Q1 2022 Essent Group Ltd Earnings Call
Ladies and gentlemen, thank you for standing by.
My name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the Essent Group limited first quarter 2022 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.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one. Thank you. It's now my pleasure to turn today's call over to Mr. Phil Stefano Vice President of Investor Relations. Please go ahead.
Thank you Brent good morning, everyone and welcome to our call. Joining me today are Mark <unk>, Chairman and CEO and Larry <unk> Chief Financial Officer also on hand for the Q&A portion of the call is Chris Curran President of Essent Guaranty.
Our press release, which contains essence financial results for the first quarter of 2022 was issued earlier today and is available on our website at Essent group Dot com prior.
Prior to getting started I'd 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.
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-K filed with the SEC on February 16th 2022, 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, Phil and good morning, everyone. Today, we released our quarterly financial results, which continue to reflect the favorable credit performance of our portfolio.
For the first quarter of 2022, we reported net income of $274 million as compared to $136 million a year ago. Our first quarter results benefited primarily from the release of approximately $100 million of our Covid reserves associated with defaults from the second and third quarters of 2020.
On a diluted per share basis, we earned $2 52 for the first quarter compared to $1 21, a year ago and our annualized return on average equity was 26%.
From a macro standpoint, while rising rates and strong home price appreciation have started to challenge affordability in housing demand. We believe the structural outlook for the housing market is positive the under supply of housing should support home prices in the short term while favorable demographic trends should continue to bolster housing demand in the long term.
At March 31, our insurance in force was 207 billion.
A 5% increase compared to $197 billion a year ago.
The credit quality of our insurance in force remains strong with a weighted average FICO of 746, and a weighted average original LTV of 92%.
Strong home price appreciation in recent years has enabled the accumulation of embedded home equity for a material portion of our book.
While home price growth is likely to moderate going forward. This embedded value should mitigate the risk of future claims.
Our 12 month persistency at March 31 was 69%, while three month annualized persistency was approximately 80%.
In addition, 78% of our insurance in force is comprised of 2020 and later vintages with a weighted average note rate in the low 3% range.
As a result, our in force portfolio is well positioned in a rising rate environment as higher rates should translate to higher persistency.
We continue to X upon our diversified and programmatic reinsurance strategy in the first quarter, we closed a 20% quota share transaction with a panel of highly rated reinsurers to provide forward protection for our 2022 business. Also we are currently in the market to execute an excess of loss transaction, which is expected to provide.
Forward reinsurance coverage on an additional 20% of our current year business.
As of March 31, approximately 90% of our portfolio is reinsured.
We operate from a position of strength with $4 2 billion in GAAP equity access to $2 6 billion in excess of loss reinsurance and approximately $1 billion of available liquidity.
With trailing 12 month underwriting margin of 93% and operating cash flow of $702 million, our franchise remains well positioned from an earnings cash flow and balance sheet perspective as evidence of this essent guaranty remains the highest rate of mono line in our industry at single lay by a M best <unk> III <unk>.
<unk> and Triple B plus by S&P.
As of March 31, our book value per share was $38 98.
An increase of 12% from $34 75, a year ago.
Since going public in 2013, our annualized growth rate and book value per share is 21%.
We continue to believe that success in our business is best measured by growth in book value per share.
Our reinsurance entity Essent re continues to write profitable GSE business supporting our MGA clients and taking advantage of the increased supply and improved pricing in the GSE risk share market ever.
<unk> to date Essent re has earned over $200 million of income from its third party business.
We continue to make investments through versant ventures, and generating information our financial returns the carrying value of other invested assets on our balance sheet is $213 million of which $187 million relates to ever to date investments through the first quarter of 2022.
These investments have created $82 million of value of which $56 million has been returned to us as realized proceeds.
We remain committed to managing capital.
But our long term, taking a measured approach to distribution and exhibiting patients to maintain and strengthen our balance sheet in general we favor attractive investments over share repurchases as the better value creator for shareholders and the company over the long term however.
However, we also recognize that returning capital to shareholders generate meaningful returns for investors.
Finally, given our financial performance during the first quarter I am pleased to announce that our board has approved a <unk> <unk> per share increase in our dividend of 21.
This is the fifth consecutive quarterly increase and represents a 24% increase from a year ago, which we believe is a meaningful demonstration of stability in our earnings and cash flow.
Im also pleased to announce that our board has authorized a new $250 million share repurchase program now let me turn the call.
Thanks, Mark and good morning, everyone I will now discuss our results for the quarter in more detail.
For the first quarter, we earned $2 52 per diluted share compared to $1 64, since last quarter and $1 21 in the first quarter a year ago.
Net premium earned for the first quarter of 2022 was $215 million and included $12 million of premiums earned by Essent re on our third party business.
The average net premium rate for the U S mortgage insurance business in the first quarter was 39 basis points, a decrease of one basis point from the fourth quarter.
Net investment income increased $1 million or 4% in the first quarter of 2022 compared to the fourth quarter of 2021 due to an increase in the average balance of our investment portfolio and an increasing yield.
Net yield on new money invested in the first quarter of 2022 was two 4% compared to one 9% in the fourth quarter of 2021.
Income from other invested assets in the first quarter was $25 million <unk>.
Including $15 million of net unrealized gains compared to $15 million, including $12 million of net unrealized gains recorded in the fourth quarter of 2021.
Yeah.
The provision for losses and loss adjustment expenses was a benefit of $106 9 million in the first quarter of 2022.
Compared to a benefit of $3 4 million in the fourth quarter of 2021, and a provision of $32 million in the first quarter a year ago.
As a reminder, we provided reserves for the defaults reported to us in the second and third quarters of 2020, using a 7% claim rate assumption.
During the first quarter of 2022 as these defaults continue to cure at elevated levels and exceeded the cure rate implied by our 7% claim rate assumption, we revised our estimate of the ultimate claim rate for these defaults from 7% to 4%.
Which resulted in a benefit being recorded in the provision for losses on the U S mortgage insurance portfolio of $101 2 million or <unk> 78 per diluted share.
The provision for losses in the first quarter of 2022 also includes a benefit of $28 $9 million associated with prior year favorable development for defaults reported to us principally in 2021 and the fourth quarter of 2020.
Other underwriting and operating expenses in the first quarter were $41 million consistent with the fourth quarter of 2021.
The expense ratio was 19% for the first quarter of 2022.
Roughly in line with both the first quarter of 2021 and the full year 2021.
We estimate that other underwriting and operating expenses will be in the range of $170 million to $175 million for the full year of 2022.
During the first quarter Essent group limited paid a cash dividend totaling $21 $6 million to shareholders and repurchased $69 $9 million of shares in.
In April of 2022, we repurchased an additional $22 $3 million of shares completing our $250 million authorization from may of 2021.
As a reminder, essent has a credit facility with committed capacity of $825 million.
Borrowings under the credit facility accrue interest at a floating rate tied to a short term index.
As of March 31, we had $425 million of term loan outstanding with a weighted average interest rate of $1, 99% up from $1, 79% at December 31.
Our credit facility also has $400 million of Undrawn revolver capacity that provides an additional source of liquidity for the company.
At March 31, our debt to capital ratio was 9%.
During the first quarter Essent guaranty paid a dividend of $100 million to its U S holding company.
Based on unassigned surplus at March 31.
The U S mortgage insurance companies can pay additional ordinary dividends of $382 million in 2022.
As of quarter end, the combined U S mortgage insurance business statutory capital was $3 1 billion.
With a risk to capital ratio of $9 nine to one.
Over the last 12 months the U S mortgage insurance business as grant statutory capital by $281 million, while at the same time paying $347 million of dividends to our U S holding company.
Note the statutory capital includes $1 9 billion.
Of contingency reserves at March 31, 2022.
Now, let me turn the call back over to Mark.
Thanks, Larry and closing our business continued to generate high quality earnings and robust returns, while our balance sheet and liquidity remains strong we believe that our measured approach and deploying excess capital is in the best long term interest of our franchise and stakeholders looking forward, we remain confident in the strength of our operating model and view Essent.
Is well positioned to play a critical role in affordable and sustainable homeownership now, let's get to your questions operator.
I would like to remind you.
In order to ask a question press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Mark Devries with Barclays. Your line is open.
Yes. Thanks.
<unk> was really I think the Oems that didn't grow insurance in force this quarter and what looks like an expanding market, which I'm assuming reflects at least somewhat differentiated view on the risk adjusted returns available in certain pockets of the market is that a fair interpretation and is there any color you can provide us on where you might be a little bit more under index.
To the current market and what it is about these pockets you find maybe a little less attractive than competitors.
Hey, Mark I would say I wouldn't go into any I don't think there is a particular pocket that we don't like I would say our pricing has been relatively consistent over the past 12 ish 15.
<unk> 15 months.
And you've seen our market share kind of steadily decline. So I would look at it a little differently I think we're a little bit of a bellwether for pricing competition.
In the market and we've been kind of around that 12% range.
Last two quarters.
It's kind of a bottoming out in my view so as you look forward this year.
Our share continues to decrease that probably is a good indicator that pricing is going to continue to compress somewhat and if our share increases maybe maybe folks are increasing pricing as I've heard.
From a few other of our competitors so.
We will see it is not we still like credit.
I do think like I said, we think the pricing is tight and we are starting to have other areas, where we can allocate the capital right. I mean, I think that's a differentiator for us.
We have essent re and we probably allocate at $50 $60 million for that business in.
In the first quarter, Essent ventures, and close to $25 million of capital allocation. So I wouldn't look at it as there is pockets of credit again, we think credit is relatively strong I mean, there's just less visibility.
Given given out given where the market's going I mean, HPA, so youre, putting on new business at higher HPA, 30% higher.
So thats always that that provides you a little caution.
And then clearly just in terms of the economy, where we're going so.
So for US we just didnt feel like it's the market and we felt this way for a while it's been in the last six to nine months, we don't feel like this is the market they'll pain into.
So to speak so I'm not sure we want to be the market share leader.
I'll give you a history mark right in 2020, when pricing was I would say materially higher we let that we led the industry and our market share.
20% market share I believe that it's the only time, we lead in market share, but it just shows you what that is how we think through it.
So in terms of insurance in force and again, we have that we do have a lot of a tailwind there mark in terms of persistency. We have said I think last quarter, we thought it could get mid to high seventies, it's already a three month annualized of 80.
So I think and given where mortgage rates are.
Five and a quarter I believe it is today.
We feel pretty good about persistency, probably more of a tailwind than we would've thought.
Now a few months ago. So the insurance in force it will grow it will grow this year I mean normally theres been a number of quarters first quarters, where we didn't grow so we feel pretty confident it will grow throughout the year and like I said in the script.
The duration extension of the duration of the portfolio is important for investors to understand so we don't have to work as hard to add on to the portfolio or is that we have that kind of embedded.
Kind of growth just with the increased persistency and then just from a credit standpoint, Mark I mean, just with the embedded <unk>.
And that portfolio.
We're very comfortable and remember this is all about our portfolio. So again, we get hung up on share and so forth, but the portfolio is strong and we're pretty pleased and we're expecting continued performance out of it.
Okay, great. Thanks, Mark.
Your next question is from the line of Rick Shane with Jpmorgan. Your line is open.
Hey, guys. Thanks for taking my question this morning.
Mark.
Over the years, we've really come to appreciate your willingness to call balls and strikes.
Im curious.
Curious what youre seeing.
Both by either.
Mortgage originators or among your competitors in terms of what you would consider to be.
Rational or irrational behavior.
I would say on the originator front.
Not too much.
And we're well protected here Rick I mean, when you think about QM.
The strength of kind of Du and LP and just accuse the strength of the QC finished gse's and Theres. Some really good guardrails and the fairway is for most originators its in their best interest to keep the ball in the fairway. That's the biggest part of the market.
Has the easiest from a credit standpoint from a funding standpoint, I'll say go off the fairway, which is really kind of I would say non GSE. So call it non QM or jumbo much smaller market it doesn't impact us because we don't don't ensure that so.
This market, we're not saying you're always going to see a little bit of reaching when the market slows down but again I just think there's a lot of good controls both at the <unk>.
And at the Gse's to protect us in terms of our competitors no I don't I don't see anything irrational at all I think it's just a different view, perhaps in terms of of where credit is or just in terms of of return. So I think for us we're fortunate and Thats why we have been making the moves to continue.
You to build and grow other outlets to put our capital. So I don't have to sit here every quarter and talk to you about.
Why share went up or down I mean, having more capital choices I, just think makes for a better company and better returns for the shareholders long term.
So I wouldn't read into it I think I think the competitors are smart.
I think they are rational and I think they'll be watching and LFR shares lower there's a reason that people can take that for what they want.
I feel the same way about my peers. So I appreciate the comments.
Your next question is from the line of Bose George with <unk>. Your line is open.
Hey, guys good morning.
Just wanted to ask about the returns in the capital you're allocating to the CRT market. How comparable are date to the returns in Europe and the core business.
And you're talking about Essent re.
Yes, the GSE risk share third party actually the returns are the returns are better than that.
Because of the there's.
There's just been an imbalance in the reinsurance market.
You've seen a lot of issuers, even the gse's switch more business.
Two to the reinsurer. So the pricing has widened out there. So we've seen nice returns I mean, that's.
There's only so much capital we can allocate to it though so it's not like we can take all of the capital not allocated to Essent re.
And so we like we enjoy the returns, but I would say.
It's a material I think we're a material player in that side of the market I think between what we write and what our MGA clients right. We were in excess of 15% of that market the GSE risk share market in the first quarter. So.
And that's why I just put it into the script to those when you can see over time, we've earned $200 million. So when we hear essent can't get into other businesses I think it's pretty good evidence that we've done it's a tangential business to our core franchise its mortgage risk, but it is not primary am I and I think we've executed.
That pretty well. In addition, obviously, we get the affiliate quota share. So I think from that business. Its good but we're not looking to I think the market kind of the addressable market. So to speak is somewhat limited. So we're pleased with it but we're not looking.
Have any outsized growth there.
Okay, great that makes sense. Thanks, and then just achieved one on the expenses I think.
Your earlier guidance was a little higher it was 175 to 80. So this is just the increased focus on cost anything to call out there.
Yes, I mean again I think we tried to give a little bit of a wider range.
When we do this in February and I, just think you had a first quarter came in a little.
Light, especially compared to last year and as we look forward.
This year, we continue to make investments really in the core infrastructure of the business so whether that's.
Building out continuing to modernize our tech stack.
Big initiative around self service and clearly the tech stack, meaning moving to the cloud Theres a few other initiatives that we're working on around.
Our pricing engine and extensions of that but in addition, yes, I think like we said to divest risk managers or the best cost managers, so and that's of all the things that we talked about on the call today. That's the one thing we can control. So we want to make sure. We're obviously continue to invest for the future but.
We certainly look at our expenses pretty closely.
Okay, great. Thank you.
Yes.
Your next question is from the line of Mihir Bhatia with Bank of America. Your line is open.
Hi, Good morning, and thank you for taking my question.
Yes, just maybe to start with just on the new delinquency formation has that normalized now and like what is the driver.
Unemployment rates, mostly that we should be looking at.
No I don't think so I think that I think they are relatively I mean, there were a little higher this quarter than last quarter, but generally we haven't seen we.
We haven't seen much difference I think again.
Let me hear you read about it and you can and we can see it in our portfolio of unemployment.
<unk> strong wages continue to grow if anything again, its the story really for the quarter.
Foreign investors is really the.
The reduced delinquencies in that Covid cohort right that was the one where we estimated.
Back in I think we released it in August of 'twenty, but we had that second and third quarter cohort, where we had that 7% estimated claim rate and over time as we've seen just kind of more of a precipitous drop in delinquencies over the last three four months.
Our reasonable best estimate to that is four so we're seeing a lot of those borrowers continue to modify and it's important in another event.
And another note me here.
In fact, it just how important forbearance is to the MRI franchise I think that's a missed a little bit. So when you think about the improvements of the MRI franchise from a risk perspective.
Clearly the pricing engines, our ability to price risk on a sharper focus the reinsurance piece of the business is obviously the biggest transformational change we have now offloaded that mezz piece of the balance sheet, and we and we take back kind of weird acts to cap this busy.
This that we're in is a macroeconomic cat business.
And Thats always to us that's always a concern as you flow through the Mezz and two that upper layer.
But we are protected and I would say just with forbearance. It helps a lot right. So keeping borrowers in their homes and giving them a chance to get back on their feet. It clearly lowers our expected loss, which is less so there is now a less of a probability that it hits the mez piece, which helps US helps our reinsurers helps our IL and investors get more comfortable.
<unk> with the risk and that further protects us from the cat piece so.
This this is great evidence of how it played out so if you think about the great recession.
A lot of the GSC tools were done after the fact.
And here at the GSE is just responded lightning quick they took <unk> and they took the tools out and they put them to work very quickly and that kept a lot of borrowers in their homes and I think when you keep borrowers in their homes.
It's the best thing, obviously for borrowers and for lenders and certainly helps the mortgage insurers.
No absolutely I would agree with that but just curious on that point do you know how most of these delinquencies resolve default balances do people just like do you get that information from this or is it just adding it to the back end of the loan Thats whats happening most of the dialogue is there some other solutions also.
No I mean, obviously some pay off but the majority of the time it's modifications.
Okay and then.
Here It is Craig <unk>.
Just real quickly on that certainly as we get to kind of the tale of what's remaining from the two cohorts from from 2020.
Probably the majority of those are going through to modifications. However, prior to that when you look at the majority of our cures. They are really the updated they took advantage of the ongoing payment plans.
Got it okay.
Okay.
That makes sense and then just lastly, I guess for me just any thoughts on like just industry.
<unk> outlook for the year, obviously rates have moved a fair amount just how are you thinking about that for the rest of CEO for Neil.
And while the first quarter came in at 100 billion plus 104, 105, I think when I last looked at it.
And it's going to be a reach to get to kind of the upper four hundreds.
Typically second and third quarter are strong right I'm, sorry, that's the peak of mortgage origination market and given where rates are kind of a lack of supply I mean, it could happen for sure, but I don't think its our my gut is it's not going on now.
It's not going to perform like a typical.
Spring and summer season, I could be wrong for sure and I hope I am but I do think it's going to be.
I think it's going to be a little tighter than than maybe some expect and thats all right. We're just coming off like to historical years.
<unk> of <unk> and also me here again go back to it's correlated to persistency. So we've always said when.
When rates go up the book will extend well get some lift on the investment portfolio, but niwa.
Is it going to be reduced so.
I think that's playing out and it's not like we haven't seen it before I mean rates did go to 5% in the fourth quarter of 2018, which.
We obviously tend to forget a little bit so it's a little different now.
Because rates are higher and home prices are significantly higher so I think what we saw in the first quarter I mean, if you just look at our first quarter.
I think three six with our rates on our on our <unk> in the first quarter well below the five in a quarter, where they are today. So a lot of that stuff was locked in.
In the fourth quarter. So I do think I do think it's going to I think it is going to be tough to get to like kind of that upper 400 range.
Alright. Thank you that's helpful. Thank you.
Your next question comes from the line of Doug Harter with Credit Suisse. Your line is open.
Okay.
Hoping to.
Understand the current period losses in the quarter those were.
Up.
More than $10 million from last quarter on the entities didn't move that much just wondering if there's anything behind that or any noise in that number.
Doug a couple of things one you might notice is the this is Larry.
The provision for new defaults about $4000, which is getting to the range that we were in pre pandemic and.
And then the other thing is just sort of the mechanics of how the disclosure works in the fourth quarter of last year in the current period, you basically get the benefit of favorable development from the earlier quarters of that year as you get to the fourth quarter of the next year.
You don't you don't get that benefit is just really the current quarter provision thats in there. So just sort of the mechanics of the disclosure, but we saw no unusual trends from our perspective in terms of the new defaults this quarter.
Got it I appreciate it that's all right. Thank you.
Your next question comes from the line of Ryan Gilbert with <unk> your.
Your line is open.
Hi, Thanks, good morning, everyone.
Wanted to go back to Mark to your comments on production.
Production and challenge getting to the upper four hundreds in 2022 is that I mean is there anything that you've seen in your in your pipeline in April that leads you to reach that conclusion or is it just a function of looking at the speed at which mortgage rates have gone up.
Making making an assumption that this has got to lead to some demand destruction.
Yes, I think it's more looking at part of April .
April was actually pretty good.
In terms of new insurance written so.
I think it's just kind of just putting the pieces together, Brian again, it could be if there is such you could see a pull forward as everyone looks and says hey.
I want to.
Want to get that house today at five in a quarter because I don't want to wait until six alright. So you've seen you may see some of that so again I'm just I don't have any particular information I'm just saying.
We've heard different guidance and it just wouldn't surprise I think it would just be tougher to get there.
If it does thats good but again I think you have to get back to balancing it with insurance enforced and we're so focused on <unk>, which is an important metric, but at the end of the day, the cash and Hey, remember Ryan just take a step back the cash and we produced $700 million of cash over the last 12 months in our portfolio.
And.
<unk>, 93% underwriting margin, so not not too bad right. So.
Niwa market's a little smaller than it was in the last two years I think we're I think we're okay with that.
Okay great.
And then.
Related to Essent venture is $25 million of capital allocation can you talk about how.
I guess.
Pricing in private markets or the the opportunity set has has changed in in <unk> 'twenty two relative to 'twenty, one arm or prior years.
No again, I think it's a lot of it is being deployed through our funds.
So we're putting we're allocating capital to the funds we did make a smaller direct investments in the first quarter. We thought the valuation was actually relatively fair. They havent really work their way down though from kind of the public markets to the private markets, there's usually a lag with that.
At.
It's been pretty heated and some of the ventures areas and I can tell you just to remember we've been looking at this for a while we've actually invested in some of our funds three or four years ago.
It's picking up more steam this year as we build out the unit, but there are some companies that are public today three or four.
That we passed on at very low valuations and they went public at very high valuations and they're working their way back down to low valuation. So I think we have a pretty good sense of the intrinsic value of the.
These businesses just again, because we understand.
I'd say that real estate mortgage ecosystem pretty well. So we can we can assess it and given that we started up we started essent up I'm pretty good at assessing startups and their ability.
To kind of execute and again, it's limited really in my view is just in terms of more financial services I don't have much of a.
I don't have that type of insight into tech companies, because thats not really my background, but I would say anything kind of real estate or consumer oriented.
We have a pretty good understanding of it and we'll continue to make those investments.
Both in the funds and companies and what we're seeing is we'll probably see more opportunities again. This over the next three to five years. Ryan. This is this is a unit that will continue to invest excess capital into the funds and into the companies and we said before the informational return is.
As good and in fact.
<unk> said this before but one of the meetings. We've had really helped us to help that next generation of Essent edge, so as I kind of saw it.
With my own eyes, but we're also producing pretty good financial returns. So when we talk about kind of 12% to 15 ish returns in the core business, we can say with a straight face that we have.
Those returns both in Essent re and debentures unit. So we will continue to allocate capital to it as long as we can get those those type of returns.
Okay, great. Thank you I appreciate it.
There are no further questions at this time I will turn the call back over to management for closing remarks.
Okay, well, thanks, everyone for joining us and have a great weekend.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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