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Essent Group Ltd. (NYSE:ESNT) Q3 2023 Earnings Call Transcript

Essent Group Ltd. (NYSE:ESNT) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Thank you for standing by. My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Essent Group Limited Third Quarter Earnings Call. [Operator Instructions]. I'd now like to turn the call over to Phil Stefano. Please go ahead.

Philip Stefano : Thank you, Adam. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and David Weinstock, Chief Financial Officer. Also on hand for the Q&A portion of the call is Chris Curran, President of Essent Guaranty. Our press release, which contains Essent's financial results for the third quarter of 2023 was issued earlier today and is available on our website at Our press release this quarter includes non-GAAP financial measures that may be discussed during today's call. A complete description of these measures and the reconciliation to GAAP may be found in Exhibit O of our press release. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements.

These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause our actual results to differ materially. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, the risk factors that included in Form 10-K filed with the SEC on February 17, 2023, and any other reports and registration statements filed with the SEC, which are also available on our website. Now let me turn the call over to Mark.

Mark Casale : Thanks, Phil, and good morning, everyone. Earlier today, we released our third quarter 2023 financial results, which continue to benefit from both favorable credit performance and the current interest rate environment. As mentioned last quarter, rising interest rates continue to drive higher investment income and elevated persistency, which has supported our revenue growth this year. As we look ahead, we remain encouraged by the resilience of the housing and labor markets. The housing supply and demand imbalance and favourable demographic trends are expected to provide foundational support to home prices over the longer term. While economic uncertainty remains, we continue to believe the strength of our balance sheet and our Buy, Manage and Distribute operating model should position us well to be prepared for a range of economic scenarios.

And now for our results. For the third quarter of 2023, we reported net income of $178 million compared to $178 million a year ago. On a diluted per share basis, we earned $1.66 for the third quarter compared to $1.66 a year ago, and our annualized return on average equity was 15%. As of September 30, our book value per share was $44.98, an increase of 13% from a year ago. As of September 30, our insurance in force was $239 billion, a 7% increase versus a year ago. Our 12-month persistency on September 30 was 87%, and approximately 70% of our in-force portfolio has a note rate of 5% or lower. We expect that the current level of rates should support elevated persistency through the end of this year. As a portfolio business, mortgage insurance is less beholden to transaction activity in other sectors of the housing ecosystem.

The credit quality of our insurance in force remains strong, with a weighted average FICO of 746 and a weighted average of original LTV of 93%. Regulatory guardrails, including the qualified mortgage rule and prudential GSE underwriting guidelines has significantly improved industry credit quality and performance since the global financial crisis. In addition, credit performance should continue to be supported by embedded home price appreciation and implied mark-to-market values, particularly for the 2021 and prior vintages, which represent approximately 60% of the overall book. On the business front, while mortgage lenders remain challenged given the interest rate environment, we continue to focus on activating new accounts. We believe it is very important to identify and activate new customers while also continuing to support our current customers.

Year-to-date through October 31, we activated 95 new customers. We take a long-term approach in managing Essent and best positioning our franchise, especially during times like now, as the lender landscape continues to shift and evolve. As of September 30, Essent Re third party year-to-date revenues were approximately $60 million, while third-party risk in force was $2.2 billion, Essent Re continues to leverage our expertise in mortgage credit and the Bermuda platform to deliver complementary earnings to the Essent franchise. Our title and settlement services operation incurred a pretax loss of approximately $4 million in the third quarter. As we continue to work through the title integration, we will be taking a long-term approach to building out the business with a focus on risk controls and operational efficiency.

Cash and investments as of September 30 were $5.4 billion. Our new money yield in the third quarter was over 5%, while our annualized investment yield was 3.6% for the third quarter, up from 2.7% a year ago. Net investment income was $47 million in the third quarter, up approximately 44% from the same quarter last year. Higher investment income is another way that our valve business is levered to higher rates. Our balance sheet remains strong with $4.8 billion in GAAP equity, access to $1.6 billion in excess of loss reinsurance and over $1 billion of available holding company liquidity. During the third quarter, we closed on our ninth Radnor Re ILN transaction. The utilization of programmatic reinsurance helps to diversify our capital resources while seeding a meaningful portion of our mezzanine credit risk.

A financial advisor confidently discussing the latest financial trends with a room full of clients.
A financial advisor confidently discussing the latest financial trends with a room full of clients.

With a trailing 12-month operating cash flow of $720 million and a mortgage insurance underwriting margin of 75%, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. Our strong financial performance and capital position enable us to take a balanced approach between capital deployment and distribution. Year-to-date through October 31, we repurchased approximately 1.4 million shares for $57 million. I am pleased to announce that our Board has authorized a new $250 million share repurchase program and has approved a common dividend of $0.25. We continue to see our dividend as a meaningful demonstration of the confidence we have and the stability of our cash flows, the strength of our capital position.

Now let me turn the call over to Dave.

David Weinstock : Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the third quarter, we earned $1.66 per diluted share compared to $1.61 last quarter and $1.66 in the third quarter a year ago. Net premium earned for the third quarter of 2023 was $247 million and included $16.9 million of premiums earned by Essent Re on our third-party business, and $20.6 million of premiums earned by the title operations acquired on July 1. The average base premium rate for the U.S. mortgage insurance portfolio in the third quarter was 40 basis points, consistent with last quarter. The net average premium rate on the U.S. mortgage insurance portfolio was 35 basis points in the third quarter of 2023, up 2 basis points from last quarter, primarily to the net impact of the successful ILN tender in the second quarter.

Ceded premium decreased to $30.3 million in the third quarter compared to $39.5 million in the second quarter due to expenses incurred last quarter related to the tender and lower outstanding insurance-linked notes during the third quarter. Net investment income increased $1.8 million or 4% in the third quarter of 2023 compared to last quarter, due primarily to higher yields on new investments and floating rate securities resetting to higher rates. Other income in the third quarter was $5.6 million compared to $8.1 million last quarter. The largest component of the decrease was the change in the fair value of embedded derivatives in certain of our third-party reinsurance agreements. In the third quarter, we recorded an $898,000 decrease in the fair value of these embedded derivatives compared to a $2.7 million increase recorded last quarter.

The provision for loss and loss adjustment expense was $10.8 million in the third quarter of 2023 compared to $1.3 million in the second quarter of 2023 and $4.3 million in the third quarter a year ago. At September 30, the default rate on the U.S. mortgage insurance portfolio was 1.62%, up 10 basis points from 1.52% at June 30, 2023. Other underwriting and operating expenses in the third quarter were $54.8 million and include $13.5 million of title expenses. Expenses for the third quarter also includes title premiums retained by agents of $13.2 million, which we are reporting separately in our income statement. Our consolidated expense ratio was 27% this quarter. Our consolidated expense ratio excluding title, which is a non-GAAP measure, was 18% this quarter.

A description of our consolidated expense ratio excluding title and the reconciliation to GAAP may be found in Exhibit O of our press release. As a reminder, our consolidated expense ratio was 20% for both the second quarter and third quarter a year ago. As Mark noted, our holding company's liquidity remains strong and includes $400 million of undrawn revolver capacity under our committed credit facility. At September 30, we had $425 million of term loan outstanding with a weighted average interest rate of 7.07%, up from 6.87% at June 30. At September 30, 2023, our debt-to-capital ratio was 8%. During the third quarter, Essent Guaranty paid a dividend of $60 million to its U.S. holding company. Based on unassigned surplus at September 30, the U.S. mortgage insurance companies can pay additional ordinary dividends of $290 million in 2023.

At quarter end, the combined U.S. mortgage insurance business statutory capital was $3.3 billion, with a risk-to-capital ratio of 10.3:1. Note that statutory capital includes $2.3 billion of contingency reserves at September 30. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $181 million, while at the same time paying $300 million of dividends to its U.S. holding company. During the third quarter, Essent Group paid a cash dividend totaling $26.5 million to shareholders, and we repurchased 102,000 shares for $5 million under the authorization approved by our Board in May 2022. Now let me turn the call back over to Mark.

Mark Casale : Thanks, Dave. In closing, Essent continues to generate high-quality earnings, while our balance sheet and liquidity remains strong. Higher interest rates to turnover of our investment portfolio and robust operating cash flows have contributed to strong net investment income growth this year, supporting our revenues and operating returns. Earlier this week, we celebrated the tenth anniversary of Essent's initial public offering on the New York Stock Exchange. Since our IPO, Essence book value per share has grown at a compound annual growth rate of approximately 19%, and Essent shares have delivered an annualized total return of approximately 12%. And I want to thank our team for their dedication and contribution to Essent's achievement and growth over the last decade.

I'd also like to thank our customers and shareholders for your continued support, enabling us to fulfill Essent's mission to promote and serve affordable and sustainable homeownership. Now let's get to your questions. Operator?

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