Q3 2024 Essent Group Ltd Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by.
My name is Abby and it'll be a conference operator today.
This time I would like to welcome everyone to the Essent Group limited third quarter earnings call.
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Speaker Change: Thank you and I would now like to turn the conference over to fill the funnel you may begin.
Okay.
Thank you Abby 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 Carey President of Essent Guaranty.
Speaker Change: Our press release, which contains essence financial results for the third quarter of 2024.
Speaker Change: Issued earlier today and is available on our website at Essent group Dotcom.
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 may be found in exhibit Oh of our press release.
Speaker Change: 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 read.
Speaker Change: View.
Speaker Change: The cautionary language regarding forward looking 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. Thanks.
Mark: Thanks, Bill and good morning, everyone earlier today, we released our third quarter 2024 financial results, which continue to benefit from our high quality portfolio and the impact of higher interest rates on persistency and investment income.
Mortgage rates interest rates have reduced overall mortgage originations as a portfolio of business, we are less relying on transaction activities and other sectors of the housing ecosystem.
As such our results for the quarter continued to demonstrate the strength of our business model in generating high quality earnings are.
Mark: Our long term outlook for housing remains constructive as the supply demand imbalance and favorable demographic trends should provide foundational support to home prices.
Mark: At the same time, the U S labor market and consumers continue to exhibit resilience, which is supportive of economic growth and credit performance and now for our results.
Mark: The third quarter of 2024, we reported net income of $176 million compared to $178 million a year ago.
Mark: The diluted per share basis, we earned $1 65 for the third quarter compared to $1 66, a year ago on an annualized basis. Our return on average equity was 13% in the third quarter.
Mark: As of September 30th our U S mortgage insurance in force was $243 billion, a 2% increase from a year ago. Our 12 month persistency was approximately 87% relatively flat compared to last quarter with nearly 65% of our enforced portfolio, having a note rate of five 5% or lower.
Mark: While persistency has likely peak, we expect that the current level of mortgage rates should continue to support elevated levels.
Mark: The credit quality of our insurance in force remained strong with a.
Mark: Weighted average FICO of 746, and a weighted average original LTV at 93% credit performance in the third quarter reflected both the aging of our portfolio and the typical seasonality of default behavior, our 2021 and prior vintages represent about half of our portfolio and home price appreciation should continue to mitigate ultimate claim experience.
Mark: Today's cohorts newer vintages continue to perform in line with our expectations.
Mark: On the business front, we are monitoring the potential fallout from Hurricanes Helene and Milton that impacted the southeast region of the country like Hurricanes Harvey and Irma in the second half of 2017. These stores have the potential to cause an uptick in delinquencies for the affected areas. While delinquencies may be higher we remind you that mortgage insurance policies have an exclusion for <unk>.
Mark: James if property damage as the principal cause for borrower default and therefore, the ultimate P&L impact may be mute.
During the third quarter, we closed our 10th Radnor re Ireland transaction, providing us with $363 million of fully collateralized excess of loss coverage. We were pleased with the execution and continue to be encouraged by the strong demand from investors in our program.
Mark: We remain committed to our programmatic reinsurance strategy, which helps to diversify our capital resources, while seeding a meaningful portion of our mezzanine credit risk.
Mark: Cash and investments as of September 30th or $6 $4 billion, and our new money yield in the third quarter was nearly 5%.
Mark: The annualized yield for investments available for sale in the third quarter was three 8% up from three 6% a year ago and we'd note that higher yields in our growing investment portfolio generate incremental revenues for our business model.
Mark: We continue to operate from a position of strength with $5 $6 billion in GAAP equity access to $1 $7 billion in excess of loss reinsurance and our pmiers sufficiency ratio of 186%.
Mark: Given our strong financial performance and capital position, we continue to take a measured approach to capital management. Our objectives remain the same railroad to maintaining a conservative balance sheet preserving optionality for strategic growth opportunities and optimizing shareholder returns over the longer term now let me turn the call over to Dave.
Dave: Thanks, Mark and good morning, everyone. Let me review our results for the quarter and a little more detail.
For the third quarter, we earned $1 65 per diluted share compared to $1 91, since last quarter and $1.66 in the third quarter a year ago.
Dave: Our U S mortgage insurance portfolio ended September 32024, with insurance in force of $243 billion.
Dave: $2 3 billion compared to June 30, and 2% higher compared to the third quarter a year ago.
Dave: <unk> see at September 30th was 86, 6% largely unchanged from 86, 7% last quarter.
Dave: Net premiums earned for the third quarter were $249 million and included $17 $1 million of premiums earned by Essent re on our third party business and $17 $7 million of premiums earned by the title operations.
The base average premium rate for the U S mortgage insurance portfolio for the third quarter was 41 basis points consistent with last quarter.
Dave: And the net average premium rate was 35 basis points for the third quarter down one basis point from last quarter.
Dave: Net investment income increased $1 $3 million or 2% to $57 $3 million in the third quarter of 2024 compared to last quarter due primarily to higher balances.
Dave: Other income in the third quarter was $7 4 million compared to $6 $6 5 million last quarter.
Dave: The increase in other income includes higher title settlement services income, partially offset by a decrease in the change in fair value of embedded derivatives and certain of our third party reinsurance agreements.
Dave: In the third quarter, we recorded a $1 $2 million decrease in the fair value of these embedded derivatives compared to a $732000 increase recorded last quarter.
Dave: In the third quarter, we recorded a provision for losses and loss adjustment expense of $30 7 million.
Dave: Compared to a benefit of $334000 in the second quarter of 2024 and provision of $10 $8 million in the third quarter a year ago.
Dave: At September 30th default rate on the U S mortgage insurance portfolio was 195% up 24 basis points from 171% at June 32024.
Dave: Other underwriting and operating expenses in the third quarter were $57 $3 million and include $14 $8 million of title expenses.
Dave: Expenses for the third quarter also include title premiums retained by agents of $9 $6 million, which are reported separately on our consolidated income statement.
Dave: Our consolidated expense ratio was 27% this quarter.
Dave: Our expense ratio, excluding title, which is a non-GAAP measure was 18% this quarter.
Dave: A description of our expense ratio excluding title and the reconciliation of GAAP can be found in exhibit a of our press release.
Dave: For the nine months ended September 30 of 2024, other underwriting and operating expenses, excluding our title operations totaled approximately $131 million.
We are revising our guidance for this metric from $185 million previously to approximately $180 million for the full year 2024, as a result of disciplined expense management, along with higher ceding commissions from quota share reinsurance transactions.
As Mark noted our holding company liquidity remains strong.
Dave: As we discussed last quarter on July one we issued $500 million of senior unsecured notes with an annual interest rate of 625% that mature on July one 2029.
Dave: Approximately $425 million of the proceeds were used to pay off the term loan outstanding as of June 30th at.
Dave: Net interest expense in the third quarter includes $3 $2 million of expense associated with this repayment.
Dave: At September 30th 2020 for our debt to capital ratio was eight 1%.
Dave: Additionally, effective July one we entered into a five year five year 500 million dollar unsecured revolving credit facility amending and replacing our previous $400 million secured revolving credit facility.
Dave: Combined these transactions provide assay with access to approximately $1 billion in capital.
Dave: No amounts were outstanding under the revolving credit facility at September 30 of 2024.
Dave: At September 30th Essent, Guaranty's, PMA sufficiency ratio, excluding the 0.3 Covid factor remained strong at 186% with $1 $7 billion in excess of Apple assets.
Dave: During the quarter Essent guaranty paid a dividend of <unk> $58 million to its U S holding company.
Dave: The U S mortgage insurance companies can pay additional ordinary dividends of $267 million in 2024.
Dave: At quarter end, the combined U S mortgage insurance business statutory capital was $3 6 billion with a risk to capital ratio of nine seven to one.
Dave: Note that statutory capital includes $2 $5 billion of contingency reserves at September 30th.
Dave: Over the last 12 months the U S mortgage insurance business has grown statutory capital by $275 million, while at the same time paying $225 million of dividends to our U S holding company.
Dave: During the third quarter <unk> paid a dividend of $87 $5 million staffing group.
Speaker Change: Also in the quarter Essent group paid cash dividends totaling $29 $5 million to shareholders and we repurchased 170000 shares for $9 6 million under the authorization approved by our board in October 2023.
Now, let me turn the call back over to Mark Thanks, Dave Our performance this quarter reflects the strength and resilience of our franchise. Our team continues to focus on executing our long term strategy, which includes expanding our lender network, maintaining financial discipline and evaluating potential growth opportunities looking forward, we remain committed to the buy manage and distribute operating.
Speaker Change: Model and believe that Essent remains well positioned in the current economic environment to deliver strong operating returns to our shareholders shareholders now lets get to your questions operator.
Speaker Change: Thank you and we will now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to leisure Hampden join the queue.
Speaker Change: If you would like to withdraw your question simply press Star one a second time.
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Speaker Change: Again, it is star one if you would like to join the queue.
Speaker Change: And your first question comes from the line of Terry MA with Barclays. Your line is open.
Terry MA: Hi, Thank you good morning.
Terry MA: I think you addressed it a bit in your prepared remarks, but was there any quantifiable impact on the default rate on new notices this quarter from just hurricanes.
Speaker Change: Hey, Terry its mark there was a little bit, but it was pretty it was pretty.
Speaker Change: Minimal mostly coming from barrel not from the New Orleans, we should see we should definitely see some noise.
In the fourth quarter on those.
Okay got it.
Speaker Change: So if I look at the rate of increase year over year and you notice is its kind of accelerated each of the last three quarters.
Speaker Change: Are we starting to see the effects of kind of vintage seasoning from sending some of their larger post COVID-19 post COVID-19 vintages materialize more and I guess going forward, how should we kind of think about how that kind of rate or trajectory evolves.
Speaker Change: Yeah, I mean, I would look at it we said this before.
Speaker Change: The portfolio is definitely seasoning right. The average age is 32 months versus historically was 18 months there is a little bit of seasonality in the third and the fourth quarter.
Speaker Change: And you also have to mix in Terry just again, the noise around forbearance that probably exasperated Bose.
Speaker Change: The number of new defaults in the cure rate people coming in and out of forbearance that check the rule change last.
Speaker Change: November December so I think we're starting to see a little bit of a normalization of that.
Speaker Change: Looking forward, it's hard to tell again, we're still levered mostly to unemployment.
And in a pretty strong portfolio, here's an interesting fact for you and I was just wondering you kind of think through that.
Speaker Change: The provision or there's a false starting to grow one right around 16000 defaults at the end of the quarter. We were roughly 15000 at the end of last year.
Speaker Change: It's gone up but and I know youre talking about the incentive payouts, but also take a step back with our defaults I would say approximately 70% of the defaults Terry our 'twenty, one vintage and prior the mark to market on those defaults is 61%.
Speaker Change: So even if they were to go to claim the probability of us pushing cash out the door is pretty low so just trying to put it in context of the whole portfolio.
Speaker Change: And try to take a step back from that movement again, we should see seasoning, you may see increasing defaults, but the probability of claim which is when cash leaves the door again, I think is probably pretty low.
Speaker Change: Okay got it that's helpful. Thank you.
Speaker Change: Sure.
Speaker Change: And your next question comes from the line of Doug Harter with UBS. Your line is open.
Alright, Thanks, Mark just to touch on that last comment you made around probability of claim.
Doug Harter: Did you make any changes in kind of the claim rate assumptions in the quarter because.
Doug Harter: By our calculations, you know kind of the current year loss over <unk> that rates seem to be higher so just trying to understand that.
Speaker Change: No no real change in the claim rate assumptions for the quarter.
Speaker Change: Okay.
Speaker Change: In that where you said, 70% of defaults were 21 vintage or older.
Speaker Change: Any change in kind of the new notices in that in that mix or is that been been relatively consistent.
Speaker Change: It's been pretty consistent.
Speaker Change: Okay. Thanks.
Speaker Change: Thanks Mark.
Speaker Change: Sure.
Speaker Change: And as a reminder, it is star one if you would like to ask a question.
Speaker Change: And your next question comes from the line of Bose George with <unk>. Your line is open.
Bose George: Good morning, actually just to follow up on Doug's question on the new notices or the loan sizes getting bigger in terms of just.
The provision for new noticeably.
Bose George: Calibrated went up as well so just curious how much loan sizes impacting them.
Speaker Change: Yes Bose.
Speaker Change: Clearly the loan sizes, just in general with what we're doing in our insurance in force the average.
Speaker Change: With with the Gse's, raising whats eligible definitely our loan sizes have grown.
Speaker Change: So a lot of what youre seeing.
Speaker Change: And you can see this in our in our supplement we're still reserving at about the same amount for early notice is as we always have been.
Speaker Change: Clearly, what's going to impact that is the size of the loan when youre looking at a provision dollar number.
Okay. I mean, just to give you a sense of that both the average and the average loan size for our insurance in force right. Now is right around 290000, when historically it was probably $2 26, and Youre also saying that.
Speaker Change: On the front end right and then we talk about the insurance in force portfolio has been relatively.
Speaker Change: Flattish over the past years, so a lot of it caused by low.
Speaker Change: Lower originations.
Loan size.
Speaker Change: Of our portfolio is continuing to grow so new originations and IW back in say 2017 18 was like 240000. This past year, it's probably 380000. So when you think about growth in the portfolio and just look at units right. We probably did about 130000 units last year will.
Speaker Change: Due to less than that this year, that's really reflective of the environment kind of that whole.
Speaker Change: Transactional part of the business, we originated I think between 2017 and 18, so well before COVID-19 kind of normalized housing we were right around between those two years, we averaged 190000 units in IW. So when you think about <unk>.
Speaker Change: Future growth in the portfolio. It has the potential for renewed growth. So it works both ways right, so youre going to see it and the losses, but eventually you'll start seeing it.
Alan.
Speaker Change: And our portfolio.
Speaker Change: Great. That's helpful. Thanks, and then just in terms of the commentary you made on if we might see some noise around the storms in <unk>.
Speaker Change: For those those notices do provision for that since they will should be excluded from.
Speaker Change: From the losses.
Speaker Change: And we May we Havent decided yet we havent seen well have to wait to see the numbers come in we did just to give you guys.
Speaker Change: Some color remember back in 2017, when we had the last storms. We ended up we did do it we did kind of set that aside and I think 99% of them cured. So again, we'll have to wait and let the defaults come in and then we'll assess it from there.
Speaker Change: Okay, great. Thanks.
Speaker Change: And your next question comes from the line of Mihir Bhatia with Bank of America. Your line is open.
Mihir Bhatia: Hi, good morning, and thank you for taking my questions.
Mihir Bhatia: Let us start on the claims on the default Lindsay and I appreciate what you're saying mark about them.
Mihir Bhatia: Normalizing, increasing but just quarter over quarter right.
Almost 2000 in the default inventory, that's a big jump than we've seen and I'm just trying to understand was it.
Mihir Bhatia: This quarter unusual like well I guess, maybe talk maybe.
Mihir Bhatia: Give us some.
Mihir Bhatia: From you on like 25, or like just as things normalize what should default rate do you think normalized too.
To hear Aro inventory default jumped 15 Hunter from September 23 to December 23.
Speaker Change: So again I think.
Speaker Change: I can do your jobs for you I do think I think theres <unk> theres, a lot of noise with the ins and the outs because of forbearance. So what youre really seeing is youre not seeing some of the cure activity come through because it's kind of worked its way through forbearance. So it's more of a normalization of that but I would say, yes, given given the environment.
Speaker Change: <unk> and the seasoning, just again 32 months it wouldn't surprise me to see the defaults increase.
But again from a from a mark to market I think we're relatively in a good position from claims I think our loss provision for the quarter was 12%. So again, taking a step back.
Speaker Change: We never thought we'd run the business recession free I don't think were in a recession or anything close to it yet. So again I think it's just normalization of of the default inventory.
Speaker Change: And I would just add I think this is really normal seasonality I mean, if you look.
Pre COVID-19 generally what we would see is an increase in defaults in the second half of the year.
Speaker Change: Starting with <unk> in the third and fourth quarters.
Speaker Change: Peeking out maybe in January and then kind of following back in the first two quarters of the year people catch back up they get their tax refunds.
Speaker Change: And become more current on their default and I think this is just kind of.
Speaker Change: We have had a lot of disruption from Covid and the normal trends I think this is starting to come back to normal seasonality.
Got it and then maybe just switching just real quickly on the investment side. It looks like the investments in corporate bonds corporate debt securities has been increasing.
Speaker Change: Is that right.
Speaker Change: Okay.
Speaker Change: I know from.
Reading standpoint, it's still pretty similar but is there hasn't been any change in philosophy any.
Speaker Change: Like what's driving that.
Speaker Change: No there's not.
Speaker Change: I think what were there the change is really getting back to our normal mix during kind of 'twenty two when short rates really increased.
Speaker Change: It was a good risk return and treasuries.
Speaker Change: Kind of kept the portfolio relatively short and in those securities and now what we've done over the past quarter.
Speaker Change: Quarter, pluses kind of kind of get back into our normal mix of the portfolio, we plan to announce the duration.
Speaker Change: A little bit too, but it's really more a normal course of business not nothing special driving it.
Speaker Change: Got it okay. Thank you for taking my questions.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Again, it is star one if you would like to ask a question.
Speaker Change: And your next question comes from the line of Melissa Wedel with JP Morgan Your line is open.
Speaker Change: Good morning, and Melissa on for Rick today.
Speaker Change: I don't think.
Speaker Change: Might have missed that Mark did you elaborate specifically quantify the risk in force and the.
Speaker Change: Helene and Milton hit areas.
Speaker Change: No we have not we haven't really seen many defaults.
Speaker Change: From that yet.
Speaker Change: Probably see some.
Speaker Change: We most likely will see some in the fourth quarter and we will update everyone in February.
Speaker Change: Okay. Okay. I appreciate that and then as we think just going back to your comments on credit and not painful kidney coming through because of forbearance can you help us think about that.
Speaker Change: <unk> line at around the forbearance process and how that might just the timing of it might involve true impact those.
Speaker Change: Numbers.
This is for Melissa This is Chris and your question pertains to the Hurricanes.
Speaker Change: Just to clarify the forbearance.
Speaker Change: Are you referring to the Covid forbearance that ended last November just trying to get a sense.
Speaker Change: I thought your earlier comments were related to the Covid forbearance in particular.
Speaker Change: Right. So I think Mark's point from earlier is that the forbearance.
Speaker Change: Process for the Cove defaults ended last November.
Speaker Change: When you think about the term.
Speaker Change: We're about a year out so at this point in time, there will be no more COVID-19 forbearance.
Speaker Change: But over the last several years you certainly have had I'll call. It favorable development because of some of the forbearance associated with the Covid loans.
Speaker Change: Yes, Melissa its mark it just made it easier because the way the forbearance works Theres really no friction you can just you can just tell you our servicer that you wanted to forbearance and you can do it now there's obviously a lot. There you have to share. It you have to have right party contact yet to talk to the borrower. So what we think we're going to see is less people go in.
Speaker Change: To forbearance, just because they can and probably more require it.
Speaker Change: And as that works its way through the pipe so to speak you're seeing less cares too. So again, it's more of a normalization we used to see just a lot of noise I think youre going to see less of it.
Speaker Change: And to our point earlier more normalization around kind of defaults and cares.
Speaker Change: Okay. Thanks for clarifying.
Speaker Change: Sure.
Speaker Change: We have no further questions at this time I would like to turn the call back over to management for any additional or closing remarks.
Speaker Change: Yes.
Thank you everyone for joining today and have a great weekend.
Speaker Change: Ladies and gentlemen, this concludes today's call. We thank you for your participation you may now disconnect.
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