Essent Group Ltd. (NYSE:ESNT) Q1 2023 Earnings Call Transcript

Essent Group Ltd. (NYSE:ESNT) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Hello, and welcome to the Essent Group Ltd. First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Phil Stefano. Please go ahead.

Phil Stefano: Thank you, Sarah. 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 first quarter of 2023 was issued earlier today and is available on our website at essentgroup.com. Prior to getting started, I would like to remind participants that today’s discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially.

For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today’s press release, the risk factors included in our Form 10-K filed with the SEC on February 17, 2023 and any other reports and registration statements filed with the SEC, which are also available on our website. Now, let me turn the call over to Mark.

Mark Casale: Thanks, Phil, and good morning everyone. Earlier today, we released our first quarter 2023 financial results, which continue to demonstrate the earnings power of our business. Our financial performance for the first quarter benefited from rising interest rates and favorable credit performance. Higher rates translated to higher investment income along with higher persistency, which supports the growth of our in-force portfolio, despite lower origination volumes. As we continue through 2023, we remain confident in our buy, manage and distribute operating model. While we recognize the uncertainty surrounding the economy in the near term, we continue to manage the business, considering a range of scenarios. We remain constructive on housing over the longer term, as we believe that demographic-driven demand and low inventory should provide foundational support to home prices.

And now, for our results. For the first quarter of 2023, we reported net income of $171 million, compared to $274 million a year ago. On a diluted per share basis, we earned $1.59 for the first quarter, compared to $2.52 a year ago and our annualized return on average equity was 15%. As of March 31, our insurance in force was $232 billion, a 12% increase compared to a year ago. Our 12-month persistency on March 31 was 84% and approximately 80% of our in-force portfolio has a note rate below 5%. Given current rates, we anticipate that persistency could remain elevated in the short term. The credit quality of our insurance in force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 92%. While certain MSAs could experience price corrections, we believe home prices nationwide will generally be flat in the coming years.

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We also anticipate that the embedded home equity within the existing book should continue to mitigate the risk of near-term claims. On the business front, during the quarter, we continued raising rates through our risk-based pricing engine, EssentEDGE. We believe that the pricing environment remains constructive and is reflective of ensuring long-tail mortgage credit risk, given the macroeconomic backdrop. As of March 31, Essent Re’s third-party annual run rate revenues are approximately $70 million, while our third-party risk in force was approximately $2 billion. During the quarter, Essent Re continued to capitalize on the current environment to optimize returns and contribute to the profitability of our franchise. Cash and investments as of March 31 were over $5 billion and the annualized investment yield for the first quarter was 3.4%, up from 2.1% a year ago.

Our new money yield in the first quarter approximated 5%, providing continued tailwinds for our investment portfolio. As a reminder, for every one point increase in the investment yield, there is roughly a one point increase in ROE. We continue to operate from a position of strength with $4.6 billion in GAAP equity, access to $2.1 billion in excess of loss reinsurance and over $1 billion of available holding company liquidity. With a trailing 12-month underwriting margin of 87% and operating cash flow of $595 million, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. We continue to take a measured approach to capital and remain committed to managing it for the long term. Our strong financial performance affords us the ability to take a balanced approach to capital between distribution and deployment, which includes the $100 million for our planned title acquisition announced in February.

While we have initiated an integration and transition process for the pending title transaction, the companies will continue to operate independently until we close the deal later in the year. As noted in the past, we believe allocating capital for growth is a better value creator for the shareholders over the long-term. However, we also recognize that returning capital to shareholders generates meaningful returns for investors. Year-to-date through April 30th, we repurchased approximately 800,000 shares for $32 million. Further I’m pleased to announce that our Board has approved a common dividend of $0.25. We continue to see our dividend as a meaningful demonstration of the confidence we have in the stability of our cash flows and the strength in 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 first quarter, we earned $1.59 per diluted share compared to $1.37 last quarter and $2.52 in the first quarter a year ago. As a reminder, our first quarter 2022 results benefited from the release of approximately $100 million of reserves associated with COVID related defaults from 2020. Net premium earned in the first quarter of 2023 was $211 million and included $14.7 million of premiums earned by Essent Re on our third-party business. The average premium rate for the US mortgage insurance business in the first quarter was 40 basis points and the net average premium rate was 34 basis points both consistent with the fourth quarter of 2022.

Net investment income increased $5.4 million or 14% in the first 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 first quarter was $4.9 million, which includes a $368,000 loss due to a decrease in the fair value of embedded derivatives in certain of our third-party reinsurance agreement. This compares to a $6.5 million decrease in the fair value of these derivatives in the fourth quarter of 2022. The provision for loss and loss adjustment expenses was a benefit of $180,000 in the first quarter of 2023 compared to a provision of $4.1 million in the fourth quarter of 2022 and a benefit of $106.9 million in the first quarter a year ago.

At March 31st, the default rate was 1.57%, down nine basis points from 1.66% at December 31st largely due to favorable cure activity on prior year defaults. Other underwriting and operating expenses in the first quarter were $48.2 million, an increase of $1.3 million over the fourth quarter of 2022 and included approximately $3.4 million of transaction costs associated with our announced title business acquisition. The expense ratio was 23% this quarter consistent with the fourth quarter of 2022. We continue to estimate that other underwriting and operating expenses will be approximately $175 million for the full year 2023, excluding expenses associated with the announced title business acquisition and related transaction costs. During the first quarter, Essent Group paid a cash dividend totaling $26.8 million to shareholders.

In March, we repurchased $16.6 million of shares under the authorization approved by our Board in May, 2022. We repurchased an additional $15.1 million of shares in April 2023. As a reminder, Essent has a credit facility with committed capacity of $825 million. Borrowings under the credit facility accrue interest at a floating rate tied to a short-term index. As of March 31st, we had $425 million of term loan outstanding with a weighted average interest rate of 6.52%, up from 6.02% at December 31st. Our credit facility also has $400 million of undrawn revolver capacity that provides an additional source of liquidity for the company. At March 31st, our debt to capital ratio was 8%. During the first quarter, Essent Guaranty paid a dividend of $90 million to its US holding company.

Based on unassigned surplus at March 31st, the US mortgage insurance companies can pay additional ordinary dividends of $292 million in 2023. As of quarter end, the combined US mortgage insurance business statutory capital was $3.2 billion with a risk-to-capital ratio of 10.3:1. Note that statutory capital includes $2.2 billion of contingency reserves at March 31, 2023. Over the last 12 months, the US mortgage insurance business has grown statutory capital by $148 million while at the same time paying $310 million of dividends to our US holding company. Now, let me turn the call back over to Mark.

Mark Casale: Thanks Dave. In closing, our balance sheet and liquidity remains strong, while higher interest rates continue to benefit the persistency of our in-force book and investment income. Also the quality of our portfolio continues to drive positive credit performance. Looking forward, our franchise is well-positioned and we remain confident in the strength of our operating model. Our strong financial results continue to generate excess capital, which we will deploy in a balanced manner between investment in growing our business and distribution to our shareholders. Now, let’s get to your questions. Operator?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] One moment please for your first question. Your first question comes from the line of Mark DeVries with Barclays. Please go ahead.

Operator: Your next question comes from the line of Bose George with KBW. Please go ahead.

Operator: Your next question comes from the line of Mihir Bhatia with Bank of America. Please, go ahead.

Operator: Your next question comes from the line of Geoffrey Dunn with Dowling & Partners. Please, go ahead.

Operator: Your next question comes from the line of Rick Shane with JPMorgan. Please go ahead.

Operator: Your next question comes from the line of Doug Harter with Credit Suisse. Please go ahead.

Operator: Your next question comes from the line of Roland Mayer with RBC Capital Markets. Please go ahead.

Operator: Your next question comes from the line of Eric Hagen with BTIG. Please go ahead.

Operator: Your next question is a follow-up from Geoffrey Dunn of Dowling & Partners. Please go ahead.

Operator: There are no further questions at this time. I will turn the call back to the management team.

Phil Stefano: Okay. Well, thanks everyone. Good questions today. Good discussion and have a great weekend.

Operator: This concludes today’s [Abrupt End]