Q3 2023 Essent Group Ltd Earnings Call
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Thank you for standing by my name is Adam and I'll be your conference operator today 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. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply.
Star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again, thank you.
I'd now like to turn the call over to Phil to funnel. Please go ahead.
Thank you Adam Good morning, everyone and welcome to our call. Joining me today are Mark <unk>, Chairman and CEO, and David Weinstock, Chief Financial Officer.
Also on hand for the Q&A portion of the call is Chris Karen President of Essent Guaranty.
Our press release, which contains essence financial results for the third quarter of 2023 was issued earlier today and is available on our website at Essent group Dotcom.
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 Oh 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 included in our form 10.
K filed with the SEC on February 17th 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.
Thanks, Phil and good morning, everyone earlier today, we released our third quarter 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 continued to drive higher investment income and elevated persistency, which has supported our revenue growth this year as well.
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 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 third quarter of 2023, we reported net income of $178 million compared to $178 million a year ago.
On a diluted per share basis, we earned $1 66 for the third quarter compared to $1 66, a year ago and our annualized return on average equity was 15%.
As of September 30th our book value per share it was $44 98.
An increase of 13% from a year ago.
Yeah.
As of September 30th our insurance in force was $239 billion, a 7% increase versus a year ago. Our 12 month persistency on September 30th 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 rates should support elevated persistency through the end of this year.
As our portfolio of business mortgage insurance is less beholden to transaction activity in other sectors of the housing ecosystem.
The credit quality of our insurance in force remained strong with a weighted average FICO of 746 on a weighted average original LTV of 93% regulatory guard rails, including the qualified mortgage rule and credential GSE underwriting guidelines has significantly improved industry credit quality and performance since the global financial crisis.
Yes.
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.
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 is the lender landscape continues to shift and evolve.
As of September 30th Essent re third party year to date revenues are approximately $60 million, while third party risk in force was $2 2 billion.
Essent re continues to leverage our expertise in mortgage credit and the Bermuda platform to deliver complementary earnings to the Essent franchise or.
Our title and settlement services operation incurred a pretax loss of approximately $4 million in the third quarter as we continue to work through the title integration, we will be taking a long term approach to building out the business with a focus on risk controls and operational efficiencies.
Cash and investments as of September 30th were $5 4 billion, our new money yield in the third quarter was over 5%, while our annualized investment yield was three 6% for the third quarter up from two 7% a year ago.
Net investment income was $47 million in the third quarter up approximately 44% from the same quarter last year higher.
Higher investment income is another way that our valve business is levered to higher rates.
Our balance sheet remains strong with $4 8 billion in GAAP equity access to $1 6 billion in excess of loss reinsurance and over $1 billion of available holding company liquidity during the third quarter. We closed on our ninth Radnor re island transactions the utilization of programmatic reinsurance helps to diversify our <unk>.
Capital resources, while seeding a meaningful portion of our mezzanine credit risk.
With a trailing 12 month operating cash flow of $720 million 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 to enable us to take a balanced approach between capital deployment and distribution.
Year to date through October 31, we repurchased approximately one 4 million shares for $57 million I am pleased to announce that our board has authorized a new $250 million share repurchase program and its approved a common dividend of <unk> 25.
We continue to see our dividend as a meaningful demonstration of the confidence we have in the stability of our cash flows the strength of our capital position now let me turn the call over to Dave.
Thanks, Mark and good morning, everyone. Let me review our results for the quarter and a little more detail.
For the third quarter, we earned $1 66 per diluted share compared to $1 61 last quarter.
$1.66 in the third quarter a year ago.
Net premium earned for the third quarter of 2023 was $247 million and included $16 $9 million of premiums earned by Essent re on our third party business.
And $26 million of premiums earned by the title operations acquired on July one.
The average base premium rate for the U S mortgage insurance portfolio in the third 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 third quarter of 2023 up two basis points from last quarter due primarily to the net impact of the successful Ireland tender in the second quarter.
Ceded premium decreased to $33 million in the third quarter compared to $39 5 million in the second quarter due to expenses incurred last quarter related to the tender and lower outstanding insurance linked notes during the third quarter.
Net investment income increased $1 8 million or 4% in the third quarter 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 third quarter was $5 6 million compared to $8 $1 million last quarter.
The largest component of the decrease was the change in the fair value of embedded derivatives and certain of our third party reinsurance agreements in the third quarter. We recorded an $898000 decrease in the fair value of these embedded derivatives compared to a $2 $7 million increase recorded last quarter.
The provision for loss and loss adjustment expense was $10 8 million in the third quarter 2023, compared to $1 3 million in the second quarter of 2023, and $4 3 million in the third quarter a year ago.
At September 30th that default rate on the U S mortgage insurance portfolio was 162% up 10 basis points from 152% at June 32023.
Other underwriting and operating expenses in the third quarter were $54 8 million and include $13 $5 million of title expenses.
<unk> for the third quarter also include title premiums retained by agents of $13 $2 million, 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 a of our press release as a reminder, our consolidated expense ratio was 20% for both the second quarter and third quarter a year ago.
As Mark noted our holding company liquidity remains strong and includes $400 million of Undrawn revolver capacity under our committed credit facility.
At September 30, we had $425 million of term loan outstanding with a weighted average interest rate of seven 7% up from $6 eight 7% at June 30th.
At September 30 of 2023, our debt to capital ratio was 8%.
During the third quarter Essent guaranty paid a dividend of $60 million to its U S holding company.
Based on unassigned surplus at September 30th U S mortgage insurance companies can pay additional ordinary dividends of $290 million in 2023.
At quarter end the U S. Combined the combined U S mortgage insurance business statutory capital was $3 3 billion with a risk to capital ratio of 10, 3% to one.
Note that statutory capital includes $2 $3 billion of contingency reserves at September 30th.
Over the last 12 months U S mortgage insurance business has grown statutory capital by $181 million, while at the same time paying $300 million of dividends to its U S holding company.
During the third quarter Essent group paid a cash dividend totaling $26 $5 million to shareholders and we repurchased 102000 shares for $5 million under the authorization approved by our board in May 2022.
Now, let me turn the call back over to Mark.
Thanks, Dave and closing Essent continues to generate high quality earnings while our balance sheet and liquidity remained strong higher interest rates the turnover of 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 essence initial public offering on the New York stock exchange since our IPO essence book value per share has grown at a compound annual growth rate of approximately 19% in essence shares have delivered an annualized total return of approximately 12%.
Thank our team for their dedication and contribution to essence 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 essence mission to promote and serve affordable and sustainable homeownership now, let's get to your questions.
Operator.
At this time I would like to remind everyone to ask a question Press Star then the number one on your telephone keypad.
First question comes from the line of Bose George with <unk>. Your line is open hey, guys.
Good morning, Thanks, I wanted to ask just about buybacks here.
Our view on buybacks changed over the last year just to.
Could be could be <unk> being a little more active year, just any thoughts there would be great.
Yeah, Hey, Bose its 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 passed where kind of a retain and invest type mentality. So always we're going to look from our capital position to invest in our core business.
We've continued to invest in re over the years, we've obviously invested in title this year.
And in terms of also looking to manage ROE over the longer term. So in a 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 in the way we manage our Roes.
It's primarily the dividend right and we're pretty committed to the dividend, we think thats a good.
Kind of tangible evidence to our shareholders of the cash generation of the business, which is.
Is really strong and I think on repurchases. There I think it has become a little bit more dynamic. So I think we've changed a little bit over the past kind of year Bose, we bought back 200 $250 million back in 2021 over 11 months 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 <unk> five plan out there, but we look at it every quarter and then we're looking and saying where are the growth opportunities in our core businesses now.
What's the outlook for losses, right, where do we see the portfolio growing right. So you always want to have.
Capital around P Myers and other potential capital needs and then finally, where is the stock trading. So I think our view is we're all about growth and book value per share and if we can buy 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 so.
Trades up so.
That depends 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 always uncertain and probably a little bit more uncertain over the next 12 to 18 months with what's going on.
And in the world where rates are or we have an election coming up.
In less than 12 months so.
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.
Okay, Great. That's very helpful. Thanks, and then actually 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.
It's pretty early right.
We are seeing 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 <unk>.
But again stay tuned for more.
Okay, great. Thanks.
Your next question comes from the line of Mihir Bhatia with Bank of America. Your line is open.
Good morning. Thank you for taking my questions maybe to start with on pricing, obviously always a big topic so investors.
Just how would you characterize the current pricing environment anything's changed quarter over quarter.
Yeah.
No I think it's been it's been pretty consistent.
Really over the last.
Six to 12 months in terms of just where it is and in terms of where we see it in terms of our earned premium yield 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 where they are now so I think the unit economics of the business are good.
In terms of pricing no again, I would like to take a step back and just try to give investors a little bit more context, because I'm not sure. It's it's.
The change in pricing has really.
Sure.
Is appreciated by the Investor community. So we always talk about three changes to the business model since the GSC right you have reinsurance which has us out.
Mezz risk, which we think is important there is the regulatory changes that are substantial REIT qualified mortgage the strength of the GSE Systems' forbearance all of those things have really helped has 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 <unk>.
Is 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, while there's not a lot of discipline in the industry and I think that again, it's not appreciated just how the pricing was really brought to the consumer five years ago.
In order for a price change to be made in the industry that you had to re file in all 50 rates you had to change your card. One card you had that you usually take two or three of the top.
Banks in the country.
And really they decided where because they didn't have this there was a system.
The inability of their system is to program in like six different cards. So they can only program in one card or what's going to happen here, they're going to program and the lowest card so they're going to get six cards and whoever had the lowest everyone was forced to that so you didn't have a lot of flexibility. So people confuse that with a lack of discipline per se, but.
It is really just kind of it's a little bit of game theory right in terms of when you put six guys up against.
One lender the lender had the lender had the pricing power in the industry and I think with the engines.
That's changed significantly now we all file a range of rates we can change.
We can change rates much more frequently.
It's really become what we said it was going to be which is a risk and a.
Our risk management tool. It allows all the MRI to pick their spots right people have different geographical profile.
Francis different parts of the capital structure of 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, meaning that we must have raised pricing 12 times different times in different places may be a tail here and MSA there once in a while across the board if that was under the old card system, we would've had one shot at raising pricing and whatever shot we had.
It had been would have been mitigated by the competitive factors and again I think it's underappreciated I think there is a form of pricing power with the mortgage insurers now and again if you just look at our and it's still good economics at a bar, where the borrower wins the lenders when and I think <unk> now have the chance to kind of.
<unk> their portfolios and take this pick the spots where they want to be in much much similar to how other insurance companies operate.
Got it. Thank you I really appreciate that answer.
<expletive> to take a step back thank you.
On the maybe maybe switching gears a little bit to the title site in Nevada understand Youre building that business. It's a long term play for you, it's not about a quarter or something like that but as new position that business for long term success.
Is the idea you in the near term the focus here, we need to build out the infrastructure. So over the next few quarters is a little bit of an investment period before we start really driving revenue growth, maybe just talk about what you expect.
Youre looking at that business for the next two full quarters.
Even as you look at the long term.
No 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 asset 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 2009, and kind of gave us that base to.
To build off we inherited some exceptional employees.
And when you kind of marry the platform and the folks from triad that came over to us and with the existing essent folks that really that really laid the foundation for building of essence here that was in 2009.
And I was probably 18.
Almost 24 months from starting to raise the money so and Thats 2009, we didn't breakeven in 2012. So when we became we came public in 2013.
We were already fully formed and Thats, what investors got to view.
This is going to play out differently, 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, we bought <unk> we acquired.
<unk> 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 essence infrastructure, we're going to have to invest.
Very risk and control oriented I mean youre talking this is a company, where we hired our head of internal audit before we hired our first sales person so.
We're very much control oriented and there is a lot of risk in title in terms of the search process, the curative process to closing and funding.
I think from the 30000 feet people think theres not risk in title and it's entirely.
Entirely bad premise and there's risk and we have to understand that so we're going to we're going to build it from the inside out.
And we're going to take our time, it's going to play out I'm going to be transparent, but we're not going to skimp on investments in order to show quarterly results. So we're 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.
To build Essent and taken a step back here again think about it right. This is a company.
$150 million a quarter, we're earning.
Cash flows $6 $700 million a year for us to take a few bucks to invest.
A business that has the potential of and the title side.
It's a really good risk risk return trade off of risk reward tradeoff 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.
Okay great.
Thank you. Thank you for taking my questions.
Again, if you'd like to ask a question press star one on your telephone keypad. Your next question comes from the line of Rick Shane with Jpmorgan. Your line is open.
Hey, good morning, guys.
Two questions on two pretty different topics.
Mark.
Other things in terms of the title insurance business and I'm going to draw an analogy here.
20 years ago, when capital one got in queue.
Depository building depository franchise, one of the things with deemphasize was that scale was not.
Our efficiency was not a function of being.
On net having a national footprint of being concentrated in particular regions, where they can generate substantial market share.
How do you guys look at the title expansion do you want to be a national.
Title insurance company or is the plan to be really concentrated regionally as you build the business.
Yes, I think the answer is both and the reason why Rick really it's the business and as we acquired two separate businesses. So we're in the process of putting it into one kind of functional organization S. Entitle. So we'll have the agency services channel, which will service.
Title agents and that will be focused on large states right I mean, it's pretty obvious where the premiums are coming from.
Forrarder, Texas within the southeast parts of the southwest and northeast.
And there are and so we'll focus around that and build around that.
The agency services has 200 agents that they service today. So it's really tiny we will grow that out and we will scale that out very similar to how we scale that am I right and you go and you hire good salespeople salespeople go and call on title agents and again it doesn't happen overnight right. At this took us a long time on the Ams.
But were slow and steady wins the race, so we'll attack it.
On the agency services that way the lender services channel is actually more.
There's a lot more geared it centralized refinance so it's a lot more geared to lenders. So that is national by it. So its in that its a 50 state title and settlement services business, it's quite a valuable platform and I think as we we continue to invest in the infrastructure. There we will offer that out to our key lenders we're not it.
Step that phase right now I mean, they do 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 will have kind of three two.
Two channels agency services lender services it will be supported by an operational group.
You can see there it's going to be regional and so unless the agency services will be much more regionally targeted where the lender services will be more of a national footprint.
Got it okay. Thank you that's helpful and then the other.
Other question, we've been asking this in a few different ways, but.
Very unique time.
Volumes, particularly concentrated in purchase.
Given the.
The limited supply of existing homes stock for sale, particularly concentrated in new home sales.
That drives.
Mortgage originations, particularly through builder channels.
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 buy downs, whether they are short term or permanent.
Okay.
Yes, I mean, I think with buy downs, one has taken a step back or it gets probably three or 4% of our originations as buy downs and and so it's not it's not super material and remember we underwrite that at full rate.
And we've got an assembler we've had some more questions around student loans same thing with student loans, we underwrite those assuming they're going to payback the loan so.
There is some concentration I think around builders because clearly they are not they're not building a lot in the northeast because theres 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.
And a 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. 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 forever.
But certainly its the concentration certainly something to look at but it's not something we're concerned about at this time and Chris has a few words on this too yeah, Hey, good morning, Rick.
When you look at the buy down product.
Certainly we're ensuring from the builders.
The majority of those buy downs are permanent so 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 is certainly a benefit of the permanent nature of these buy downs and certainly by extension.
That will benefit the credit performance as well.
Got it okay. Thank you guys and Mark I think on a personal level. There is some congratulations in order as well.
Thank you, yes, that's why we're having the call on Thursday, because my daughter's getting married on Saturday.
And I have the rehearsal dinner Tonight. So I was not allowed to have the call tomorrow. So thats why I appreciate.
Some of our competitors they were very gracious and moving their times, but yes. Thank you Rick.
Your next question comes from the line of Eric Hagen with BTG. Your line is open.
Hi, Thanks, Congratulations Mark.
A quick modeling question upfront you feel like the ceded premium of five basis points is a good way to think about modeling that going into next year.
Hey, good morning, it's Chris Yeah, I think Thats, a reasonable range I mean really when you look at certainly our history within in that range. So thats reasonable from a modeling perspective.
Okay great.
There's always kind of kind of two dimensions of risk to think about right. There is the borrower risk and then there is the asset level risk like which one would you say you are.
Maybe more sensitive to right now and whether you think like.
Like how you adjust for that and how that factors into the risk adjusted return that you think.
You are picking up right now.
I think it's a good question a really good question I think on the portfolio. It is clearly around the asset at risk rates already you've already underwritten the mortgage home prices can fluctuate borrowers cannot pay and then you have severity issues. So I think we're more focused because you can't control that 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've talked about the persistency angle, helping us and I think also so for new originations clearly right I mean, it's going to be higher DTI, it's obvious with seven 8% mortgages. So you're much more focused youre not going to have.
And certainly not going to have that HPA growth, it's going to be our view probably more flattish.
Over the next three to four years so.
I think it's a little bit more no more on the borrower risk on that side.
Okay. That's really helpful. Thank you guys.
I will now turn the call back over to management for closing remarks.
I would like everyone to thanks, thanks, everyone for joining us and have a great have a great day.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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