Q2 2024 Essent Group Ltd Earnings Call

Amy: Thank you for standing by. My name is Amy, and I will be your conference operator for today. I would like to welcome everyone to the Essent Group 2nd Quarter 2024 Earnings Call. Please note that all lines have been placed on mute to prevent any background noise.

Thank you for standing by my name is Amy and I will be your conference operator for today.

Mihir Bhatia: Thank you for the questions. There are no further questions at this time, so I would like to turn it back over to the management team for closing remarks.

Speaker Change: I would like to welcome everyone to the Essent group second quarter 2024 earnings call. Please note that 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 he would like to ask a question. During this time simply press the star followed by the number one on your telephone keypad.

Speaker Change: If you would like to withdraw your question again press the star and number one it is now my pleasure to turn the call over to Phil Stephano Investor Relations you May begin your conference.

Amy: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star and number one. It is now my pleasure to turn the call over to Phil Stefano, Investor Relations. You may begin your conference.

Unknown Executive: I'd like to thank everyone for their attendance today and questions, and have a great weekend.

Operator: Thank you. This concludes today's conference call. You may now disconnect. Please wait; the conference will begin shortly.

Amy: You Amy 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.

Phil Stefano: and welcome to our call. 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 second quarter of 2024, 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.

Speaker Change: Our press release, which contains <unk> financial results for the second quarter of 2024 was issued earlier today and is available on our website at Essent group Dot com.

Speaker Change: 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 a 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 the use of forward-looking statements in today's press release, as well as the risk factors included in our Form 10-K filed with the SEC on February 16th, 2024, 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.

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.

Speaker Change: For a discussion of these risks and uncertainties. Please review the cautionary language regarding.

Speaker Change: Statements in today's press release.

Speaker Change: The risk factors included in our Form 10-K filed with the SEC on February 16th 2024, 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.

Mark Casale: Thanks Phil and good morning everyone. Earlier today, we released our second quarter 2024 financial results, which continue to benefit from favorable credit performance and the impact of higher interest rates on the persistency of our insured portfolio and investment income. Our results for the quarter continue to demonstrate the strength of our business model and how Essent is uniquely positioned within the current economic environment. Our outlook for housing and our business remains constructive. Favorable demographics continue to drive housing demand, while supply remains constrained by a lack of inventory and the lock-in effect of previously low mortgage rates.

Mark: Thanks, Phil and good morning, everyone earlier today, we released our second quarter 2024 financial results, which continue to benefit from favorable credit performance and the impact of higher interest rates on the persistency of our insured portfolio and investment income our results for the quarter continue to demonstrate the strength of our business model and how essent is uniquely.

Speaker Change: Positioned within the current economic environment.

Speaker Change: Our outlook for housing and our business remains constructive favorable demographics continue to drive housing demand while supply remains constrained by a lack of inventory and a lock in effect previously low mortgage rates we.

Mark Casale: We believe that the supply-demand imbalance should continue to support home prices, which is positive for our business. While housing and the labor markets have demonstrated resiliency, we also recognize that affordability remains challenged and that consumers are being impacted by higher rates and higher. As a risk management company, we view Essent as well positioned for a range of economic scenarios, given the strength of our balance sheet and our buy, manage, and distribute operating model. And now for our results.

Speaker Change: We believe that the supply demand imbalance should continue to support home prices, which is positive for our business.

Speaker Change: Warehousing and the labor markets have demonstrated resiliency. We also recognize that affordability remains challenged and that consumers are being impacted by higher rates and higher prices.

Speaker Change: As a risk management company, we view Essent is well positioned for a range of economic scenarios, given the strength of our balance sheet and our buy manage and distribute operating model.

Mark Casale: For the second quarter of 2024, we reported net income of $204 million, compared to $172 million a year ago. On a diluted per share basis, we earned $1.91 for the second quarter, compared to $1.61 a year ago. On an annualized basis, our return on average equity was 15% in the second quarter. As of June 30th, our U.S. mortgage insurance in force was $241 billion, a 2% increase from a year ago. Our 12-month persistency was approximately 87%, relatively flat compared to last quarter. Additionally, nearly 70% of our in-force portfolio has a note rate of 5.5% or lower. We expect that the current level of rates should support elevated persistency for the remainder of 2024.

Speaker Change: And now for our results for the second quarter of 2024, we reported net income of $204 million compared to $172 million a year ago.

Speaker Change: The diluted per share basis, we earned $1 91 for the second quarter compared to $1 61, a year ago on an annualized basis. Our return on average equity was 15% in the second quarter.

Speaker Change: As of June 30th our U S mortgage insurance in force was $241 billion, a 2% increase from a year ago. Our 12 month persistency was approximately 87% relatively flat compared to last quarter, while nearly 70% of our enforced portfolio has a note rate of five 5% or lower we.

Speaker Change: Expect that the current level of rates should support elevated persistency for the remainder of 2024.

Mark Casale: The credit quality of our insurance-in-force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 93%. We continue to be pleased with the quality of new business given the prudent credit limits of the GSEs and the high underwriting standards of our lender partners. In our existing portfolio, home price appreciation should continue to mitigate potential claims and support near-term credit performance. In our core mortgage insurance business, we remain focused on activating new lenders and continuing to refine and enhance our proprietary credit engine, S&Edge, through additional data sources.

Speaker Change: 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%. We continue to be pleased with the quality of the new business given that prudent credit box of the GSE and the high underwriting standards of our lender partners.

Speaker Change: And our existing portfolio of home price appreciation should continue to mitigate potential claims and support near term credit performance.

Speaker Change: And our core mortgage insurance business, we remained focused on activating new lenders and continuing to refine and enhance our proprietary credit engine S and edge two additional data sources in a challenging mortgage origination market S and edge is an advantage for lenders at their borrowers benefit from receiving our best rate.

Mark Casale: In a challenging mortgage origination market, S&Edge is an advantage for lenders as their borrowers benefit from receiving our best rates. We remain pleased with the progress that we are making in our title business as we continue to make investments to leverage the operations and technology expertise from our mortgage origination business. In building out title, we have a longer-term view and maintain a control, profitability, and growth philosophy. From my standpoint, we are currently in the control phase and do not expect that title will have any meaningful impact on earnings over the near term.

Speaker Change: We remain pleased with the progress that we're making in our title business as we continue to make investments to leverage the operations and technology expertise from our semi business and building out title, we have a longer term view and maintain a control profitability in growth velocity from my standpoint, we are currently in the control phase and do not expect.

Speaker Change: The title will have any meaningful impact on earnings over the near term.

Mark Casale: Longer term, however, we believe the title will generate supplemental earnings for our franchise, similar to what we have demonstrated with Essent Re. As for S&RE, we continue to be pleased with its strong earnings profile. S&RE's steady performance is driven by its third-party business, which is primarily related to risk assumed from GFC, CRT, and fee-generating MGA services. As of June 30th, Essent Re's third-party risk and force was $2.3 billion. We continue to operate from a position of strength with $5.4 billion in GAAP equity, access to $1.3 billion in excess of Wall Street insurance, and over $1.2 billion of available holding company liquidity.

Speaker Change: Longer term. However, we believe that title will generate supplemental earnings for our franchise similar to what we have demonstrated with Essent re.

Speaker Change: As for respiratory we continue to be pleased with its strong earnings profile <unk> steady performance is driven by its third party business, which is primarily related to risk assumed from GSE CRT and fee generating MGA services.

Speaker Change: As of June 30, Essent re is third party risk in force was $2 $3 billion.

Speaker Change: We continue to operate from a position of strength with five $4 billion in GAAP equity access to $1 $3 billion in excess of loss reinsurance and over $1 $2 billion of available holding company liquidity.

Mark Casale: On July 1st, we closed on our initial senior notes offering of $500 million and upsized our revolving credit facility to $500 million. These transactions strengthened Essent's capital structure and enhanced its financial flexibility. In total, we secured approximately $1 billion of total debt capacity while continuing to maintain the lowest financial leverage in the mortgage insurance industry. Additionally, effective July 1, we entered into an excess of loss transaction with a panel of highly rated reinsurers to cover our 2024 business.

Speaker Change: On July one we closed on our initial senior notes offering of $500 million and Upsized, our revolving credit facility to $500 million. These transactions strengthen essence capital structure and enhanced our financial flexibility and total we secured approximately $1 billion of total debt capacity, while continuing to maintain the lowest financial leverage.

Speaker Change: The mortgage insurance industry.

Speaker Change: Effective July one we entered into an excess of loss transaction with a panel of highly rated reinsurers to cover our 2024 business. We continue to be encouraged by the strong demand from reinsurers, who are taking mortgage credit risk looking forward, we remain committed to our programmatic and diversified reinsurance strategy executed through the quota.

Mark Casale: We continue to be encouraged by the strong demand from re-insurers for taking mortgage credit risk. Looking forward, we remain committed to a programmatic and diversified re-insurance strategy executed through the QuotaShare, XOL, and ION channels. Cash and investments as of June 30th were $5.9 billion, and our new money yield in the second quarter was approximately 5%. The annualized investment yield for the second quarter was 3.8%, up from 3.5% a year ago. New money rates have largely held stable over the past several quarters and remain a tailwind for investment income growth. With a year-to-date mortgage insurance underwriting margin of 79%, our franchise continues to generate solid returns and remains well-positioned from an earnings, cash flow, and balance sheet perspective. Now, let me turn the call over to Dave.

Speaker Change: Sure <unk>.

Speaker Change: And I'll end channels.

Speaker Change: Cash and investments as of June 30th were $5 $9 billion and our new money yield in the second quarter was approximately 5% the annualized investment yield for the second quarter was three 8% up from three 5% a year ago, new money rates have largely held stable over the past several quarters and remain a tailwind for investment income growth.

Dave: With a year to date mortgage insurance underwriting margin of 79%. Our franchise continues to generate solid returns and remains well positioned from an earnings cash flow and balance sheet perspective, now, let me turn the call over to Dave.

Dave Weinstock: Thanks, Mark. Good morning, everyone.

Dave: Thanks, Mark and good morning, everyone. Let me review our results for the quarter and a little more detail.

Dave Weinstock: Let me review our results for the quarter in a little more detail. For the second quarter, we earned $1.91 per diluted share compared to $1.70 last quarter and $1.61 in the second quarter a year ago. Our U.S. mortgage insurance portfolio ended June 30, 2024, with insurance in force of $240.7 billion, $2.2 billion compared to March 31st, and 2% higher compared to the second quarter a year ago. Persistency at June 30th was 86.7%.

Dave: For the second quarter, we earned $1 91 per diluted share compared to $1 70 last quarter and $1 51 in the second quarter a year ago.

Dave: Our U S mortgage insurance portfolio ended June 32024, with insurance in force of $240 7 billion up.

Dave: Up to $2 billion compared to March 31.

Speaker Change: And 2% higher compared to the second quarter a year ago.

Speaker Change: Persistency at June 30th was 86, 7%.

Dave Weinstock: Largely unchanged from 86.9% last quarter. Net premiums earned for the second quarter were $252 million and included $17.7 million of premiums earned by Essent Re on our third-party business and $16.6 million of premiums earned by the title operation. The base average premium rate for the U.S. mortgage insurance portfolio for the second quarter was 41 basis points, and the net average premium rate was 36 basis points for the second quarter, both consistent with last quarter.

Speaker Change: Largely unchanged from 86, 9% last quarter.

Speaker Change: Net premiums earned for the second quarter were $252 million and included $17 $7 million of premiums earned by Essent re on our third party business.

Speaker Change: And $16 $6 million of premiums earned by the title operations.

Speaker Change: The base average premium rate for the U S mortgage insurance portfolio for the second quarter was 41 basis points and the net average premium rate was 36 basis points for the second quarter.

Speaker Change: Both consistent with last quarter.

Dave Weinstock: Net investment income increased $4 million, or 8%, to $56.1 million in the second quarter of 2024 compared to the previous quarter, due primarily to higher balances and continuing to invest at higher yields than the book yield of our existing portfolio. Other income in the second quarter was $6.5 million compared to $3.7 million last quarter. The largest component of the increase was the change in fair value of embedded derivatives in certain of our third-party reinsurance agreements.

Speaker Change: Net investment income increased $4 million or 8% to $56 1 million in the second quarter of 2024 compared to last quarter, due primarily to higher balances and continuing to invest at higher yields in the cookie out of our existing portfolio.

Speaker Change: Other income in the second quarter was $6 5 million compared to $3 $7 million last quarter.

Speaker Change: The largest component of the increase with the change in fair value of embedded derivatives and certain of our third party reinsurance agreements.

Dave Weinstock: In the second quarter, we recorded a $732,000 increase in the fair value of these embedded derivatives, compared to a $1.9 million decrease recorded last quarter. In the second quarter, we recorded a benefit for losses and loss adjustment expenses of $334,000, compared to a provision of $9.9 million in the first quarter of 2024 and a provision of $1.3 million in the second quarter a year ago. At June 30th, the default rate on the U.S. mortgage insurance portfolio was 1.71%, down one basis point from 1.72% at March 31st, 2024.

Speaker Change: In the second quarter, we recorded a $732000 increase in the fair value of these embedded derivatives compared to a $1 $9 million decrease reported last quarter.

Speaker Change: In the second quarter, we recorded a benefit for losses and loss adjustment expenses of $334000.

Speaker Change: Compared to a provision of $9 9 million in the first quarter of 2024, and a provision of $1 $3 million in the second quarter a year ago.

Speaker Change: At June 30th the default rate on the U S mortgage insurance portfolio was 171%.

Speaker Change: Down one basis point from 172% at March 31, 2024.

Dave Weinstock: Other underwriting and operating expenses in the second quarter were $56 million and included $12.9 million of title expenses. Expenses for the second quarter also included title premiums retained by agents of $10.2 million, which are reported separately on our Consolidated Income Statement. Our consolidated expense ratio was 26% this quarter. Our expense ratio excluding title, which is a non-GAAP measure, was 18% this quarter. A description of our expense ratio excluding title and the reconciliation of GAAP can be found in Exhibit O of our press release.

Speaker Change: Other underwriting and operating expenses in the second quarter were $56 million and included $12 $9 million of title expenses.

Speaker Change: <unk> for the second quarter also included title premiums retained by agents of $10 $2 million, which are reported separately on our consolidated income statement.

Speaker Change: Our consolidated expense ratio was 26% this quarter.

Speaker Change: Our expense ratio, excluding title, which is a non-GAAP measure was 18% this quarter.

Speaker Change: A description of our expense ratio, excluding title and the reconciliation to GAAP can be found in exhibit a of our press release.

Dave Weinstock: As Mark noted, our holding company liquidity remains strong, and June 30th included $425 million of term loans outstanding with a weighted average interest rate of 7.07%. As of June 30th, 2024, our debt to capital ratio was 7.3%. On July 1st, we closed our first public offering of senior unsecured notes, issuing $500 million of notes with an annual interest rate of 6.25% that mature on July 1st, 2029. Approximately $425 million of the proceeds were used to pay off the term loan outstanding as of June 30th, with the remainder available for working capital and general corporate purposes.

Speaker Change: As Mark noted our holding company liquidity remains strong at June 30 included $425 million of term loan outstanding with a weighted average interest rate of seven 7%.

Speaker Change: At June 30th 2020 for our debt to capital ratio was seven 3%.

Speaker Change: On July one we closed our first public offering of senior unsecured notes issuing $500 million of notes with an annual interest rate of six 5% that mature on July one 2029.

Speaker Change: Approximately $425 million of the proceeds were used to pay off the term loan outstanding as of June 30th.

Speaker Change: With the remainder available for working capital and general corporate purposes.

Dave Weinstock: After giving effect to the senior note issuance and term loan repayment, on July 1st, our debt to capital ratio was approximately 8.5%. Additionally, effective July 1st, we entered into a five-year, $500 million unsecured revolving credit facility, amending and replacing our previous $400 million secured revolving credit facility. Combined, these transactions provide Essent with access to approximately $1 billion in capital. At June 30th, Essent Guarantees' PMAIRS sufficiency ratio, excluding the 0.3 COVID factor, remains strong at 169%, with $1.4 billion in excess available assets.

Speaker Change: After giving effect to the senior note issuance in term loan repayments on July one our debt to capital ratio was approximately eight 5%.

Speaker Change: Okay.

Speaker Change: Additionally, effective July one we entered into a five year $500 million unsecured revolving credit facility amending and replacing our previous $400 million secured revolving credit facility.

Speaker Change: Combined these transactions provide assay with access to approximately $1 billion in capital.

Speaker Change: Yeah.

Speaker Change: At June 30th Essent, Guaranty's, PMA or sufficiency ratio, excluding the 0.3 Covid factor remains strong at 169% with $1 4 billion in excess available assets.

Mark Casale: During the second quarter, Essent Guarantee paid a dividend of $62.5 million to its U.S. holding company. Based on the unassigned surplus at June 30th, the U.S. mortgage insurance companies could pay additional ordinary dividends of $329 million in 2024. At quarter end, the combined U.S. mortgage insurance business statutory capital was $3.5 billion, with a risk to capital ratio of 9.9 to 1. Note that statutory capital includes $2.4 billion of contingency reserves on June 30.

Speaker Change: During the second quarter, Essent guaranty paid a dividend of $62 $5 million to its U S holding company.

Speaker Change: Based on unassigned surplus at June 30th the U S mortgage insurance companies can pay additional ordinary dividends of $329 million in 2024.

Speaker Change: At quarter end, the combined U S mortgage insurance business statutory capital was $3 $5 billion with a risk to capital ratio of nine nine to one.

Speaker Change: Note that statutory capital includes $2 $4 billion of contingency reserve to June 30th.

Mark Casale: Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $287 million while at the same time paying $222.5 million of dividends to our U.S. holding company. During the second quarter, Essent repaid a dividend of $87.5 million to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $29.6 million to shareholders, and we repurchased 396,000 shares for $22 million under the authorization approved by our board in October 2023. Now, let me turn the call back over to Mark. Thanks, Dave. In closing, we are pleased with our second quarter.

Speaker Change: Over the last 12 months the U S mortgage insurance business is grow statutory capital by $287 million, while at the same time paying $222 5 million of dividends to our U S holding company.

Speaker Change: During the second quarter Essent re paid a dividend of $87 $5 million to Essent group also in the quarter Essent group paid cash dividends totaling $29 $6 million to shareholders and we repurchased 396000 shares for $22 million under the authorization approved by our board in October 2023.

Speaker Change: Now, let me turn the call back over to Mark.

Mark Casale: Thanks, Dave. In closing, we are pleased with our second quarter performance. Our results continue to benefit from strong credit performance and the positive impacts of higher interest rates on persistency and investment income. Our balance sheet capital and liquidity remain strong and were further strengthened through our successful $500 million senior debt issuance. When combined with an amended and extended revolving credit facility, we secured approximately $1 billion in total debt capacity and remain well-positioned.

Mark: Thanks, Dave and closing we are pleased with our second quarter performance. Our results continue to benefit from strong credit performance and the positive impacts of higher interest rates, our persistency and investment income our balance sheet capital and liquidity remains strong and were further strengthened through our successful $500 million senior debt issuance while combined.

Speaker Change: With an amended and extended revolving credit facility, we secured approximately $1 billion in total debt capacity and remain well positioned looking.

Mark Casale: Looking forward, we remain confident in our buy, manage, and distribute operating model and believe that Essent is well-positioned in the current economic environment to generate high-quality earnings and attractive operating returns. Now, let's get to your questions. Operator?

Mark: Forward, we remain confident in our buy manage and distribute operating model and believe that Essent is well positioned in the current economic environment to generate high quality earnings and attractive operating returns now let's get to your questions operator.

Speaker Change: Okay.

Speaker Change: Thank you.

Amy: The floor is now open for questions, and as a reminder to enter the queue, we're going to press star and the number one on the telephone keypad. If you are called upon to ask your question and are listening via a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from the line of Terry Ma with Barclays. Your line is now open.

Speaker Change: The floor is now open for questions and as a reminder to enter the queue, we're going to press star and the number one on the telephone keypad.

Speaker Change: If you are called upon to ask your question and our listening via allowed speaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.

Speaker Change: Our first question comes from the line of <unk>.

Terry MA: Terry MA with Barclays.

Speaker Change: Your line is now open.

Terry MA: Hey, thank you. Good morning.

Terry MA: Hey, Thank you good morning.

Terry MA: If I look at your cumulative cure rates by quarter of default going back to 2021, and it's been pretty consistent it looks like about 90% of your defaults on any given quarter cure within about a year. So I'm just curious as we kind of look forward and take into account the macro backdrop and the vintage seasoning math, that's occurring and maybe the various announcements.

Unknown Executive: If I look at your cumulative cure rates by quarter of default going back to 2021, it's been pretty consistent. It looks like about 90% of your defaults on any given quarter cure within about a year. So I'm just curious, as we kind of look forward and take into account the macro backdrop and the vintage seasoning math that's occurring and maybe the various amounts of embedded home equity across the different vintages, does that cumulative cure rate performance change going forward?

Speaker Change: <unk> home equity across the different vintages does that cumulative cure performance change going forward.

Dave Weinstock: Hey, Terry. Thanks for the question. It's Dave Weinstock.

Speaker Change: Hey, Terry Thanks for the question as stabilized stack.

Speaker Change: No.

Dave Weinstock: It will be something that, you know, in the current environment and with what is in our default inventory right now, I would not expect significant changes from that 90% cure rate after about a year. You know, there are a couple of things that are clearly favorably impacting our credit performance. You know, it's been a very favorable credit environment with a high level of cures from the default inventory. The other thing that's really still playing through the defaults is forbearance.

Speaker Change: It will be something that.

Speaker Change: In the current environment and with what is in our default inventory right now.

Terry: I would not expect significant changes from that 90% cure rate after about a year there.

Speaker Change: There are a couple of things that are clearly favorably impacting our credit performance.

Terry: Been a very favorable credit environment with a high level of cures from the default inventory. The other thing Thats really play still playing through the default.

Speaker Change: The default is forbearance.

Dave Weinstock: I mean, forbearance ended at the end of November last year, but we still have a handful of defaults that are in forbearance. And we still have not seen the return of pre-COVID normal default patterns, even at this point in time. And so we think it may take a little bit of time to play out. But that said, that should support the roughly 90% cure rate that we're seeing, you know, about a year out.

Speaker Change: Forbearance ended at the end of November last year, but we still have a handful of defaults that are in forbearance and you still have we still have not seen the return of pre COVID-19 normal default patterns. Even at this point in time and so we think it may take a little bit of time to play through but that said that should.

Terry: Support the.

Terry: Roughly 90% cure rate that we're seeing about a year out.

Dave Weinstock: Got it. That's helpful. And is there a similar stat that you can share for maybe kind of pre-COVID vintages? Or like a normalized stat for lack of a better term?

Speaker Change: Got it that's helpful and is there a similar stat that you can share from maybe kind of pre COVID-19 vintages.

Speaker Change: Hello, or like a.

Terry: Normalized stat for lack of a better term.

Dave Weinstock: Yeah, I'm not sure I have that necessarily at my fingertips, Terry, but I would think because our credit was really very solid prior to COVID, that it would probably be pretty similar. Got it. Okay, that's helpful.

Terry: Yes, I'm not sure I have that necessarily at my fingertips, Terry, but I would think because our credit was really very solid prior to COVID-19 that it would probably be pretty similar.

Terry MA: Got it. Okay. That's helpful. Thank you.

Terry: Got it okay. That's helpful. Thank you.

Terry: Yes.

Soham Bhonsle: Your next question comes from Soham Bhonsle from BTIG. Your line is now open.

Speaker Change: Your next question comes from Soham, Firstly from BT I E.

Speaker Change: Your line is now open.

Soham: Hey, guys good morning.

Soham Bhonsle: So, Mark, I think, historically, the MIs have priced to sort of a 20% through-cycle loss ratio. And, you know, obviously, we're well below that today.

Speaker Change: So mark I think historically, the <unk> price to sort of 20% through cycle loss ratio, obviously, we're well below that today.

Mark Casale: But is it your sense that, you know, as an industry, we've sort of moved away from that sort of framework, given the sort of tools that every MI has to, you know, react to these changes and just the advent of reinsurance or better manufacturing quality? I'm just trying to get a sense for what's embedded in industry pricing today because, look, losses could go up. But as long as, you know, we're all sort of pricing for them, the expected returns shouldn't really be that different from what you underwrote them as.

Speaker Change: But is your sense that as an industry, we've sort of moved away from that sort of framework given the sort of tools that every MRI has to react to these changes and just the advent of reinsurance or better manufacturing quality I am just trying to get a sense for what's embedded in industry pricing today, because local losses could go up but as long as we're also a price.

Speaker Change: For them the expected returns shouldn't really be that different from what you underwrote them at.

Mark Casale: Yeah, it's a good question. Soham and I agree with you, I think in terms of when we think about losses, longer term or just through the cycle, I would really equate it to the claim rate. We've always kind of priced it at 2% to 3% cumulative claim rate, but it's clearly running below that now. But that's where we price, and that's kind of how we look at where our pricing is today, kind of within that 12% to 15% range, given where the rates or the losses are coming in. Clearly, we're at the high end of that range, but nothing lasts forever.

Speaker Change: Yes, it's a good question so ham.

Speaker Change: I agree with you I think in terms of when we think about losses.

Speaker Change: Longer term or just through the cycle I would really equated to claim rate.

Speaker Change: <unk> always kind of price to that 2% to 3%.

Speaker Change: Cumulative claim rate is clearly running below that now, but that's where we price. So thats kind of how we look for when we know where our pricing is today kind of within that 12% to 15% range given where.

Speaker Change: The rates are the losses are coming in clearly we're at the high end of that range, but.

Speaker Change: Nothing last forever. So we would expect as we get into a softening economy, whether thats. This year next year it doesn't really matter.

Mark Casale: So we would expect as we get into a softening economy, whether that's this year or next year, it doesn't really matter. The provision will go up for sure, but we do have the ability with the engines to change pricing relatively quickly, which should, to your point, maintain probably more consistent loss ratios and, more importantly, more consistent returns. And that's a big change, right?

Speaker Change: Provision will go up for sure, but we do have the ability with the engines to change pricing relatively quickly.

Speaker Change: Should to your point maintain probably more consistent.

Speaker Change: Loss ratios and more important and more consistent returns and that's a big change right. We've talked about all the different changes in.

Mark Casale: We've talked about all the different changes in the business over the years, and you touched on one, right? With the regulatory change, with the qualified mortgage, it's just a cleaner book that we're seeing with the GSEs, right? Better credit quality, enhanced performance with DU and LP, good quality control, all those sorts of things through the GSEs are bringing a better quality, 746 FICO, which you didn't see kind of pre-crisis. And then the engines, clearly, we think we have a bit of an advantage with our credit engine, but the pricing engines with all the MIs do give us the ability to price and change prices relatively quickly. We did it during COVID.

Speaker Change: In the business over the years and you touched on one rate with the qualify the regulatory change with a qualified mortgage it's just a cleaner book that we're seeing with the Gse's better better.

Speaker Change: Better credit quality enhanced.

Speaker Change: Performance with EU and LP, good quality control, all those sort of things through the GSC is bringing a better a better quality 746, FICO, which you didn't see kind of pre crisis.

Speaker Change: And then the engines and are clearly we think we have a bit of an advantage with our credit engine, but the pricing engines with all the mis have do do give us the ability to price and change price in a relatively quickly we did it during COVID-19, we did a lot in 'twenty two and 'twenty three.

Mark Casale: We did it a lot in 22 and 23, when we started to really look for the ability to kind of, we saw more normalized credit rates coming or loss rates coming, so we were able to move prices. And I would expect, given, when you think about different pockets in the country, whether it's Texas or Florida, some softening, the month supply starting to extend both with existing homes and new homes. The engine allows us to react to that fairly quickly. So again, I think with that tool, I do think it helps us.

Speaker Change: When we started to really look for ability to kind of we saw more normalized credit rates coming our loss rates coming so we're able to move pricing and I would expect given again when you think about different pockets in the country, whether it's Texas or Florida.

Speaker Change: Some softening.

Speaker Change: Amongst supply starting to extend both with existing home existing homes and new homes.

Speaker Change: Engine allows us to react to that fairly quickly. So again I think with that tool.

Speaker Change: And I do think it helps us and as we think about.

Speaker Change: The economy is.

Speaker Change: <unk> beginning to slow what does that really mean could mean lower rates.

Mark Casale: And as we think about the economy potentially beginning to slow, what does that really mean? It could mean lower rates, mortgage rates, which I think actually helps, right? It'll start to lighten up affordability, which will be good. So you'll see more buyers come into the market, which I think will help keep quality standards really well. Lenders will start to see more production, which I think is a good thing. And I think it will also start to show the balanced business model that we've had. We've always been kind of more in a lower rate environment. We performed well. Rates switched. You know, they got really high really fast in 22.

Speaker Change: Mortgage rates, which I think is actually helps right. It started it will starting to lighten up affordability, which will be good.

Speaker Change: So youll see youll see more and more buyers come into the market.

Speaker Change: Which I think will will help keep keep quality standards really well lenders will start to see more production, which I think is a good thing and I think it will also start to show the balance business model that we've had right. We've always been kind of more on a lower rate environment, we performed well rates switch.

Speaker Change: They've got really high really fast in 'twenty, two our originations went down but we saw kind of the upside with persistency and investment income growth. So if rates start to move the other way what does that mean, well and IW is going to go up persist.

Soham Bhonsle: You know, our originations went down, but we saw kind of the upside with persistency and investment income growth. So if rates start to move the other way, what does that mean? Well, NIW is going to go up, and persistency will go down, obviously, a bit. Investment yields, they should tend to go down, Soham, but they're not going to go to the level they were in 21. Our yields, our investment yields in 2021 were less than 2%.

Speaker Change: Persistency will go down obviously, a bad investment yields.

Speaker Change: Should tend to go down so hand, but theyre not going to go to the level. They were in 'twenty, one our yields our investment yields in 2021 were less than 2%.

Soham Bhonsle: And they clocked in at 3.8, you know, in the past quarter. And as we lengthen duration, you know, at these rates, we should see kind of a, continue to see tailwinds on investment income growth. So that's when we take a step back. We feel like we're really well positioned. Again, what's the bottom line? Continue to grow book value per share. And I think we feel pretty good about that

Speaker Change: Clocked in at three eight.

Speaker Change: In the past quarter and as we lengthened duration.

Speaker Change: These rates, we should see kind of a.

Speaker Change: Continue to see tailwind on the investment income growth. So that's why when we take a step back we feel like we're really well positioned again with the bottom line continuing to grow book value per share and I think we feel pretty good about that.

Soham Bhonsle: I just, I guess just piggybacking off of that, can you just remind us where you'd expect the book to perform or, you know, your claims and things like that in an environment where, say, unemployment goes to, call it, 5%, right? I'm sure you guys have done some sort of sensitivity analysis, so any color there would be helpful. Thank you.

Speaker Change: I just I guess, just piggybacking off of that can you just remind us where you would expect how you'd expect that book to perform more claims.

Speaker Change: Claims and things like that in an environment, where say unemployment goes declined 5% right I'm sure you guys have done sort of sensitivity. So any color there would be helpful. Thank you.

Mark Casale: Yeah, I mean, I got a quote, like, it's not like 5% losses equal x. But I think we can point you back to COVID, right?

Mark Casale: Yeah, I mean, I don't know.

Speaker Change: I'm not going to quote like it's not like 5% losses equal X, but I think we can point you back to Covid right when losses Wang.

Mark Casale: When when losses went, I mean, default rates went to 5%. Unemployment was in the double digits, and we still performed pretty well. So I would say at a 5% unemployment rate, yeah, the default rate will kick up a little bit, you may see it, you know, the provision go up a little bit just because Dave mentioned forbearance. The old forbearance went away in November, but forbearance is still available to borrowers. And that's a little bit of a free lunch for certain borrowers if they're able to do it.

Speaker Change: Fault rates went to 5% unemployment was in the double digits and we still performed pretty well. So I would say at a 5% unemployment rate yeah. The default rate will kick up a little bit you may see the provision go up a little bit just because of Dave mentioned forbearance the old forbearance went away in November.

Dave: But forbearance is still available to borrowers and thats, a little bit of a free put for certain borrowers that theyre able to do it so you see a little bit.

Mark Casale: So you see a little bit, you know, you might still see a little bit of noise in the provision. But you know, when you just think about, you know, 75, 80% of the margins that we have now, I'm not particularly concerned if rates or losses go up a little bit. So I think we'll I think we'll perform quite well through it. I mean, again, I can't I don't have the exact stats for you.

Speaker Change: You might say is still a little bit noise in the provision, but when you just think about 70, 580% margins that we have now I'm, not particularly concerned and if.

Speaker Change: If rates if losses go up a little bit. So I think we'll I think we'll perform quite well through it I mean again I cant I don't have the exact stat for you, but you can model it out pretty easily I mean, if you look at kind of increased the loss ratio are an increase depending on how your model works with claim rates you can run through we run through it a lot and we're not particularly concerned about that.

Mark Casale: But you can model it out pretty easily. I mean, if you kind of increase the loss ratio or increase it, depending on how your model works with claim rates, you can run through it. We run through it a lot. And we're not particularly concerned about that. You know, so I think we're more concerned about the cat risk, right? At the end of the day, we own the first loss piece. We and the rest of the industry have done a really good job of kind of hedging out the Mez piece.

Speaker Change: So I think we're more concerned about the cat risk right at the end of the day, we own the first loss piece.

Speaker Change: And the rest of the industry have done a really good job of kind of hedging out the mez piece.

Mark Casale: You know, the ultimate risk in a business is when we come back at the cat level, right? I mean, at the end of the day, we're a cat business; our cat happens to be a severe economic recession.

Speaker Change: The ultimate risk in our business when we come back at the Cat level right I mean at the end of the day we are.

Speaker Change: We're a cat business, our cat happens to be a severe economic recession and so that's when we think about that we don't think about the moderate losses were well prepared for that from a capital balance sheet liquidity at those significant stress that we wanted to make sure that we're well prepared for and is that we are right and we run those we run the S. Four stress.

Mark Casale: And and so that's the, you know, when we think about that, we don't think about the moderate losses; we're well prepared for that. From a capital balance sheet liquidity perspective, it's those significant stress that we want to make sure that we're well prepared for. And as I said, we are right, and we run those We run the S4 stress within the GFC stress every month.

Speaker Change: We are in a GSE stress every month and we look at it from.

Mark Casale: And we look at it from a number of different, you know, we look at it from a P&L perspective, we look at it from a capital perspective, and we look at it from a P&L to Mars perspective, which again is really, that's really the liquidity trigger for the MI industry. And so when we think about capital in general, people always ask us about excess capital, and P Mars' excess capital, I mean, a lot of that excess for P Myers, it's really necessary, given the pro-cyclical nature of how the calculation works.

Speaker Change: A difference when we look at that from a P&L perspective, we look at it from a capital perspective, when we look at it from a P. Myers perspective, which again is really that's really the liquidity trigger.

Speaker Change: For the semi industry and so when we think about capital in general people always ask us about excess capital and Pmiers excess I mean, a lot of that excess for P. Myers drilling necessary given a pro cyclical nature of how the calculation works. So when we think about capital we think about potentially growth rate. That's the offense a piece of it and I think we started.

Mark Casale: So when we think about capital, we think about potentially growth, right, that's the offensive piece of it. And I think we started to, you know, execute upon that with title, we continue to, you know, with ventures and continue to look at ways to grow the business. S&R is a way to grow the business, we would expect the existing mortgage portfolio to actually, you know, re reignite growth in certain it's we're kind of on a pause on growth on the insurance portfolio now given where rates are, but we would expect given demographics, both existing demographics and potential upside, you know, with immigration, we would expect the industry, you know, it's trillion and a half today, you know, we would expect that to grow to two over the next x number of years, and potentially, you know, a little bit higher, we think about capital distribution, right, that's dividends, and that's buying back our shares at, you know, attractive prices.

Dave: Two.

Dave: To execute upon that with title we continue.

Dave: With ventures and continue to look at ways to grow the business.

Dave: <unk> as a way to grow the business, we would expect the existing mortgage portfolio to actually re.

Dave: We reignite growth.

Dave: In certain niche, we're kind of in a pause.

Dave: On growth on the insurance portfolio now given where rates are but we would expect given demographics.

Dave: Both existing demographics and potential upside with immigration, we would expect for the industry. It's trailing in the half today, we would expect that to grow to two over the next X number of years and potentially a little bit higher.

Speaker Change: We think about capital distribution rate thats dividends and Thats buying back our shares at attractive prices and then when you think about defense and so when we when we when we think about our explained kind of capital management and we talk about a measured approach and I think right. There is kind of an example of how we think through it.

Mark Casale: And then we think about defense. And so when we when we think about or explain any kind of capital management, and we talk about a measured approach, and I think right there is kind of an example of how we think through it. Perfect.

Soham Bhonsle: Perfect. Thanks a lot for the thoughts.

Speaker Change: Perfect. Thanks, a lot for the thoughts.

Dave: Yes.

Bose George: Your next question comes from the line of Bose George with KBW. Your line is now open.

Speaker Change: Your next your next question comes from the line of Bose George with <unk>.

Speaker Change: Your line is now open.

Bose George: Hey everyone, good morning. In terms of your new, your provision for new notices, it looked like it went down a little bit. Is that right? And, you know, can you just talk about assumptions in there?

Speaker Change: Good morning.

Bose George: In terms of your you provision for new notices it looked like it went down a little bit is that right and can you just talk about assumptions in there.

Dave Weinstock: Yeah, hey, Bose, it's Dave. You know, what I would actually say is that we really haven't made any changes to how we're providing for defaults. I think what you're seeing is just a higher level of cure activity for 2020 for default. So if you were to look at Exhibit K this year compared to last year, and you looked at the first quarter of 2024's cure rate versus the first quarter of 2023, you'll see a little bit higher cures in the first quarter from the first quarter of 2024 at this point. And the same thing's really true a little bit for the default that came in in the second quarter. So I think that's what's playing out in the numbers.

Dave: Yeah, Hey, Bose its Dave.

Dave: I would actually say is we really haven't made any changes on how we are providing for defaults I think what youre seeing.

Speaker Change: Is just a higher level of cure activity.

Speaker Change: 2024 defaults. So if you were to look at.

Bose George: Exhibit K this year compared to last year and you looked at the first quarter of 2024 as cure rate versus the first quarter of 2023, what Youll see is a little bit higher cures in the first quarter 'twenty from the first quarter 2024 at this point and the same thing is really true a little bit even for the defaults that came in in the second quarter.

Bose George: So I think thats whats playing through the numbers.

Dave Weinstock: Okay, so those are sort of intracordial cures that That's right. Okay, great. That's helpful. Thanks. And then can you remind us what your guidance is for OPEX for this year? And just any thoughts on sort of the cadence when you think about 25 for growth?

Speaker Change: Okay. So those are sort of intra quarter cures.

Dave: Essentially netted out to then.

Dave: That's right.

Speaker Change: Okay. Great. That's helpful. Thanks, and then can you remind us which of guidance for Opex for this year and just any thoughts on sort of the cadence of when you think about 25% for growth.

Bose George: Yeah, sure. So our OPEX guidance was 185 million for non-title expenses, excluding expenses, excluding titles, the best way to say it. So, and, you know, right now, you know, if you look at the results, and, you know, we've talked about this a lot, our team is clearly focused on managing expenses. And so, you know, through the first half of the year, we're in really good shape for that and, you know, clearly could beat that guidance. Okay.

Speaker Change: Yes sure.

Speaker Change: So we our opex.

Speaker Change: Guidance was $185 million for.

Bose George: Non title expenses.

Speaker Change: <unk> expenses, excluding title is the best way to say it.

Speaker Change: So and we are right now.

Speaker Change: If you look at the results.

Speaker Change: We've talked about this a lot.

Speaker Change: Our team is clearly focused on managing expenses.

Speaker Change: And so.

Speaker Change: The first half of the year, we're in really good shape for that and clearly could.

Speaker Change: Beat that guidance.

Speaker Change: Okay, great. Thank you.

Doug Harter: Okay, great. Thank you. Thank you. Your next question comes from the line of Doug Harder with UBS. Your line is now open.

Speaker Change: Thank you. Your next question comes from the line of Doug Harter with UBS. Your line is now open.

Doug Harter: Thanks, Mark. I know you don't manage to do

Speaker Change: Thanks.

Doug Harter: Mark I know you don't manage to market share, but if you look the market share the gap between the high and the low kind of seems the tightest. It's been in a while what do you think that tells us about kind of the competitiveness in the market and kind of how we should think about.

Speaker Change: Kind of market dynamics going forward.

Mark Casale: Yeah, it's a good question. I would say it's very balanced.

Mark: It's a good question.

Speaker Change: Yeah.

Speaker Change: I would say, it's very balanced.

Mark Casale: We've talked about it, I've heard other MIs say it, but it really is kind of a pretty prudent market, very constructive in terms of pricing. I think that's for a number of reasons. Again, it's the pricing engines, the ability to make changes quickly. Also, with some of these pricing services, we can see kind of win rates and where everyone's at. And so there's that discipline there, and just our ability, Doug, to make those changes has really kind of shifted some of that power from the lenders to the MIs. Or flexibility, maybe, is a better way to say it.

Speaker Change: Talked about I've heard other MSA, but it really is kind of a pretty prudent market very constructive in terms of pricing.

Speaker Change: I think that's for a number of reasons.

Speaker Change: Again, it's the pricing engines the ability to make changes quickly also with some of these pricing services, we can see kind of win rates and where everyone's at and so there is that discipline, there and just our ability to make those changes has really kind of shifted some of that power.

Speaker Change: From the lenders too to the semis and or flexibility maybe is a better way to say it went with the old rate cards.

Mark Casale: With the old rate cards, you really were allocated business, and it was kind of done at the highest level, or it was done by the secondary marketing manager or the head of underwriting or the head of sales. But there was that relationship part of it, and we fought for business, and competed for business really with service and relationships, soft dollar, contract underwriting, training, all those sort of things. And now it's just a fee business.

Speaker Change: You really were allocated business and it was kind of done at the highest level or it was done by the secondary marketing manager or the head of underwriting or the head of sales, but there was that relationship part of it and we fought for business.

Speaker Change: For business really.

Speaker Change: With service and relationships soft dollar contract underwriting training, all those sort of things and now it's just a fee business and so someone who may have allocated M. I six seven years ago, I don't even know what their MRI. They look at the semi reports, but they can't really dictated it's really being driven.

Mark Casale: And so someone who may have allocated MI six, seven years ago, I don't even know what their MI is; they look at the MI reports, but they can't really dictate it. It's really being driven by the LOs, and that really allows the MIs. So there's not that difficult conversation where you have to go in and talk to the president and tell him why you're charging so high and you're not his partner anymore, which is the furthest thing from the truth.

Speaker Change: And nobody yellows and that really allows the semis. So there is not that difficult.

Speaker Change: Conversation, where you have to go in and talk to the president.

Speaker Change: Tell him, while you're pricing, so high and Youre not as partner anymore, which is the furthest thing from the truth I think our view is when we talk to lenders today, We said Hey, you should have all six <unk> there.

Mark Casale: I think our view is when we talk to lenders today, we say, hey, you should have all six MIs in there. And every different MI has different pockets, certain MIs like different geographies, different parts of the structure, whether it's higher FICO, lower FICO, different parts of, or different credit appetites, I should say, and that's great for the borrower, right? It's great for the lender. And we tell, and we say it in the script, we give every single borrower our best price. That doesn't mean it's the lowest price; it's the best price that we feel is fair for the borrower.

Speaker Change: And every every different Emma has different pockets certain <unk> like different geographies different parts of the structure, whether it's higher FICO lower FICO.

Speaker Change: Different parts of different credit appetites I should say.

Speaker Change: And that's great for the borrower Ryan it's great for the lender and retail and we said it in the script, we give every single borrower or best price that doesn't mean, it's the lowest price.

Speaker Change: The best price that we feel for the borrower and we think about in terms of unit economics on all those sort of things and we're when we say we're one of six work, we're fine being in that middle range, even at the lower end of the range. If we're getting a price right I mean, it's all about for us about returns.

Mark Casale: And we think about it in terms of union economics and all those sort of things. And when we say we're one of six, we're fine being in that middle range, even at the lower end of the range, if we're getting our price, right? I mean, it's all about returns for us, but I do think the dynamics in the industry have really changed for the better, and I don't think they're going back. And here's the example, right?

Speaker Change: But I do think the dynamics in the industry have have really had changed for the good and I don't think they are going back and here's. The example, right. It's a slow market right from or a low origination market from an <unk> perspective. This is the time when you would expect to see competition and Youre not right. So if rates start to go down.

Mark Casale: It's a slow market, right? Or a low origination market from an NIW perspective. This is the time when you would expect to see competition, and you're not, right? So if rates start to go down and more volume comes in, I don't necessarily see that changing. And one interesting tidbit, Doug, is just look at all of the MI press releases over the last week. You have to hunt for the NIW for the quarter.

Speaker Change: One <unk>.

Speaker Change: And more volume comes in I don't necessarily.

Speaker Change: See a changing and one kind of.

Doug: Interesting Tidbit, Doug is just look at all of the MRI press releases over the last week you have to hunt for the <unk> for the quarter before it used to be fronting and IW record niwa.

Mark Casale: Like before, it used to be the front thing, NIW, record NIW, and you almost have to hunt for it. It took me five minutes to find it on some of the reports, which I think that's a sign. That's a sign that the MI industry, in general, was focused on returns, growth in book value per share, and managing their balance sheets. And that's because this is a risk business. It's not a market share business; it never was. And I think that bodes well for the industry.

Doug: You almost have to hunt for it it took me five minutes defined it answer some of the reports that I think that's a sign that as a sign that the semi industry in general was focused on returns growth and book value per share.

Doug: Managing their balance sheet and that's because this is a risk business. It's not a it's not a market share business that never was.

Doug: And I think that bodes well for the industry.

Speaker Change: Great I appreciate that answer Mark Thank you.

Rick Shane: Your next question comes from the line of Rick Shane with JPMorgan. Your line is now open.

Speaker Change: Your next.

Speaker Change: <unk> comes from the line of Rick Shane with JP Morgan.

Speaker Change: Your line is now open.

Melissa: Good morning, it's Melissa on for Rick today. I'm hoping you could touch briefly on how you're thinking about the risk and the 23 and 24 vintages in particular, given the sort of affordability challenges right now. It would seem like there would be elevated risk, but I'm wondering with the prospect of potentially lower mortgage rates, do you view that as sort of prime for being disruptive, prime for being repaid, and sort of de-risking the portfolio that way should we see lower mortgage rates in the months and quarters ahead?

Speaker Change: Good morning, it's Melissa on for today.

Melissa: Hoping you could touch briefly on how youre thinking about the risk in the 'twenty three in 2012 vintages in particular.

Speaker Change: Given sort of the affordability challenges right now.

Speaker Change: It would seem like there would be elevated risk, but I'm wondering with the prospect of potentially lower mortgage rates.

Doug: Yes.

Speaker Change: Certain time for being disruptive time for being repaid.

Doug: And certainty risking the portfolio that way should we see lower mortgage rates in the months and quarters ahead.

Mark Casale: Yeah, hi Melissa, it's Mark. It's a good question. We would say, we've said it before, there's kind of the, the books are really broken into two parts. It's the pre-June 22 book, which is before rates really rose, and then there's the post-book, post-June 22, book when it's at much higher rates, higher HPA. I would say, to your point, it's definitely impacted affordability. I think our response, though, and I think it's been the industry response, is we've raised rates, right?

Doug: Yeah, Hey, Melissa it's mark.

Melissa: Good question, we would say we said it before there's kind of a.

Speaker Change: The books are really broken into two parts I would call. It the pre June 22 book, which is before rates really rose and then there is the post book.

Speaker Change: Post 'twenty two Brooklyn, it's at much higher rates.

Doug: HPA.

Doug: I would say to your point.

Speaker Change: Definitely impacted affordability.

Melissa: I think our response, though is and I think it's been the industry responses. We've raised rates right. So from a unit economic standpoint, Melissa we feel like the unit economics of the business are actually quite strong I think the pricing when you compare kind of earlier books to where we are in the last 18 to 24 months, we feel pretty comfortable with the returns so.

Speaker Change: Yes.

Speaker Change: You can see you may see higher losses come through but again I think we're pricing for it in terms of lower rates I think it's a really good point I pointed I touched on it within my response to <unk> if rates come down clearly that book will we'll have increased refinance activity I would expect it to be there versus that 20%.

Speaker Change: 21 book, where the average rate is 33132, that's really that lock in effect isn't going anywhere even if rates go let's.

Speaker Change: Let's call it into the mid fives, but I do I do think.

Speaker Change: I think it's actually really beneficial for the borrower.

Speaker Change: Bought a home.

Speaker Change: They stretched either on DTI, but theyre, making the payments for sure as we can see it but if all of a sudden you get a 100 basis point drop of 150 basis point drop that that really does help the borrower refinance and I would say theyre going to refinance at lower rates and really help them on the payment and affordable that's probably a good thing.

Mark Casale: So, from a unit economics standpoint, Melissa, we feel like the unit economics of the business are actually quite strong. I think the pricing, when you compare kind of earlier books to where we are in the last, you know, 18, 24 months, we feel pretty comfortable with the return. But if all of a sudden you get a 100 basis point drop or a 150 basis point drop, that really does help the borrower refinance, and I would say they're going to refinance at, you know, kind of lower rates and really help them with their payment and affordability. That's probably a good thing for the industry.

Speaker Change: For the industry.

Mark Casale: Thanks, Mark, and I guess as a follow-up question there, would you expect the sort of normal, continued home price appreciation in a lower rate environment? We've seen it sort of stabilize, but on really low volumes right now. With a pickup in volume, would you expect to see sort of continued stabilization but just better affordability? Or would you expect to see home prices just generally migrate higher? And again, knowing that it's dependent on the MFA.

Speaker Change: Thanks, Mark and I guess as a follow up question. There would you expect to sort of normal.

Speaker Change: Okay.

Speaker Change: <unk>.

Speaker Change: Home price appreciation and a lower rate environment, we've seen it sort of stabilized but on really low volumes right now with a pickup in volume would you expect to see.

Speaker Change: Sort of continued stabilization, but just better affordability or would you expect to see.

Speaker Change: Prices generally migrate higher.

Speaker Change: Again, knowing that is dependent on the MSA.

Mark Casale: Right I think it's I think it depends on what the demand is right now. I know it's hard to gauge right now given the lock-in effect if some of those folks do want to move into larger homes. So, you know, right now, I think months' supply and it's still, like, I think it's still four months nationally, right? So it's still low, and six is kind of normal. A lot more new homes I think the month supply of new homes is closer to nine.

Speaker Change: Right I think it's I think it depends on what the demand is right.

Speaker Change: Hard to gauge right now given the big given the lock in effect that some of those folks do.

Speaker Change: I want to move into larger homes. So right now I think month supply and is still at like I think it's still four months nationally right. So it's still it's still low in <unk> is kind of normal.

Speaker Change: There's a lot more new homes are coming onboard I think the month's supply for new homes is closer to nine so theres a lot of new homes coming onboard so I would say lower rates I think it gets absorbed.

Mark Casale: So, there are a lot of new homes coming on board. So, I would say lower rates. I think it will be absorbed.

Mark Casale: You know, I think I would say more flattish HPA growth, maybe it picks up one or two percent, but I wouldn't see a sudden rise unless demand is overwhelming again. And that would have to be a real jolt to rates. And we don't see that coming. I think, you know, we definitely see rates coming down, but I think it'll be in a more orderly fashion, which, again, I think will help. It'll help the borrowers because, to your point earlier, if rates go down and HPA goes up, that doesn't necessarily help affordability. But I don't know if I see that in the cards.

Speaker Change: I think I would say more flattish HPA growth.

Speaker Change: Maybe maybe it's a little bit picks up 1% or 2%, but I wouldnt see a sudden horizon unless the demand is overwhelming again and that would have to be a real jolt to rates.

Speaker Change: And we don't we don't see that coming I think we definitely see rates coming down, but I think it'll be in a more orderly fashion, which again I think will help it'll help the borrowers because it will to your point earlier, if rates go down and HBA goes up but thats I would necessarily help affordability, but I don't I don't know if I see that in the cards.

Mark: Thanks Mark.

Speaker Change: Yes.

Speaker Change: Yeah.

Mihir Bhatia: And just as a reminder, before we move on to the next question, if you would like to ask a question and enter the queue, press star and the number one on your keypad now. The next question comes from Mihir Bhatia with Bank of America.

Speaker Change: And just as a reminder, before we move on to the next question. If he would like to ask a question and enter the queue Press star and the number one on your key pad now.

Speaker Change: Our next question comes from Mihir Bhatia with Bank of America.

Speaker Change: Your line is now open.

Mihir Bhatia: Hi Mark, good morning. Thank you for taking my question. I wanted to start just very quickly on the title. I think you mentioned in your script that you view it as currently in the control phase.

Mihir Bhatia: Good morning, Thank you for taking my question.

Mihir Bhatia: Wanted to start just very quickly on title.

Speaker Change: Thank you mentioned in your script.

Speaker Change: And you view it as currently in the control space.

Mihir Bhatia: And I was wondering if you could expand on that a little bit. Is that driven by just the market conditions? Or is it more about, hey, we just bought this, we need to make some investments, we need to improve stuff? Like what's driving the like, you know, I guess what's going on with title?

Speaker Change: And I was wondering if you could expand on that a little bit is that driven by just the market conditions or is it more about here. We just bought base, we need to make some investments needed to improve stuff, but what's driving the <unk>.

Speaker Change: I guess, what's going on with Deutsche Bank.

Mark Casale: It's a good question. I think it's more us. I don't necessarily think the market gives us, affords us some time, right? I mean, on the lender services side, it's really a refinance-driven model. And there's not really a lot of refinances.

Speaker Change: It's.

Speaker Change: It's a good question I think it's more us I don't necessarily I think the market gives us affords us some time right. I mean, we are given on a lender services side, it's really our refinance driven model and there is not really a lot of refinances. So we're kind of afford at the time and we're just going back to the playbook that we used with MRI right I mean, we build EMI from the time.

Mark Casale: So we're kind of afforded the time, and we're just going back to the playbook that we used with MI, right? I mean, we built MI. I mean, from the time I started raising dollars until we did our first loan was like 27 months or something. It was a pretty long period of time.

Speaker Change: I started raising dollars.

Speaker Change: Until we did our first along with like 27 months or something it was it was a pretty long period of time. So we're used like patients and we do have patients. So I think with US we are using this to our advantage. So I think our guidance to the team and we're bringing folks over from MRI and we're bringing in new folks we have a really strong core.

Mark Casale: So we're used, like patients; we do have patients. So I think with us, we're using this to our advantage. So I think our guidance to the team, and we're bringing folks over from MI, we're bringing in new folks. We have a really strong core team that we inherited, both on the lender services and the agency services side.

Speaker Change: Our team that we inherited both on the lender services and the agency services side and I think our instructions is let's build out the infrastructure. So we use a third party transaction management system, we want to bring that in house, along with the rest of it.

Mark Casale: And I think our instructions are, let's build out the infrastructure. So we use a third-party transaction management system. We want to bring that in-house along with the rest of IT. I mean, they outsourced all of IT here, and we clearly don't do that. We like to control it because, especially when you think about the future with new technologies, owning and managing your own system allows you to plug in things a lot quicker, as opposed to you've kind of outsourced it and have, I would say, less control over that.

Speaker Change: Outsourced all of my team here and we clearly don't do that we'd like to control it because.

Speaker Change: Because especially when you think about the future with the new technologies owning managing your own system allows you to plug in things a lot quicker as opposed to kind of outsourcing and have I would say less control over that so that's not really that's not really how we operate so we're spending the time doing that and is it going to take longer is it going to cost a few dollars.

Mark Casale: So that's not really how we operate. So we're spending time doing that. Is it going to take longer? Is it going to cost a few dollars to do it?

Speaker Change: But we also look and say where do we want to be in five years entitled right.

Mark Casale: Absolutely. We also look and say, where do we want to be in five years' time? And we've talked about this before. Our goal in this title is to position ourselves to take advantage when the market does come back. And if it comes back a little quicker, and we don't take advantage of it as much as we could have, that's fine. We're in this for the long haul. So I think, again, it's making sure we have the technology, building out the infrastructure, making sure we can become more efficient in the whole process. So I would look at it that way.

Speaker Change: This before our goal entitle us to position ourselves to take advantage when the market does come back and if it comes back a little quicker and we don't take advantage of it as much as we could have that's fine getting we're in this for the long haul.

Speaker Change: So I think it's again, it's making sure we have the technology you build out the infrastructure, making sure we can be become more efficient.

Mark Casale: And we remain pleased with it. I mean, I think it's probably 12 to 18 months to stand it up. We're 12 months in. It may take a little bit longer.

Speaker Change: Around the whole process. So I would look at it there and we remain pleased with it I mean I think it's we said probably 12 months to 18 months the standard out we're 12 months in.

Mark Casale: But again, that's – time is on our side, given where we ultimately think the business is. S&Re, we started hiring there in 2009. We didn't write our first policy until 2014.

Speaker Change: It may take a little bit longer, but again thats time is on our side given where.

Speaker Change: Where we ultimately think the businesses Essent re we started hiring there in 2009, we didn't we didn't write our first policy to 2014. So it took.

Mark Casale: So it took – I don't think it's going to take that long with title, because we have an existing business. And we started the process even by leveraging our relationships on the MI side. I think we've signed up 50 new lenders on the mortgage insurance side this year. And like we said earlier, we continue to try to attract clients. For the title side, it's – I think it's 15 clients that we've been able to activate.

Speaker Change: Don't think its going to take that long with title because we have an existing and existing business and we started the process even with leveraging our relationships.

Speaker Change: On the on the Ams side, we've I think we've we've signed up 50, new lenders on the mortgage insurance side this year.

Speaker Change: We said earlier, we continue to try to activate clients for the title side. It's I think it's 15 clients that we've been able to activate.

Speaker Change: And then it's really kind of working well.

Mark Casale: And it's really kind of working well. We have a – I would say a core kind of SWOT team on the title side, senior account managers that have really, really, really sharp individuals. And they're really working closely with the MIBD team, so it's not like they're going out on their own. They're really – they're getting the benefit of being part of Essent, which I think helps them. And for the MI guys, it's actually helping them a lot. They're learning a different aspect of their client's business. It just makes you smarter at the top of the house, right?

Speaker Change: I'd say, a core kind of Swat team on the title side of Cassini our account managers.

Speaker Change: That is really really really sharp individuals and they are really working closely with the BD team. So it's not like they're going out on their own and they're really they're getting the benefit of being part of assets, which I think helps them and for the semi guys. It's actually helping them a lot. They are learning a different aspect.

Speaker Change: <unk> of their clients' business just makes you smarter at the top of the house right.

Mark Casale: It's the old saying, you want to know your customer. And for the ability for Chris or for some of the other senior folks on the BD team to go in and have that conversation with title, we're learning a lot. I mean, I was out with – I would say out of the top five lenders in the country, I interacted with three of them over the past few months, just understanding how they think about title, what their pain points are, and then you try to build for that.

Speaker Change: It's the old saying you want to know your customer and so the ability for Chris.

Chris: Some of the other senior folks on the BD team and go in and have that conversation in title.

Speaker Change: We're learning a lot I mean, I was out with I would say out of the top five lenders in the country I interacted with three of them over the past few months just understanding how they think about title what are their pain points.

Speaker Change: And then you try to build for that so again, we're in this for the long haul.

Mark Casale: So again, we're in this for the long haul. And it's – again, I still think we're – I guess from an investor standpoint, we kind of call it a call option, but I think it's beyond that now. I think we're into the operating part of it, but we're still really in that investment phase. And I'm more willing to invest dollars today to be able to recoup larger returns down the road.

Speaker Change: And again I still think we're I guess from an investor standpoint.

Speaker Change: We kind of call to the call option, but I think it's beyond that now I think we are into the operating part of it but we're still really in that investment phase and are more willing to invest dollars today to be able to recoup larger returns down the road.

Speaker Change: Okay.

Speaker Change: That makes sense. Thank you maybe just.

Chris Curran: Okay. That makes sense. Thank you. Maybe just one on a couple of the MI side first. The coverage ratio, if you're taking up for a few quarters, I think it's at 27% currently. Is that just a function of you all writing higher LTV loans? And where do you think that settles out?

Speaker Change: Couple of the Ami side.

Speaker Change: Average ratio youre picking up for a few quarters.

Speaker Change: I think it's a 27% is that just a function of.

Speaker Change: Higher LTV loans, and where do you think that settles out.

Chris Curran: Yeah, hey Mihir, it's Chris. The higher coverage ratio is really just a function of the production coming in today, as far as the higher LTVs, right? And that's just based on home prices and some of the, I'll call it, affordability challenges relative to, you know, the higher loan prices and not putting down as much. So I don't know as far as where that goes. I don't expect it to go much higher from where it is today, but certainly, it's just more of a function of what's being originated in the marketplace.

Chris: Yes, Hi, Mihir, it's Chris.

Chris: At the higher coverage ratio is really just a function of certainly the production coming in today as far as the higher Ltvs right and Thats just based on home prices and some of the I'll call. It the affordability challenges relative to.

Chris: The higher higher loan prices and not putting down as much. So I don't know as far as where that goes I don't think an unexpected to go.

Chris: Much higher from where it is today, but certainly it's just more of a function of whats being originated in the marketplace.

Chris Curran: And is that also a function of the fact that I think you've talked before about Essent Edge working best maybe a little bit lower down the, closer to the low end of the credit spectrum? What is the top end?

Speaker Change: And is that also a function of the fact that I think you've talked before about essent edge working best maybe a little bit lower down the closer to the low end of the credit spectrum.

Chris Curran: Is that also influencing it, or not really?

Speaker Change: And does that also influencing it or not really.

Chris Curran: Now, I think it's more, again, Essent Edge does operate across the entire credit spectrum as far as how we try to optimize our unit economics and returns, but I think the bigger driver is more along the lines of where the market is today with regard to home prices and certainly the LTVs being higher.

Speaker Change: No I think it's more again essent edge does operate obviously across the entire credit spectrum as far as how we try to optimize our unit economics and returns, but again I think the bigger driver is more along the lines of kind of where the market is today with regards to home prices and certainly the LTV.

Speaker Change: He is being higher.

Mark Casale: And this is Mark and there is a there is a function of that which we spoke to last quarter if we do see You know, we think with with edge, you know, if there is a higher DTI or higher LTV We're able to select out of say ten of them the two or three that we think are going to perform better Right, so they have a higher edge score And and and they're able to given given where the market is and so forth You know, we believe they'll it will sign them a higher edge score or they'll get a higher edge score Which means kind of a lower cumerates or a little bit more comfortable versus one size fits all which you know again If you have a more static pricing and and you don't like the tails You're probably going to stay away from all the tails And I think our view is we're going to try to get a couple, you know Two or three of them that we think will outperform and there's a little value there and you can you can see it in our yield Right. Our yield is still in that kind of 40 41 basis points, which I think is again back to again to an earlier question You know, we believe with edge we're able to kind of price for that risk Thank you for taking my question.

Chris: Yes. This is mark and there is a there is a function of that which we spoke to last quarter. If we do see we think with edge. If there is a higher DTI or higher LTV.

Speaker Change: We're able to select out of say 10 of them. The two or three that we think are going to perform better right. So they have a higher H score.

Chris: And they're able to given given where the market is and so forth. We believe they will it will assign them a higher H score or they'll get a higher Ed score, which means kind of a lower kume rates. So we're a little bit more comfortable versus one size fits all which again if you have a more static pricing and you don't like details youre, probably going to stay away from all that.

Chris: So I think our view is we're going to try to get a couple two or three of them that we think will outperform and theres little value. There and you can you can see it in our yield rate our yield.

Chris: It's still in that kind of 40% 41 basis points, which I think is again back to again to an earlier question. We believe with edge, we're able to kind of price for that risk.

Speaker Change: Got it okay. Thank you for taking my questions Youre welcome.

Speaker Change: Thank you for the questions. There are no further questions at this time I would like to turn it back over to the management team for closing remarks.

Speaker Change: I'd like to thank everyone for their attendance today and questions and have a great weekend.

Speaker Change: Thank you. This concludes today's conference call you may now disconnect.

Mihir Bhatia: Okay, thank you for taking my question.

Speaker Change: Please wait the conference will begin shortly.

Chris: Yes.

Chris: Yes.

Chris: Okay.

Chris: Yes.

Chris: Okay.

Chris: Yes.

Chris: Okay.

Chris: Yeah.

Chris: Yes.