Q4 2023 Essent Group Ltd Earnings Call
Operator: www. EssentGroupLtd.com Thank you for standing by. My name is Eric, and I will be your conference operator. At this time, I would like to welcome everyone to the Essent Group Ltd. 4th Quarter 2023. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, press star> followed by the number one on your telephone. If you would like to withdraw your question, press star 1.
Thank you for standing by my name is Eric and I will be your conference operator today.
Eric: At this time I would like to welcome everyone to the Essent Group limited fourth quarter 2023 earnings call.
Eric: All lines have been placed on mute to prevent any background noise.
Eric: After the Speakers' remarks, there will be a question and answer session.
Eric: If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Eric: He would like to withdraw your question Press Star one again.
Phil Stefano: Thank you. I would now like to turn the call over to Phil Stefano, Investor Relations. Thank you, Eric. 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&A portion of the call is Chris Curran, President of Essent Guarantee. Our press release, which contains Essent's financial results for the fourth quarter and full year 2023, was issued earlier today and is available on our website at EssentGroup.com. 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.
Eric: I would now like to turn the call over to Phil Stephano Investor Relations. Please go ahead.
Phil Stephano: Thank you Eric Good morning, everyone and welcome to our call.
Phil Stephano: 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 Curran President of Essent Guaranty, Our press release, which contains essence financial results for the fourth quarter and full year 2023 was issued earlier today and is available on our website at Essent group Dot.
Phil Stephano: Com.
Phil Stephano: 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 maybe found in exhibit Oh of our press release.
Phil Stefano: 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-K filed with the SEC on February 17, 2023, and any other reports and registration statements filed with the SEC, which are also available on our website. Now, I will turn the call over to Mark. Thanks, Phil. And good morning, everyone.
Phil Stephano: 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.
Phil Stephano: 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.
Phil Stephano: Now, let me turn the call over to Mark Thanks, Phil and good morning, everyone earlier today, we released our fourth quarter and full year 2023 financial results strong credit quality and resilience in our housing and labor markets continue to drive favorable credit performance.
Mark A. Casale: Earlier today, we released our fourth quarter and full year 2023 financial results. Strong credit quality and resilience in the housing and labor markets continue to drive favorable credit performance, while higher interest rates drove investment income growth and elevated persistency during the year. Heading into 2024, we remain constructive on the long-term outlook for housing as the supply and demand imbalance and favorable demographic trends should provide foundational support to home prices.
Mark: Higher interest rates drove investment income growth and elevated persistency during the year.
Mark: Heading into 2024, we remain constructive on our long term outlook for housing as the supply and demand imbalance and favorable demographic trends should provide foundational support to home prices.
Mark A. Casale: Even though sentiment has improved for a soft landing on the back of strong employment and consumer spending, we continue to manage our business for a range of economic scenarios. Given the strength of our balance sheet and our buy, manage, and distribute operating model, we believe Essent is well positioned. And now for our results.
Mark: Even the sentiment has improved for a soft landing on the back of strong employment and consumer spending we continue to manage our business for a range of economic scenarios.
Mark: Given the strength of our balance sheet and our buy manage and distribute operating model. We believe essent is well positioned.
Mark: And now for our results for the fourth quarter of 2023, we reported net income of $175 million compared to $147 million a year ago on a diluted per share basis, we earned $1 64 for the fourth quarter compared to $1 37, a year ago.
Mark A. Casale: For the fourth quarter of 2023, we reported net income of $175 million compared to $147 million a year ago. On a diluted per share basis, we earned $1.64 for the fourth quarter compared to $1.37 a year ago. For the full year, we earned $696 million, or $6.50 per diluted share, while our return on average equity was 15%. As of December 31st, our book value per share was $47.87, an increase of 16% from a year ago. As of December 31st, our U.S. mortgage insurance in force was $239 billion, a 5% increase versus a year ago.
Mark: For the full year, we are at $696 million or $6 50 per diluted share while our return on average equity was 15%.
Mark: As of December 31, our book value per share was $47 87.
Mark: An increase of 16% from a year ago.
Mark: As of December 31, our mortgage U S mortgage insurance in force was $239 billion, a 5% increase versus a year ago. Our 12 month persistency on December 31 was 87% and nearly 75% of our in force portfolio has a note rate of five 5% or lower.
Mark A. Casale: Our 12-month persistency on December 31st was 87%, and nearly 75% of our in-force portfolio has a note rate of 5.5% or lower. Despite the recent shift lowering rates, we expect persistency will remain elevated in 2024. The credit quality of our insurance in force remains strong, with a weighted average FICO of 746 and a weighted average original LPV of 93%.
Mark: The recent shift lower in rates, we expect persistency will remain elevated in 2024.
Mark: The credit quality of our insurance in force remained strong with a weighted average FICO of 746, and a weighted average original LTV of 93%.
Mark A. Casale: Regulatory guardrails implemented after the global financial crisis have significantly improved industry credit quality and performance, while embedded home equity in our insurance portfolio should mitigate potential claims. During 2023, in light of higher mortgage rates and lower mortgage origination volume, we will continue to focus on supporting our customers while expanding our franchise. Despite the challenging environment, we successfully activated 108 new customers and continue to leverage S&Edge to optimize our unit economics and deliver our best rate to the borrowers. Our Bermuda-based reinsurance entity, Essenary, had another strong year of performance, riding high-quality GSE risk-share business and expanding its fee-based MGA services. S&RE ended the year with annual third-party revenues of approximately $80 million, while our third-party risk and force was $2.2 billion. Our title operations incurred a pre-tax loss of approximately $4 million in the fourth quarter, similar to last quarter.
Mark: Regulatory guard rails implemented after the global financial crisis have significantly improved industry credit quality and performance.
Mark: Embedded home equity in our insurance portfolio should mitigate potential claims.
Mark: Yeah.
Mark: During 2023 in light of higher mortgage rates and lower mortgage origination volume, we continue to focus on supporting our customers, while expanding our franchise. Despite the challenging environment. We successfully activated 108, new customers and continuing to leverage <unk> to optimize our unit economics and deliver our best rates to borrowers.
Mark: Our Bermuda based reinsurance entity Essent re had another strong year performance, writing high credit high quality GSE risk share business and expanding its fee based MGA services SME.
Mark: <unk> ended the year with annual third party revenues of approximately $80 million, while our third party risk in force was $2 2 billion.
Yeah.
Mark: Our title operations incurred a pretax loss of approximately $4 million in the fourth quarter similar to last quarter. We remained focused on integrating title, while implementing risk controls and improving operational efficiency.
Mark A. Casale: We remain focused on integrating title while implementing risk controls and improving operational efficiency. The Essent Ventures team continues to invest in funds, gaining insights to improve our core business while enhancing financial returns. As of December 31st, the carrying value of other invested assets was $277 million, and ever to date, these investments have created $74 million of value. Cash-in investments as of December 31st were $5.7 billion, and our new money yield in the fourth quarter remained over 5%. For the full year of 2023, our investment yield was 3.5% compared to 2.6% in 2022. Net investment income was $186 million in 2023, up approximately 50% from 2022.
Mark: The Essent ventures team continues to invest in funds gaining insights to improve our core business, while enhancing financial returns.
Mark: As of December 31, the carrying value of other invested assets is $277 million in ever to date. These investments have created $74 million of value.
Mark: Cash and investments as of December 31 were $5 $7 billion and our new money yield in the fourth quarter remained over 5%.
Mark: For the full year of 2023, our investment yield was three 5% compared to two 6% in 2022.
Mark: Net investment income was $186 million in 2023 up approximately 50% from 2022.
Mark A. Casale: New money yields in our investment portfolio continue to run ahead of our book yields, which should contribute to future revenue growth. As of December 31st, we are in a position of strength with $5.1 billion in GAAP equity, access to $1.4 billion in excess of loss-free insurance, and over $1 billion of available holding company liquidity. With a full year 2023 operating cash flow of $763 million and a mortgage insurance underrating margin of 77%, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. As evidence of this, in January, S&P upgraded the financial strength ratings of our two primary operating entities, Essent Guarantee and Essent Re, to single A-. With this upgrade, we reached a milestone of single A- or higher financial strength ratings by all rating agencies that cover Essent Guarantee and Essent Re. During the year, we continued to execute our diversified and programmatic reinsurance strategy while retiring the majority of two-season Radnery ILN deals that no longer provided economic or regulatory capital credit. In the fourth quarter, we closed an excess-of-loss reinsurance transaction covering our 2023 NIW.
Mark: New money yields on our investment portfolio continue to run ahead of our book yields which should contribute to future revenue growth.
Mark: As of December 31, we are in a position of strength with $5 $1 billion in GAAP equity access to $1 $4 million in excess of loss reinsurance and over $1 billion of available holding company liquidity.
Mark: With our full year 2023, operating cash flow of $763 million and a mortgage insurance underwriting margin of 77% our franchise remains well positioned from an earnings cash flow and balance sheet perspective.
Mark: As evidence of this in January S&P upgraded the financial strength ratings of our two primary operating entities Essent Guaranty and Essent re to single a minus with this upgrade we reached a milestone of single a minus or higher financial strength ratings by all rating agencies that cover Essent guaranty and Essent re.
Mark: During the year, we continue to execute our diversified and programmatic reinsurance strategy, while retiring the majority of two season Radnor re Ireland deals that no longer provided economic or regulatory capital credit and.
Mark: In the fourth quarter, we closed in excess of loss reinsurance transaction covering our 2023 niwa.
Mark A. Casale: At year-end 2023, approximately 93% of our portfolio is reinsured. Our strong financial performance and capital position enable us to take a measured approach between capital retention, investment, and distribution. In 2023, we repurchased approximately 1.5 million shares for $66 million.
At year end 2023, approximately 93% of our portfolio is reinsured.
Mark: Our strong financial performance and capital position enable us to take a measured approach between capital retention investment and distribution on 2023, we repurchased approximately one 5 million shares for $66 million further I am pleased to announce that our board has approved a 12% increase in our quarterly dividend of <unk> 28.
Mark A. Casale: Furthermore, I'm pleased to announce that our board has approved a 12% increase in our quarterly dividend of $0.28 per share. Looking forward, we will continue to review our common dividend annually. We believe paying a dividend is a meaningful demonstration of the confidence we have and the stability of our cash flows and the strength of our operating model. Now, I'll turn the call over to Dave.
Mark: Per share.
Mark: Looking forward, we will continue to review our common dividend annually, we believe paying a dividend is a meaningful demonstration of the confidence we have in the stability of our cash flows and the strength of our operating model now let me turn the call over to Dave.
David Weinstock: Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the fourth quarter, we earned $1.64 per diluted share, compared to $1.66 last quarter and $1.37 in the fourth quarter a year ago. Our U.S. mortgage insurance portfolio ended 2023 with insurance in force of $239.1 billion. An increase of $417 million from September 30th, at an increase of $12 billion, or 5%, compared to $227.1 billion at December 31, 2022. Persistency at December 31st, 2023 increased to 86.9% compared to 86.6% at the end of the third quarter. The Net Premium Yield for, net premiums earned for Q4 2023 was $246 million and included $17.2 million of premiums earned by Essent Real and our 3rd party business and $17.4 million of premiums earned by the title operation.
Thanks, Mark and good morning, everyone. Let me review our results for the quarter and a little more detail.
Dave: For the fourth quarter, we earned $1 64 per diluted share compared to $1 66 last quarter and $1 37 in the fourth quarter a year ago.
Dave: Our U S mortgage insurance portfolio ended 2023 with insurance in force of $239 1 billion, an increase of $417 million from.
Dave: From September 30th.
Dave: And an increase of $12 billion or 5% compared to $227 1 billion at December 31 2022.
Dave: Persistency at December 31, 2023 increased to 86, 9% compared to 86, 6% at the end of the third quarter.
Dave: Yes.
Dave: The net premium yield.
Dave: <unk> fourth quarter 2023, or excuse me net premiums earned for fourth fourth quarter 2023, with $246 million and included $17 $2 million of premiums earned by Essent re on our third party business and $17 $4 million of premiums earned by the title operations.
David Weinstock: The average base premium rate for the U.S. Mortgage Insurance Portfolio for the fourth quarter was 40 basis points, and the net average premium rate was 35 basis points in the fourth quarter of 2023, both consistent with the last quarter. We expect that the average base premium rate for the full year 2024 will be largely unchanged from the fourth quarter rate of 40 basis points. Net income increased $3.5 million, or 7%, in the fourth quarter of 2023 compared to the previous quarter due primarily to an increase in yields on new investments and higher yields on cash and cash equivalents. Other income in the fourth quarter was $6.4 million compared to $5.6 million last quarter.
Dave: The average base premium rate for the U S mortgage insurance portfolio for the fourth quarter was 40 basis points and the net average premium rate was 35 basis points in the fourth quarter of 2023 with both consistent to last quarter.
We expect that the average base premium rate for the full year 2024 will be largely unchanged from the fourth quarter rate of 40 basis points.
Dave: Net income increased $3 5 million or 7% in the fourth quarter of 2023 compared to last quarter due primarily to an increase in yields on new investments and higher yields on cash and cash equivalents.
Dave: Other income in the fourth quarter was $6 4 million compared to $5 $6 million last quarter.
The largest component of the increase with the change in fair value of embedded derivatives in certain of our third party reinsurance agreements.
David Weinstock: The largest component of the increase was the change in fair value of embedded derivatives in the third of our third party reinsurance agreement. In the fourth quarter, we recorded a $412,000 increase in the fair value of these embedded derivatives compared to an $898,000 decrease recorded last quarter. The provision for loss and loss adjustment expenses was $19.6 million in the fourth quarter of 2023 compared to $10.8 million in the third quarter of 2023 and $4.1 million in the fourth quarter a year ago.
Dave: In the fourth quarter, we recorded a $412000 increase in the fair value of these embedded derivatives compared to an $898000 decrease recorded last quarter.
Dave: The provision for loss and loss adjustment expenses was $19 6 million in the fourth quarter of 2023 compared to $10 8 million in the third quarter of 2023, and $4 1 million in the fourth quarter a year ago.
Dave: At December 31, the default rate on the U S mortgage insurance portfolio was one 8% up 18 basis points from 162% at September 32023.
Dave: For the full year 2023, we recorded a net provision of approximately $32 million as the increase in new defaults was materially offset by favorable reserve development from strong cure activity.
David Weinstock: At December 31st, the default rate on the U.S. Mortgage Insurance Portfolio was 1.8%, up 18 basis points from 1.62% at September 30th, 2023. For the full year 2023, we recorded a net provision of approximately $32 million as the increase in new defaults was materially offset by favorable reserve development from strong cure activity. Other underwriting and operating expenses in the fourth quarter were $55.2 million and included $11.6 million of title expenses. Expenses for the fourth quarter also include title premiums retained by agents of $11.5 million, which are reported separately on our consolidated income statement. Our consolidated expense ratio was 27% this quarter. Our consolidated expense ratio, excluding title, which is a non-GAAP measure, was 19% this quarter.
Dave: Other underwriting and operating expenses in the fourth quarter were $55 $2 million and include $11 $6 million of title expenses.
Dave: Expenses for the fourth quarter also include title premiums retained by agents of $11 $5 million, which are reported separately on our consolidated income statement.
Dave: Our consolidated expense ratio was 27% this quarter.
Dave: Our consolidated expense ratio, excluding title, which is a non-GAAP measure was 19% 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.
Dave: We estimate that other underwriting and operating expenses, excluding title operations will be approximately $180 million for the full year 2024.
Dave: The effective tax rate for full year 2023 was 15, 4%.
Dave: Income tax expense for the fourth quarter includes a $2 7 million net benefit associated with the recognition of a deferred tax asset for unrealized losses on investment on the investment portfolios of Essent group and Essent re upon the enactment of the Bermuda corporate income tax.
David Weinstock: A description of our consolidated expense ratio, excluding title, and the reconciliation to GAAP may be found in Exhibit O of our press release. We estimate that other underwriting and operating expenses, excluding title operations, will be approximately $180 million for the full year 2024. The effective tax rate for the full year 2023 was 15.4%.
Dave: For 2024, we estimate that the annual effective tax rate will be approximately 15, 5%, excluding the impact of any discrete items.
Dave: As Mark noted our holding company liquidity remains strong and includes $400 million of Undrawn revolver capacity under our committed credit facility.
David Weinstock: Income tax expense for the fourth quarter includes a $2.7 million net benefit associated with the recognition of a deferred tax asset for unrealized losses on the investment portfolios of Essent Group and Essent Re upon the enactment of the Bermuda Corporate Income Tax. For 2024, we estimate that the annual effective tax rate will be approximately 15.5%, excluding the impact of any discrete item. As Mark noted, our holding company liquidity remains strong and includes $400 million of undrawn revolver capacity under our committed credit facility. Additionally, at December 31st, we had $425 million of term loans outstanding with a weighted average interest rate of 7.11%, up from 7.07% at September 30th. At December 31st, 2023, our debt-to-capital ratio was 8%. On December 31st, Essent Guarantees' PMRS deficiency ratio was strong at 170%, with $1.4 billion in excess available assets.
Dave: At December 31, we had $425 million of term loan outstanding with a weighted average interest rate of 711% up from 7.07% at September 30th.
Dave: At December 31, 2023, our debt to capital ratio was 8%.
Dave: At December 31, Essent Guaranty, <unk> sufficiency ratio was strong at 170% with $1 $4 billion in excess available assets.
Dave: Excluding the 0.3 covered factor the <unk> sufficiency ratio remained strong at 165% with $1 $3 billion in excess available assets.
Dave: At quarter end, the combined U S mortgage insurance business statutory capital was $3 4 billion.
Dave: With a risk to capital ratio of 10 two to one.
Dave: Note that statutory capital includes $2 3 billion of contingency reserves at December 31.
Dave: Over the last 12 months U S mortgage insurance business has grown statutory capital by $198 million.
Dave: During the fourth quarter and full year, 2023, Essent guaranty paid dividends of $55 million and $295 million, respectively to its U S holding company.
Dave: For 2024 U S mortgage insurance companies can pay ordinary dividends of $304 million.
David Weinstock: Excluding the 0.3 COVID factor, the PMIR sufficiency ratio remains strong at 165%, with $1.3 billion in excess available assets. At quarter end, the combined U.S. mortgage insurance business statutory capital was $3.4 billion, with a risk to capital ratio of 10.2 to 1. Note that statutory capital includes $2.3 billion of contingency reserves at December 31st. Over the last 12 months, the U.S. mortgage insurance business has grown its statutory capital by $198 million. During the fourth quarter and full year 2023, Essent Guarantee paid dividends of $55 million and $295 million, respectively, to its U.S. holding company. For 2024, the U.S. mortgage insurance companies can pay ordinary dividends of $304 million. During the fourth quarter, Essent Realty paid a dividend of $60 million to Essent Group.
Dave: During the fourth quarter at the re paid a dividend of $60 million staffing group.
Dave: Also in the quarter Essent group paid cash dividends totaling $26 $4 million to shareholders and we repurchased 302000 shares for $15 million under the authorization approved by our board in May 2022.
Dave: Now, let me turn the call back over to Mark.
Mark: Thanks, Dave and closing we are pleased with our fourth quarter and full year 2023 financial results, which continue to reflect the strength of our operating model our high credit quality portfolio combined with resilience and housing unemployment continues to translate to strong credit performance, while our franchise benefited from the impact of higher rates on investment income and persistency.
Mark: Our strong operating performance continued to generate excess capital, which we will approach in a measured manner between retention investment in distribution to our shareholders. We believe this approach is in the best long term interest of Essent and our stakeholders. While Essent continues to play an integral role in supporting affordable and sustainable homeownership now, let's get to your questions operator.
Mark A. Casale: Also in the quarter, Essent Group paid cash dividends totaling $26.4 million to shareholders, and we repurchased 302,000 shares for $15 million under the authorization approved by our board in May 2022. Now, let me turn the call back over to Mark. Thanks, Dave. In closing, we are pleased with our fourth quarter and full year 2023 financial results, which continue to reflect the strength of our operating model. Our high credit quality portfolio, combined with resilience in housing and employment, continues to translate to strong credit performance, while our franchise benefited from the impact of higher rates on investment income and persistency. Our strong operating performance continues to generate excess capital, which we will approach in a measured manner between retention, investment, and distribution to our shareholders. We believe this approach is in the best long-term interest of Essent and our stakeholders, while Essent continues to play an integral role in supporting affordable and sustainable home ownership. Now, let's get to your questions. Operator?
Mark: Sure.
Mark: Okay.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: Your first question comes from the line of Rick Shane with JP Morgan.
Please go ahead.
Rick Shane: Hey, Mark Thanks for taking my questions and I appreciate your enthusiasm for taking the questions. This morning, I suspected from my peers not for me that yourselves.
Rick Shane: One of your questions. Your first on the list got us excited.
Speaker Change: Oh, there you go.
Speaker Change: Ross Sandler.
Speaker Change: So.
Speaker Change: And have a.
Speaker Change: High level question I was on a call yesterday, where the theme of the call was rate higher for longer and we're clearly at a crossroads and I don't think anybody really knows whats going to happen.
Speaker Change: One of the things that I'm really wrestling with is when I think of when I think of the sector.
Operator: At this time, I would like to remind everyone, in order to ask a question, press star on the number one on your. The first question comes from the line of Rick Shane with J.P. Morgan. Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: What are the scenarios that you think are the best and what are the scenarios that you think are the worst.
Mark A. Casale: Hey Mark, thanks for taking my questions and I appreciate your enthusiasm for taking the questions this morning. I suspect it's from my peers, not from me that you're so excited and want to use the questions. You were first on the list, got us excited.
Speaker Change: It can't be heads I win tails I win scenario.
Speaker Change: Are you worried about what's the ideal path forward from here.
Speaker Change: Well remember Rick I mean, taking a step back right rates to get all of the press, but really credit is what drives our performance longer term. So if you just think through and forecast out our business over the next three to five years.
Mark A. Casale: Oh, there you go. That's a rough day, Mark. It's a kind of a high-level question. I was on a call yesterday where the theme of the call was raped higher for longer, and we're clearly at a crossroads, and I don't think anybody really knows what's going to happen. Um, One of the things that I'm really wrestling with is when I think of Essent and when I think of the sector. What are the scenarios that you think are the best, and what are the scenarios that you think are the worst?
Speaker Change: The real expenses are we manage them well and you can kind of see where the insurance in force.
Speaker Change: Got and grow relative to the industry and investment income.
Speaker Change: That will ebb and flow depending on kind of where rates are it's to provision that's really has the most.
Speaker Change: Volatility in it so when I think of kind of 2024.
Mark A. Casale: I mean, it can't be a heads-I-win, tails-I-win scenario; what are you worried about, and what's the ideal path forward? Well, remember, Rick, I mean, taking a step back. Rates get all of the press, but really, credit is what drives our performance longer term. So if you just think through and forecast out our business over the next three to five years, the real, you know, expenses are, we manage them well, and you can kind of see where the insurance and force is going to grow relative to the industry. Investment income, you know, that'll ebb and flow depending on kind of where rates are. It really has the most volatility in it.
Speaker Change: It's hard to tell with rates in terms of where the market's going I'm not sure. It's everyone said it was higher for longer until until the fed spoken December then it became rates are going lower I think from an essent perspective, right I think we're well positioned in that.
Speaker Change: We're probably levered a bit positively to rates going down.
Speaker Change: If they don't.
Speaker Change: And the reason why is 45% of our bulk Rick is still in that 2021 advantage, which is.
Speaker Change: That's a little bit over 3%. So it's not really going anywhere. So if rates go down and IW increases I'm not sure that persistency goes down in tandem the way kind of a normal hedge just because of the unusual.
Mark A. Casale: So when I think of kind of 2024, it's hard to tell with rates in terms of where the market's going. I'm not sure it's, you know, everyone said it was higher for longer until the Fed spoke in December, then it became, you know, rates are going lower. I think from an Essent perspective, right, I think we're well positioned in that we're probably levered a bit positively to rates going down. If they don't, you know, and the reason why is, you know, 45% of our book Rick is still in that 2021 vintage, which is, it's a little bit over 3%.
Speaker Change: Kind of lock in effect of that portfolio.
Speaker Change: If rates stay higher for longer yield stay high.
Speaker Change: Cash the persistency in the book stays higher we continue to generate cash flow and the important thing for investors as we continue to grow book value per share right. So.
Speaker Change: A lot of things around growth, we're growing book value per share and if you just think about investment income for a second rig we grew that $60 million.
Speaker Change: <unk>.
Speaker Change: Year over year, if you were to equate that to insurance in force.
Speaker Change: It's close to like a $20 billion increase in insurance in force to say $20 billion at 40 basis points of Ace yield at a 35% combined ratio, which again just shows you theres different avenues for us to grow at Sn versus just kind of looking at the insurance in force. So I'm not going to say theres a hedge we win tails we win.
Mark A. Casale: So it's not really going anywhere. So if rates go down, NIW increases, I'm not sure the persistency goes down in tandem the way a normal hedge would, just because of the unusual kind of lock-in effect of that portfolio. If rates stay higher for longer, yields stay high, you know, cash continues to flow, you know, the persistency in the book stays higher. We continue to generate cash flow. And the important thing for investors is we continue to grow book value per share, right? So, you know, I've heard a lot of things around growth. We're growing book value per share. And if you just think about investment income for a second, Rick, we grew that $60 million year over year. If you were to equate that to insurance and forex, close to a $20 billion increase in insurance in force, just say $20 billion at 40 basis points, so base yield at a 35% combined ratio, which again just shows you there are different avenues for us to grow at Essent versus just kind of looking at the insurance in force. So I'm not going to say there's a heads we win, tails we win scenario.
Speaker Change: Scenario I would just say from a what are we concerned about it still credit it's always credit I'm not too worried about rates because I think again a lot of this is going to balance out credit is what we have our eye on and I think there as long as employment.
Speaker Change: Stays stays strong.
Speaker Change: I think one relatively good shape going into 2024.
Speaker Change: Got it okay very helpful. Thanks, Mark.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Bose George with <unk>. Please.
Bose George: Please go ahead.
Bose George: Hey, good morning, everyone. This is actually Alex on for Bose.
Alex: Firstly, just wanted to get a little more color surrounding why the cure rate of 28% was lower this quarter. It looked like it looked like it had been trending down from 90% in the fourth quarter of last year to 62% in <unk> is there anything specific that led that to decline sharply this quarter.
Speaker Change: No, Alex and again I would caution investors to dig too.
Mark A. Casale: I would just say from a, you know, what are we concerned about? It's still credit. It's always credit.
Speaker Change: Too far into new default rates cure rates.
Mark A. Casale: I'm not too worried about rates because I think, again, a lot of this is going to balance out. Credit is what, you know, we have our eye on. And I think there, as long as employment stays, you know, stays strong, I think we're in relatively good shape, you know, going into 2024. Very helpful.
Speaker Change: Percentage growth, we've seen we've heard a lot of the questions and just big picture Alex.
Speaker Change: At 14000 defaults on 820000 policies that we've been relatively consistent around.
Speaker Change: There's a lot of noise in the defaults in the claims more on the default side because of the.
Alex: Thanks, Mark. Sure. Your next question comes from the line of Boze George with KBW. Hey, good morning, everyone. This is actually Alex on ForBose.
Speaker Change: The effect of forbearance, alright, so to take a look at forbearance really the frictionless forbearance just ended a month ago. So what youre seeing is youre seeing defaults come in Theres certain.
Alex: Firstly, just wanted to get a little more color surrounding why the cure rate of..., lower this. I look like it had been trending down from 90% in the fourth quarter of last year. Is there anything specific that led that to decline sharply? No, Alex.
Speaker Change: Strategic defaulters that theyre getting a year extra on forbearance and then they're carrying so theres a lot of noise between the curation of the floating rates.
What it really is as noise.
Speaker Change: And now that there is a more of a friction.
Speaker Change: With forbearance in terms of what borrowers have to have to show up.
Mark A. Casale: And again, I would caution investors to not dig too far into new default rates, cure rates, percentage growth. We've heard a lot of those questions. And just look at the bigger picture, Alex.
Speaker Change: I would expect that to normalize in the coming kind of 12 to 18 months it remains to be seen.
Speaker Change: The message for investors as defaults are still the absolute level of defaults and even the default rate is it's pretty low I think its one eight at the end of the fourth quarter was one six.
Mark A. Casale: We're at 14,000 defaults on 820,000 policies, and we've been relatively consistent around. There's a lot of noise in the defaults and the claims, more on the default side because of the effect of forbearance. So let's take a look at forbearance.
Speaker Change: The quarter before but still relatively.
Speaker Change: Relatively good.
Speaker Change: The credit performance continues to be strong.
Mark A. Casale: Really, the frictionless forbearance just ended a month ago. So what you're seeing is you're seeing defaults come in. There are certain strategic defaulters who are getting a year extra on forbearance, and then they're curing. So there's a lot of noise between the cure rates and the default rates, which is what it really is. And now that there is more of a friction with forbearance in terms of what borrowers have to show, I would expect that to normalize in the coming kind of 12-ish to 18 months. It remains to be seen, but I think the message for investors is that defaults are still the absolute level of default, and even the default rate is pretty low. I think it was 1.8 at the end of the fourth quarter. Watch the video at https://www.youtube.com or the link in the description.
Speaker Change: Got it that makes sense and then maybe just one more I was wondering if you could provide any updated color on pricing in the industry. I know you mentioned earlier that you all expect the base premium to be stable over the course of the year, but in the event. The economy does have a soft landing and remains strong is there is there any chance we see some downside pressure on premiums or not really.
Speaker Change: No I wouldn't expect that I think again given the.
Speaker Change: The flexibility of the pricing engines, it really has given the entire industry.
Speaker Change: Again, I think I mentioned this last quarter.
Speaker Change: Lot of the pricing power per Se has moved to is move to the industry versus the lenders right I mean in the old rate cards that was the lender had a lot of control.
Speaker Change: It was bid biddings things out or allocating based on other services now it's really the best rate for each borrower.
Mark A. Casale: Got it, that makes sense. And then maybe just one more, wondering if you could provide any updated color on pricing in the industry. I know you mentioned earlier that you all expect the base premium to be stable over the course of the year. But in the event that the economy does have a soft spot, transcribed by https://otter.ai, No, I wouldn't expect that.
Speaker Change: All the mis have picked our spots.
Speaker Change: And given where some of the pricing engines and data that we get in the industry. We can see a lot of the movements in the percentages and I think everyone else can too. So we all have a pretty good beat on it.
And I think we price for unit economics, and the industry kind of reached a pretty low point in early 'twenty two.
Mark A. Casale: I think, again, given the flexibility of the pricing engines, it really has given the entire industry, as I mentioned this last quarter, a lot of the pricing power, per se, has moved to the industry versus the lenders, right? I mean, in the old rate cards, the lender had a lot of control, whether it was bidding things out or allocating based on other services. Now, it's really the best rate for each borrower. All the MIs have picked their spots, and given where some of the pricing engines and data that we get in the industry, we can see a lot of the movements and the percentages, and I think everyone else can too. So we all have a pretty good beat on it.
Speaker Change: <unk> came up.
Speaker Change: We generally look at <unk>.
Speaker Change: 12 ish to 15% returns on a unit economic basis, I would say, they're probably closer to the upper end announced pretty good.
Speaker Change: But I think its well priced and given kind of tail nature of the risks so I wouldn't in a small market.
Speaker Change: That's a relatively smaller market.
Speaker Change: We see pretty pretty consistent pricing I'm not sure as.
Speaker Change: As the industry starts to.
Speaker Change: There is a soft landing and the market starts to grow I wouldn't say a lot of change in pricing in fact, it's it's rarely a discussion point anymore, even at the lender level because it's in that used to be all about pricing because I saw it I don't really see it they are focusing on other things like I said, it really allows the S and the rest of the industry that price on risk.
Mark A. Casale: And I think we price for unit economics, and, you know, the industry kind of reached a pretty low point in early 22. Pricing came up, and we generally look at 12-ish to 15% returns on a unit economic basis. I would say they're probably closer to the upper end now.
Speaker Change: Delivering our best rates to borrowers and kind of remove that a little bit from the equation around.
Speaker Change: Around from our from our standpoint.
Speaker Change: Great. Thanks for taking the questions I appreciate it.
Mark A. Casale: It's pretty good, but I think it's well-priced given the kind of nature of the risk. So I wouldn't, in a small market, a relatively smaller market, we see pretty consistent pricing. I'm not sure, you know, as the industry starts, if there is a soft landing and the market starts to grow, I wouldn't see a lot of change in pricing. In fact, it's rarely a discussion point anymore, even at the lender level, because it's, and that used to be all about pricing because they saw it. They don't really see it that way.
Speaker Change: Sure.
Speaker Change: As a reminder, if you would like to ask a question press star one on your telephone keypad.
Speaker Change: The next question comes from the line of Doug Harter with UBS. Please go ahead.
Doug Harter: Thanks Mark.
Doug Harter: Tenants hearing what you said about the risk of reading too much into kind of one quarter.
Doug Harter: Talk about how.
Doug Harter: Kind of the recent vintages are performing.
Doug Harter: Performance and how delinquency.
Speaker Change: And those trends are performing versus kind of more historical vintages.
Speaker Change: Well again, I think theres a lot a lot of noise, Doug with kind of.
Speaker Change: The forbearance.
Mark A. Casale: They're focusing on other things. And like I said, it really allows Essent and the rest of the industry to price on risk, delivering our best rates to borrowers. And it's kind of removed that a little bit from the equation from our standpoint.
Speaker Change: We don't see I'll give you I'll tell you one thing that we see early payment default rate early payment defaults post COVID-19 are higher than they were pre COVID-19.
Speaker Change: And we assigned most of that to forbearance, because a lot of us are all here and they're not going to claim so it's back to what I said earlier about that frictionless.
Mark A. Casale: Great. Thanks for taking the questions, Mark. I appreciate it. Sure.
Speaker Change: Cost or ease of forbearance is really creating some noise in the numbers, but again step back Doug.
Operator: As a reminder, if you would like to ask a question, press star 1 on your telephone. Your next question comes from the line of Doug Harter with UBS. Go to Beadaholique.com for all of your beading supplies needs!
Speaker Change: Our insurance in force average FICO was 746 and I know you cover a lot of different businesses specialty finance 746 is a pretty strong.
Doug Harter: Thanks, Mark, you know, kind of hearing what you said about the risk of reading too much into Q&A Q&A, kind of how the recent vintages are performing and how. Transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: As a pretty strong credit score and also.
Speaker Change: I would like to point out just in the context of time right. If you think about that.
Speaker Change: The Gse's really the modern day GSE started in right around the early nineties right. That's when do you and LP.
Mark A. Casale: Well, again, I think there's a lot of noise out there, Doug, with kind of, The forbearance, we don't see, I'll give you, I'll tell you one thing that we see, early payment defaults, right? Early payment defaults post-COVID are higher than they were pre-COVID. We assign most of that to forbearance because a lot of us, they're all curing, and they're not going to claim.
Speaker Change: Started the process and you had the standardization of the mortgage business. So if you go back from say 1990 to 2023 33 years, Doug and you look at losses on GSE mortgages generally outside of the <unk> advantage. They are less than a 100 basis points. So in the context of time and this is what we.
Speaker Change: To ensure every day and then remember post crisis you have the advent of QM you had the strengthening of the models you had stronger QC you had forbearance you brought on Pmiers, which has good capital.
Mark A. Casale: So it's back to what I said earlier about that frictionless cost or ease of forbearance creating some noise in the numbers, but again, step back, Doug. Our insurance-in-force average FICO is 746. I mean, and I know you cover a lot of different businesses, specialty finance. 746 is a pretty strong credit score.
Speaker Change: Standards for the semi industry, we ensure boring GSE mortgages.
Speaker Change: And it's a boring business and it's great and we like it that way, but that's why when people are looking at.
Speaker Change: These type of quarter to quarter, our trends it is a little bit more of a specialty finance type approach to the business.
Mark A. Casale: And also, I would like to point out, just in the context of time, right? If you think about when the GSEs really started, the modern-day GSEs started right around the early 1990s, right? That's when DU and LP started the process, and you had the standardization of the mortgage business. So if you go back from, say, 1990 to 2023, 33 years, Doug, and you look at losses on GSE mortgages, generally, outside of the 05 to 07 vintage, there are less than 100 basis points.
Speaker Change: In terms of the questions and I would I would argue.
Speaker Change: That were more like a specialty and shore and our specialty happens to be mortgage and Thats now thats, our expertise, but we're really a portfolio business, it's driven by the portfolio and again just when you think about the top line, that's being driven off.
Speaker Change: The business and just the stability of the credit and I forgot to add that we've hedged a lot of the credit out too so theres that added layer of protection.
Mark A. Casale: So in the context of time, and this is what we insure every day, and then remember, post-crisis, you had the advent of QM, you had the strengthening of the models, you had stronger QC, you had forbearance, and you brought in PMIRs, which are good capital standards for the MI industry. We insure boring GSE mortgages, and it's a boring business, and it's great, and we like it that way, but that's why when people are looking at these types of quarterly or trends, it is a little bit more of a specialty finance type approach to the business in terms of the questions, and I would argue that we're more like a specialty insurer. Our specialty happens to be mortgages, and that's our expertise, but we're really a portfolio business.
Speaker Change: Again bigger picture of as these.
Speaker Change: I think I think we've said it in the script over $700 million of operating cash flow.
Speaker Change: The issue for the industry in the next few years isn't going to be the performance of the portfolio or growth or any of those sort of things, it's really going to be allocation of capital.
Speaker Change: A lot of capital being generated by us and others and certain <unk> allocated one way in certain I might as well do it the other way, but that's really going to be the differentiator.
Speaker Change: And the business.
Speaker Change: Longer term from an investor perspective, so hopefully that gives you some color.
Speaker Change: I appreciate it mark thank you.
Speaker Change: I will now turn the call back over to management for closing remarks. Please go ahead Sir.
Mark A. Casale: It's driven by the portfolio, and again, just when you think about the top line that's being driven off the business and just the stability of the credit, and I forgot to add that we've hedged a lot of the credit out too, so there's that added layer of protection. Again, bigger picture than these, I think we've said it in the script, over $700 million of operating cash flow. The issue for the MI industry in the next few years isn't going to be the performance of the portfolio or growth or any of those sort of things. It's really going to be the allocation of capital. There's a lot of capital being generated by Essent and others, and certain managers will allocate it one way, and certain managers will do it the other way, but that's really going to be the differentiator and the business, longer term from an investor perspective, so hopefully that gives you some color.
Speaker Change: Yes. Thank you everyone for your time today and have a great weekend.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
Please wait.
Speaker Change: France will begin shortly.
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Operator: I appreciate it. I will now turn the call back over to management for closing remarks. Yeah, thank you everyone for your time today, and have a great weekend. Ladies and gentlemen, that concludes today's call. Thank you all for joining us, and you may now, Please wait; the conference will begin shortly. Please stand by. Please stand by; the conference will begin shortly.
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