right around between those 2 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 kind of the growth in the portfolio.

Speaker 7

So great. That's helpful. Thanks. And then just in terms of the commentary you made on, we might see some noise around the storms in 4Q. For those notices, do you provision for that since they will should be excluded from the losses?

Speaker 2

We may. We haven't decided yet. We haven't seen we'll have to wait to see that the numbers come in. We did just to give you guys some color, remember back in 2017 when we had the last storms, we ended up we did do it 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.

Speaker 7

Okay, great. Thanks.

Operator

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

Speaker 5

Hi, good morning and thank you for taking my questions. 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.

Speaker 5

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 talk maybe give us some view on like 25 or like just as things normalize, what should the default rate you think normalize to?

Speaker 2

Here, our inventory default jumped $1500,000,000 from September of 'twenty three to December of 'twenty three. So it's again, I think, again, I can't do your jobs for you. I do think, I think, there's going to 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.

Speaker 2

But I would say, yes, given the environment and the seasoning, just again 32 months, it wouldn't surprise me to see the defaults increase. 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.

Speaker 2

So again, I think it's just normalization of the default inventory.

Speaker 3

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 increasing defaults in the second half of the year starting with the third in the 3rd and 4th quarters kind of picking out maybe in January and then kind of falling back in the 1st 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 we have had a lot of disruption from COVID and the normal trend. I think this is starting to come back to normal seasonality.

Speaker 5

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 has there been any change in philosophy, any like what's driving that?

Speaker 2

No, there's not I think what we're there, the change is really getting back to our normal mix. During kind of 'twenty two when short rates 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 quarter plus is 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.

Speaker 3

Got it. Okay.

Speaker 5

Thank you for taking my questions.

Speaker 2

Sure.

Operator

And your next question comes from the line of Melissa Wedel with JPMorgan. Your line is open.

Speaker 8

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

Speaker 2

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 Q4 and we'll update everyone in February.

Speaker 8

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?

Speaker 9

This is for Melissa. This is Chris. And your question pertains to the hurricanes.

Speaker 6

Just to clarify the forbearance.

Speaker 9

Are you referring to the COVID forbearance that ended last November? Just trying to get a sense.

Speaker 8

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

Speaker 9

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, 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.

Speaker 2

Yes, 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 have right party contact.

Speaker 2

You have to talk to the borrower. So what we think was 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 to. So again, it's more of the normalization. We used to see just a lot of noise.

Speaker 2

I think you're going to see less of it. And to our point earlier, more normalization around kind of defaults and cures.

Speaker 8

Okay. Thanks for clarifying.

Speaker 3

Sure.

Operator

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.

Speaker 2

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

Operator

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

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