Essent Group Ltd. (NYSE:ESNT) Q1 2024 Earnings Call Transcript

Essent Group Ltd. (NYSE:ESNT) Q1 2024 Earnings Call Transcript May 3, 2024

Essent Group Ltd. beats earnings expectations. Reported EPS is $1.7, expectations were $1.56. Essent Group Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the Essent Group Limited First Quarter 2024 Earnings Conference 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] Thank you. I’d now like to turn the call over to Phil Stefano, Investor Relations. You may begin.

Phil Stefano: Thank you, Rob. 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 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. 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 16, 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 first quarter 2024 financial results. Our results continue to benefit from the favorable credit performance of our insured portfolio and the impact of higher rates on both persistency and investment earnings. Given the state of the economy and higher rates, we are encouraged by the resilience of housing and the labor market. Over the longer term, our view remains constructive. We believe that improvement in supply-demand imbalances, along with favorable demographics will continue to support housing growth, which is positive for our franchise. And now for our results. For the first quarter of 2024, we reported net income of $182 million compared to $171 million a year ago.

On a diluted per share basis, we earned $1.70 for the first quarter compared to $1.59 a year ago. On an annualized basis, our return on average equity was 14%. As of March 31, our U.S. mortgage insurance in force was $238 billion, a 3% increase versus a year ago. Our 12-month persistency on March 31 was 87%, the same as last quarter and over 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 throughout 2024. Credit quality of our insurance in force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 93%. Overall, we remain pleased with the quality of the business that we are writing. Also, we anticipate that embedded home equity within the existing book should mitigate potential claims in the current housing environment.

On the mortgage insurance front, we continue to focus on activating new lenders and strengthening our operating infrastructure. This includes enhancing our proprietary scoring engine, EssentEDGE, by integrating additional data sources. Our lenders benefit from the amount of data that we analyze and delivering our best rate to borrowers, while also enabling us to optimize our unit economics. Given the challenging mortgage origination market, we believe that having access to EssentEDGE is an advantage for lenders and their borrowers. At Essent Re, we continue to leverage our mortgage credit and reinsurance expertise in generating earnings for the Essent franchise. As of March 31, Essent Re’s third-party risk in force was approximately $2.3 billion, up 10% from the first quarter of 2023.

Our title operations incurred a pre-tax loss of approximately $4 million in the first quarter, similar to the third quarter and fourth quarter of 2023. With the post-acquisition integration complete, we have begun the build-out of Essent Title, which should enable us to leverage our strong operational infrastructure, lender network and risk analytics. Cash and investments as of March 31 were $5.8 billion and our new money yield in the first quarter was approximately 5%. The annualized investment yield for the first quarter was 3.7%, up from 3.4% a year ago. New money rates have largely held stable over the past several quarters. We continue to operate from a position of strength with $5.2 billion in GAAP equity, access to $1.4 billion in excess of loss reinsurance and over $1 billion of available holding company liquidity.

With a trailing 12-month mortgage insurance underwriting margin of 76%, our franchise remains well-positioned from an earnings, cash flow and balance sheet perspective. In the first quarter of 2024, we entered into a quota share transaction with a panel of highly-rated reinsurers to provide forward protection for our 2024 business. We are encouraged by the strong interest from the reinsurance market and supporting our program. Looking forward, we will continue executing upon our reinsurance strategy to mitigate earnings volatility during economic cycles while also providing capital relief. During the quarter, we were pleased that S&P upgraded the financial strength ratings of Essent Guaranty and Essent Re to single A-, and that Moody’s affirmed Essent Guaranty’s A3 rating and raised its rating outlook to positive.

We believe these actions reflect the significant enhancements made by our industry in transforming MI into a sustainable and through-the-cycle franchise. Given our strong financial performance and capital position, we continue to take a measured approach to capital distribution. Our goal is to balance capital deployment opportunities to generate incremental revenues, while optimizing capital distributions and shareholder returns. 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 $1.70 per diluted share compared to $1.64 last quarter and $1.59 in the first quarter a year ago. Our U.S. mortgage insurance portfolio ended March 31, 2024 with insurance in force of $238.5 billion, essentially flat compared to December 31 and 3% higher compared to the first quarter a year ago. Persistency at March 31 was 86.9%, unchanged from the fourth quarter. Net premium earned for the first quarter was $246 million and included $17.8 million of premiums earned by Essent Re on our third-party business and $15.3 million of premiums earned by the title operations. The base average premium rate for the U.S. mortgage insurance portfolio for the first quarter was 41 basis points, and the net average premium rate was 36 basis points for the first quarter, both increasing 1 basis point from last quarter.

Net investment income increased $1.5 million, or 3%, to $52.1 million in the first quarter of 2024 compared to last quarter, due primarily to higher balances and continuing to invest at higher yields in the book yield of our existing portfolio. Other income for the first quarter was $3.7 million compared to $6.4 million last quarter. The largest component of the decrease was the change in fair value of embedded derivatives in certain of our third-party reinsurance agreements. In the first quarter, we recorded a $1.9 million decrease in the fair value of these embedded derivatives compared to a $412,000 increase recorded last quarter. The provision for loss and loss adjustment expenses was $9.9 million in the first quarter compared to $19.6 million in the fourth quarter of 2023, and a benefit of $180,000 in the first quarter a year ago.

At March 31, the default rate on the U.S. mortgage insurance portfolio was 1.72%, down 8 basis points from 1.80% at December 31, 2023, largely due to favorable cure activity on prior year defaults. Other underwriting and operating expenses in the first quarter were $57.4 million and include $11.8 million of title expenses. Expenses for the first quarter also include title premiums retained by agents of $9.5 million, which were reported separately on our consolidated income statement. Our consolidated expense ratio was 27% this quarter. Our expense ratio, excluding title, which is a non-GAAP measure, was 20% this quarter. A description of our expense ratio excluding title and the reconciliation of GAAP may be found in Exhibit O of our press release.

We now estimate that other underwriting and operating expenses, excluding our title operations will be approximately $185 million for the full-year 2024. As Mark noted, our holding company liquidity remains strong and includes $400 million of undrawn revolver capacity under our committed credit facility. At March 31, we had $425 million of term loan outstanding with a weighted average interest rate of 7.06%, down from 7.11% at December 31. At March 31, 2024, our debt-to-capital ratio was 8%. At March 31, Essent Guaranty’s PMIERs efficiency ratio, excluding the 0.3 COVID factor, remained strong at 170%, with $1.4 billion in excess available assets. During the first quarter, Essent Guaranty paid a dividend of $45 million to its U.S. holding company.

Based on unassigned surplus at March 31, the U.S. mortgage insurance companies can pay additional ordinary dividends of $331 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 10:1. Note that statutory capital includes $2.4 billion of contingency reserves at March 31. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $246 million, while at the same time paying $250 million of dividends to our U.S. holding company. During the first quarter, Essent Re paid a dividend of $37.5 million to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $29.6 million to shareholders, and we repurchased 97,000 shares for $5 million under the authorization approved by our Board in October 2023.

Now let me turn the call back over to Mark.

Mark Casale: Thanks, Dave. In closing, we are pleased with our first quarter results as Essent continues to generate high-quality earnings, while our balance sheet and liquidity remains strong. These results demonstrate the strength of our business model and how Essent is uniquely positioned within the current macroeconomic environment. With Title now being part of the Essent franchise, I’m very proud of the entire Essent team as we remain focused on providing best-in-class service and value to our mortgage insurance and Title customers. We continue to believe that Essent is well-positioned within the U.S. housing finance as we further our franchise and mission to support affordable and sustainable homeownership. Now let’s get to your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Terry Ma from Barclays. Your line is open. Please go ahead.

Terry Ma: Hi. Thanks. Good morning. So, your NIW was lower Q-over-Q, looks like you lost a little bit of share. So, anything to call out with respect to pricing or just the environment overall?

Mark Casale: Hey, Terry. No, not really. I mean, I think you’re relatively new to covering us. So it’s kind of like a broken record with us. I mean, market share really kind of always ebbs and flows quarter-to-quarter. I think longer term, our goal is always to be kind of in that 15% to 16% share. That’s really how you can optimize our unit economics. So, certain quarters were a little bit lower. I would note out that our premium, the gross premium yield has actually risen a bit in the first quarter. Some of that is from a pricing perspective. Given the small market, it’s probably not the time to reach for share and you rent share anyway. You don’t really own it. It’s quarter-to-quarter. But I think kind of from a unit economic basis with increased yield and we were probably increasing price a little bit more than others throughout 2023, that’s probably cause for a little bit of lower share.

But there’s not a big gap between kind of the top share and the lower share in this type of market. So again, just to reiterate, from a unit economic basis, given the yields that we’re writing along with the investment income, the unit economics of the business are quite good right now and we’re pleased with that.

Terry Ma: Got it. That makes sense. And then if I look at the rate of increase year-over-year in new notices, it’s actually been pretty consistent the last four quarters. So, if I assume the macro outlook and employment picture stays pretty similar, is there anything to think about in how the vintage curve season that could make that rate higher or lower going forward?

Mark Casale: Yeah. I can start. I mean, sure, when as the book seasons, and remember, 42%, I believe, of our book is in 2020 — in 2021. So, peak defaults are usually kind of in that three to five-year timeframe. So, you could see a seasoning and an increase in defaults. Not particularly concerned about that vintage just because of the embedded home equity we have. But yeah, sure, you could certainly see a little bit of an increase. And again, just big picture, Terry, 800,000 loans roughly and 14,000 defaults. So big picture, I think we feel pretty good about credit. And like we said, credit is the number one concern of the franchise. If you look at our forecast and our unit economics, everything’s relatively steady, right? I mean, the gross premium yield we talked about, I think we do a real good job with expenses and investment income has been a tailwind.

It’s always that credit that has the potential to be the most volatile. We feel better about that, given the credit quality of our portfolio and also just the changes in the industry over the past five years, six years and our ability to hedge out that risk. So, we’ve really protected the balance sheet. We’ve always kind of known that was where the most. That’s the Achilles heel of the business, so to speak, is credit. So, you’re looking for ways to strengthen that. One is to write good business, good unit economics, and the other is to make sure you’re kind of hedging that risk out in times of stress, which we’ve seen obviously over the — saw in 2020 and you see it occasionally.

Terry Ma: Got it. That’s helpful. And maybe I would just indulge in one more. The cures to new notices ratio was seasonally higher this quarter. As we look out for the rest of the year, should we expect a similar seasonality to play out as we saw in 2023 for that ratio?

David Weinstock: Yeah. Hey, Terry. It’s Dave Weinstock. In general, I would say that we are starting to see a little bit of return to the normal seasonality pattern that we saw prior to the pandemic. So in general, specifically in the first and second quarters and generally through February, through April, May timeframe, we generally see more cure activity. And then in the second half of the year, we start to see that wane a little bit and a modest increase in defaults. And we’re expecting that pattern to kind of play out in 2024.

Terry Ma: Great. Thank you.

Operator: Your next question comes from the line of Doug Harter from UBS. Your line is open.

Doug Harter: Thanks, and good morning. Mark, you talked about being a little more reserved in the amount of capital you’re returning to shareholders for possible organic deployment or other opportunities. Can you just talk about what opportunities you see to maybe increase the pace of capital deployment just given the strong capital generation you have right now?

Mark Casale: Yeah. Doug, it’s an interesting question for sure, right? And I would say to give everyone on the phone and investors kind of context, we do have that retain and invest mentality. And I know that’s different than some of our peers and that’s good, right? Everyone can be different and we’re obviously generating a lot of capital through the core business as it continues to perform quite well. I would say we have a measured approach. So, we’re going to look to invest kind of at the numerator. And then in terms of just capital distribution, I think dividends were fairly — we have a pretty good plan around that. We’re really — it’s kind of tiered to or linked to kind of a yield on our book value per share. So as that grows and it grew 13%, 14% last year and the dividend grew a similar amount.

And I think with buybacks, we really have a structured approach to it. And in terms of just being sensitive to valuations. So, we bought back less in the first quarter really as a function of the stock price. So as book value per share grows, the buybacks will grow along with that in terms of just how we structure that 10b5 plan. In terms of opportunities, I think we’re very active in looking at things. That doesn’t mean we’re very active in doing things. I’m a big believer that investments — it’s hard work to invest. You don’t want to wait around for the banker to give you the book. So we have, I would say, a very strong team that’s growing around both corporate development and our Essent Ventures Group. And we look at a lot of things. It’s a lot of fund-to-funds now, but we do have some direct investments and one of those investments actually led to the Title acquisition.

So it’s very difficult to time kind of capital deployment with opportunities, if that makes sense, right? It’s not a quarter-to-quarter thing. So, we look at this capital really as a luxury, Doug, not a burden. And we look at this over time. Things could happen and we’re ready to pounce on an opportunity. And if we can’t, we’re going to return it to the shareholders. At the end of the day, our goal is to maximize shareholder value. It’s just not as simple as a quarter-to-quarter. And I think we like having this excess capital. It could give us an opportunity to grow the franchise. And I think longer-term shareholders are always rewarded by growth. You see it in other businesses and our ability to allocate that is going to be a lot of the success of Essent.

And I think it’s going to be the difference in the industry over the next three years to five years. The companies that can allocate capital better than others are probably going to be the winners. And some of that maybe — some of that could be returning capital to shareholders and others could be around growth. We’re not saying which one we’re going to be. We’re just saying we’re looking at all avenues of it and we love the position we’re in. So, I think I’ll kind of leave it at that.

Doug Harter: I guess, just on — any update on kind of where you are in the progress of Title and whether that can begin to ramp or become a source of a or a use of capital?

Mark Casale: Yeah. Well, in terms of Title, I would say, like I said when we first bought it, it’s probably a 12 to 18-month build-out. We’re nine months into it. I would say it’s going well from a build-out perspective. We’re really starting to bring over the Essent framework to the Title side. So, that’s leveraging our skills around IT, risk, finance, legal. I mean, I could go into all the dirty details of kind of what we’re doing, but it’s a lot of work, right, I mean. And it’s same thing on the MI side. We started building out MI in 2009. We didn’t breakeven until the fourth quarter of 2012. So, these things take a long time. I’m encouraged we’re starting to bring in some new talent. We’re moving over talent from the MI side.

I really feel like the team is starting to gel, and that’s why we kind of said we’re starting the build-out of Essent Title. So, we’ll begin to leverage our lenders through our — we call it Essent lender services, which is really that 50-state title and settlement services business, I mean, really geared more towards refinance, which as you know, the market is down. And then the agency services, which really targets, I would say, title agents in certain regions. That’s relatively small. And in fact, we’re actually scaling back agents early on, as we start to understand the unit economics of smaller agents versus other agents and we’ll build that out over time, too. So it’s probably in the early stages. One of the beauties of it though, Doug, it’s not big on capital.

It’s relatively capital light compared to mortgage insurance. And so I don’t — the investments there are really more around people and technology and infrastructure versus you need to put a lot of capital into the business.

Doug Harter: Great. Thank you, Mark.

Operator: [Operator Instructions] Your next question comes from the line of Soham Bhonsle from BTIG. Your line is open.

Soham Bhonsle: Hey guys. Good morning. Mark, I was looking at your NIW stratification by FICO bucket. And what’s interesting to me is like your 760 FICO mix has gone up, call it 500 basis points year-over-year, yet your base rate like as you noted has ticked up slightly. And I know the base rate is on the insurance in force. But I’m wondering if you’ve seen the ability to find pockets of just higher pricing with the use of EssentEDGE without maybe taking that incremental risk out there.

Mark Casale: Yeah. Absolutely. I think we have. I think we’re really starting to see EssentEDGE be a differentiator. So, we can — and just again to bring everyone up to speed on it, it’s really not a pricing engine. EssentEDGE is a proprietary scoring engine. So, we have kind of the FICO score and we have the EDGE score and we’re able to see kind of differences. And obviously for a particular borrower that has a higher edge score than a FICO score, they’re going to get a better price than probably where the market’s at. So we’re going to win that loan and vice versa. So we do see pockets of value, particularly around some of the higher LTVs, even some of the higher DTI. Some of it is macro-oriented. But we are seeing that and I think that’s good.

That’s why we said it in the script. I think for all lenders, having Essent part of their rotation really is a win for them. And I’ll give you a good example. And we had one lender that we’re probably 10% of their business and they came to us and said, hey, you guys are only 10%, our other MIs are stepping up and they really have increased share, what are you guys doing? And we were able to go back and point out to them that we were probably the best price around some of their DTIs and LTVs that the other competitors with probably more flat and, I would say, static pricing weren’t able to take advantage of. And I think once they were educated around that, I think they were quite happy. So again, we’re here, we’re always there to give our best price to each borrower.

It’s not necessarily the lowest price. So if another MI has a different, I would say, a way to or a liking of a certain segment, that’s great. That’s great for the borrower, it’s great for the lender. Everyone wins. But again, it’s early, but I think it’s starting to get reflective in some of the things that we’re seeing around kind of the use of EDGE. It’s on the margin, right? I mean, it’s still at the end of the day you price to the market, Soham. But we’re encouraged by some of the results and we’re continuing to invest in it. As we mentioned in the script where we brought on another credit bureau this year. And what we’re seeing there is that with the different credit bureaus, they have different attributes that we may be able to leverage a little bit better to improve EDGE, potentially even in certain markets.

Different credit bureaus have different strengths across different regions. So pretty encouraged by that too.

Soham Bhonsle: Okay. Great. And maybe wanted to get your updated thoughts on a topic that has not come up in a while, which is M&A. It just seems like we’re in a market today where the industry is in excess capital position and limited growth because of just where the origination market is, at least in the medium term. Credit is still pretty good and should be good outside of some big decline in HPA or unemployment. So that capital return seems to be sustainable as well. But I’m curious if there’s a case to be made here that there’s potentially other parties that might be attracted to this capital and want to redeploy this for a higher, better use long term.

Mark Casale: Yeah. It’s a good question. I would say there’s two ways to look at it, both within the industry consolidation and when you do see kind of a slower market. And just to point out, I don’t think it’s going to be a slower market for long, Soham. I think when you look at the demographics, especially think around just immigration, right? It had almost increased in the population last year of almost 4 million people, over 3 million were new immigrants, right? So they’re coming in, they’re entering the workforce around construction and hospitality and healthcare. These are all future homeowners. So I think the industry will continue to grow. So I would look at this kind of time period as a little bit of pause on growth versus the growth as kind of stopped.

So that’s one aspect of it. But within the industry, it’s a mature industry. And when things — we’re not at the, there’s still growth, but there’s not as much growth as there probably was, say, five years ago. So it’s a little bit of consolidation one-on-one, right? You’re bringing companies together, you’re eliminating a lot of costs. It wouldn’t surprise me to see that potentially happen over the next several years, depending on where rates go and where growth goes. And then the other is really — is someone from outside the industry. And when you think about some of the large P&C players with the changes in the capital model with S&P, there’s probably even a little bit more capital arbitrage for them. So for them to come in — and again, what you’re seeing quarter after quarter, just the consistent returns, not just by Essent, but by the whole industry, I would think at one point that would be appealing for a larger player, for an MI.

So again, that wouldn’t surprise me either to see an MI or even two to be divisions of larger P&C companies down the road. So it takes a while, right? There’s still a lot of the history. We’ll hear. We’ll talk to investors and they’ll talk about the great financial crisis, which was 16 years ago. It’s a pretty long time ago, and we’ve been public for over 10 years, have compounded book value per share, 18%. I think the returns to shareholders have been pretty good. And just consistently, we would hear, you guys haven’t — you haven’t really been through a recession. Then we go through 2020. Unemployment’s double digits, our default rate shot to 5%. Essent made money and did well. Right? Rates go down, NIW is up. Insurance in force grows. Essent does well.

Rates start to go high, NIW falls. Persistency increases, yield increases. Essent does well. That at some point it takes a while, Soham, that’s going to get noticed. It just takes time, and sometimes you have to almost earn your way through it. But over time, I think people will understand kind of the strengths of the business model and how it’s improved so much over the past 10 years, both regulatory, with the advent of QM, the changes that the GSEs have made, which have been quite significant with the strengthening of DU and LP, the improvements around QC, the addition of forbearance, and how it helps borrowers add in the kind of the ability of the industry to change pricing the way we have and able to change pricing almost on a dime, which five years ago with rate cards took six months.

And then clearly, the introduction of reinsurance, that’s really kind of hedged out the book. It’s a much different model. And again, I think the sustainability and the consistency of the earnings will be noticed longer term by whether outside parties. And we have a core investor base that understands this well, and they’ve been investors with us for a long time, and they’re very content to allow us and watch us grow book value per share, quarter after quarter.

Soham Bhonsle: Yeah. That makes sense. And if I could just one on title. I know there’s been a lot of chatter around just title costs and some of these pilots that the GSEs are trying to implement here. Would love to maybe just get your thoughts on the topic and maybe what you’re hearing from folks out there. Thank you.

Mark Casale: Yeah. That’s a timely question. Right? We’ve gotten a lot. We’re kind of the newbies on the block there. So I think we do have a unique perspective, though, Soham, given, we’ve gone through a lot of this with mortgage insurance, especially around the crisis. The mortgage insurers, they don’t pay any claims. Do we even need the product? The fact that Essent came into the market, I think helped a lot, private capital coming in, wanting to take that risk. The industry, by the way, paid over $50 billion of claims. So again, it was a fact. It was really an opportunity to educate both regulators and folks around the value of mortgage insurance and how important it was to the national housing finance system. And I think the same way with title insurance.

It’s such a valuable product and I think it’s misunderstood. And so I think what we’re going to try to do, working with counterparts in the industry, is to do a better job of educating key constituencies on the value of title insurance and how it’s used and its role to protect borrowers and help lenders and improve the housing finance system. That being said, there is — I think there is an issue around just the price to the borrowers. In certain states, on the refinance side, the borrower can get a very efficient price, and in other states they can’t because of the promulgated states and some of the challenges they have at the state level. That would be like us charging 40 basis points in 38 states. In 12 states, we have to charge 100 basis points.

And the borrower loses in that. So I think the industry, we’re always going to put the borrower first. We do it on the MI side, we’re going to do it on the title side. And I think that’s where the noise is coming from. And I think that’s the root cause of the problem. And I think as the industry starts to think through that and until the industry really tries to solve that problem, there’s always going to be workarounds. That’s how it ends. And so that’s why you see AOL and title waivers. Those are workarounds because lenders — and we talk to lenders every day, Soham, we understand it, they’re frustrated by it and they’re looking for ways to get around it. So I think the title insurance industry longer term has to kind of come to grips to that.

And when they do, I think it’ll be fine. I think it’s a valuable product and I think the industry has a really bright future.

Soham Bhonsle: All right. Thanks a lot, Mark.

Operator: Your next question comes from the line of Melissa Wedel from J.P. Morgan. Your line is open.

Melissa Wedel: Good morning. Thanks for taking my questions today. I’m on for Rick this morning. I was wondering if you could talk about how you’re thinking about the current vintage. I know you referenced sort of the health and the credit metrics of the portfolio. There’s a lot of embedded HPA that really is supportive of credit. In this environment, we’re seeing lower affordability. It seems like there are fewer tailwinds in terms of employment. Employment will be getting better from here is sort of our base case assumption. But as you look at new business in this environment, what do you think — how much higher risk is embedded in this current vintage, do you think, compared to sort of the rest of the portfolio?

Mark Casale: That’s a good question. I would say, just big picture, we’re pretty comfortable with the new writings. I know clearly, with rates kind of close to 7% and home prices have been quite elevated, they haven’t really grown that much. They’ve grown a little, but they’ve been relatively flattish. I would say, if we’re going to pick on vintages in general, we’re talking about, again, like I said, 14,000 defaults. I would say the 2022 vintage is the one we probably look at the most, just because that was done almost at the peak of HPA and our pricing was the lowest. That’s when we had talked about we had really low share at the end of ’21, early ’22 pricing and we really bottomed out and increased materially from that point on.

So just from a unit economics basis, that’s probably the one that we’ll look at the most. It’s actually performing pretty well. But I mean, just from an incurred loss ratio, it’s probably a little bit higher. I would say with the new book we’re not — we’re pretty comfortable with the unit economics of the book. Is it going to be — could it be a touch riskier than others? Yes, but also I think we’re being compensated for that from a price standpoint, so.

Melissa Wedel: Okay. Understood. Follow-up question is a little bit tangential here, but I would imagine that a fair number of the borrowers that you’re insuring would also have some student loans. And I’m just wondering if you’re — do you have visibility into that? Are you seeing any impacts to credit from either borrowers benefiting from forgiveness or delaying payments? And is that a — any risk of that being a potential headwind as borrowers begin to repay? Thanks.

Mark Casale: We have not seen it as a headwind, and I think we pointed out in a call, I think it was last quarter, that given through EssentEDGE, we’re actually able to kind of differentiate borrowers that have student loans with ones that have identical FICOs. One cohort with student loans, one cohort with personal loans, like the old fashioned consumer finance. The student loans actually perform better. And that could be a number of different — you’d have to almost guesstimate why, what’s causing that. So I think there — that’s — from a student loan standpoint, that’s probably a good nugget for investors. But in terms of like the added burden of repaying student loans, we have not seen that impact.

Melissa Wedel: Thanks, Mark.

Operator: [Operator Instructions] Your next question comes to the line of Mihir Bhatia from Bank of America. Your line is open.

Mihir Bhatia: Hi. Good morning, and thank you for taking my questions. I wanted to follow up a little bit on a couple of the answers you gave, Mark, in terms of just — look, you highlighted Essent has performed well in a variety of macro market backdrops over the last few years. I think you’ve also mentioned today and on previous calls that credit is your number one long term concern, managing credit is job number one. Right? So I guess just trying to understand what can go wrong at Essent from an external perspective, right, assuming you’re doing everything right internally. I think one of the questions that we get a lot of is this is like such a great operating environment, from an external perspective, things can only get weaker.

I think in the earlier question, too, there was like the job environment getting weaker. Is that what we should be focusing on, the job environment getting weaker? I’m just trying to understand what is the big risk from an external perspective for Essent?

Mark Casale: Yeah. It’s a good question. We’ve heard this question for 10 years, like what can go wrong, and again, I do think we’re clearly levered to unemployment. We never promised on our IPO roadshow to run the company recession-free. I think what we do here is try to plan for both from a business and a balance sheet perspective, a range of economic scenarios. And as I pointed out earlier, that’s just — that’s the most volatile is the provision, right? Because it is so leveraged on unemployment. So, yeah, if unemployment goes up, here’s a new flash. Our provision is going to go up, right? And we saw this in 2020. And we saw almost a flash flood, so to speak, in terms of — because we saw such a sudden increase in defaults in the second and third quarter.

And if you look back on 2020, we still made money. And so I do think, at the end of the day, we’re built because of all the changes to provide consistent earnings throughout the cycle. That doesn’t mean they’re always going to go up. There’s going to be certain years where they’re not going to perform as well because of the provision. But the prevailing view of the MIs, and I would say a dated view, was the companies are going to crumble when there’s an issue in the economy. And that’s just simply not true. I mean, it’s reflected now in our ratings. We’re A rated across the board. So the rating agencies, obviously, we go through a lot of stress tests with the rating agencies, whether it’s the GFC or different scenarios, and we come out and we don’t really deplete any capital.

And that’s the — in a financial services company, when they deplete capital, there’s really not a bottom for your valuation. And I would point to, again, 2020. So when that hit and our stock dropped significantly during the March and April timeframe, our ability and the fact that we had reinsurance actually put a floor on the stock and some smarter investors jumped in. But if you saw, we traded well below book in 2020, I want to say 60-ish-percent of book, believe it or not, for a week or two. As we talked to investors and kind of walked them through how — because no one really cared about the reinsurance until they cared. Right? I mean, we were getting questions in February of ’20 around growth and then in March of ’20, everyone was worried how losses were going to be.

So it just shows you. But as we were able to talk to investors about the reinsurance and how hedged it was, you saw that the stock price started to climb back towards book. We use that because of the uncertainty in the environment. We use that as an opportunity to raise more capital. Right? I mean, we’re in this business longer term. We’re an insurance company. So we took any — we felt like we could get through the great financial crisis, given how we were structured. We weren’t sure at the time if we could get through a greater financial crisis and no one knew in April and May of 2020. So we used that as an opportunity to strengthen our balance sheet. I would argue if we didn’t have reinsurance, that would have been very difficult. It would have been very difficult to predict the bottom.

We were able to show investors where the losses would be. And so yeah, I think you’re going to get those questions. How good can it get? It’s pretty good. And I would say, we are very pleased with the balance of the business. So when rates are down — what’s going to happen when rates go down? Are yields going to go down a little bit? For sure, although higher for longer, longer may be a view, but say our investment yield goes down a little bit, persistency will certainly go down. The book’s going to grow. We’re going to end up doing a lot more NIW. Probably the title side is a little bit more levered to lower rates, and rates are up. And when the rates are up, again, look where the persistency is, the higher investment yield. So I think we’re well balanced.

I would point out some of the mortgage services are in an equal position if you’ve seen some of their performance, given the strength of their servicing portfolio. So yeah, you can always — I mean, there’s always going to be things that you can point to, but I would say I would point to the balance of the portfolio and not get too caught up in if there is kind of slowness, does that really hurt the company longer term. I don’t believe it does.

Mihir Bhatia: Got it. No, that’s helpful. Interest rate buy downs and other programs that are being put in place to help with affordability, how are you thinking about those? Is that a factor in your pricing or not, I guess either pricing or in your credit scoring?

Christopher Curran: Hey, good morning, Mihir. It’s Chris. As far as the buydown activity, we’re pretty consistent in the first quarter with the first quarter of last year relative to the amount of buydowns. And we’ll call it the temporary buydowns that we are seeing. I think from a performance standpoint, even from temporary buydowns that have reset, we continue to actually be pleased with the performance of the temporary buydowns as compared to our entire portfolio. From a pricing standpoint for us, I mean, don’t forget these loans are underwritten to the gross rates. I’ll call it to the gross coupon. So from an underwriting perspective, we’re comfortable with the production and then certainly from a pricing perspective, it really goes back to EssentEDGE and how we leverage the data, the credit data for the borrower themselves versus the rate on the note.

Mihir Bhatia: Okay. Got it. And then just my last question. Mortgage market size for the year, I guess the MI market size and even — I mean, what are you hearing from originators as we enter this better housing or seasonally better housing season here?

Mark Casale: Yeah. I mean, I don’t think you’re going to remember historically, except for certain periods, there’s usually a bell curve to origination. So lower in the first and the fourth and they kind of peak in the second and third. I don’t think you’re going to see much of it, a bump this year just given where rates are and the lack of supply. I would say overall, I think the origination market that we’re seeing from Fannie is probably a little bit optimistic. And remember, some of that came from kind of the pivot in the fourth quarter and now again, it’s back to higher for longer. I think in terms of the NIW market, I would say 2.50-ish to 2.75. I see that as kind of the market for this year, which again is fine. It just means persistency will probably stay a little bit more elevated like we said in the script.

But yeah, I’m not — I would have thought depending where rates go, maybe later in the year, and it’s obviously dependent on the election and outcome. You’re probably going to see more of a normalization in ’20 and ’25 and 2020 and 2021 were such an anomaly. You’re seeing the impact of that on the ’22 — on the ’23 and now the ’24 kind of origination market.

Mihir Bhatia: Got it. Thank you. Thank you for taking my questions.

Mark Casale: Sure.

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

Bose George: Hey, everyone. Good morning. Just have a couple of follow-up questions. In terms of your cure rates, you guys in Exhibit K, you give the cumulative cure rate. So back — so March 2023, I guess now is 91% of that is cured. Like if you roll back further, so say for example, March 2022, what does that number look like? Where does that get to for those earlier loans, vintages?

David Weinstock: Bose, thanks for the question. Don’t have those numbers right at our fingertips. And probably Phil could follow up with you and Wei afterwards. But it’s going to — as we continue to grow out, we continue to have cure activity from all the vintages of defaults. And so they’re going to be higher. They’re going to be in the mid to upper-90s. But I don’t have those numbers at my fingertips.

Bose George: Okay. But — so I guess safe to say that they’re coming in much better than your initial assumptions when you set your default to claim rates.

David Weinstock: Yeah. So clearly we do our — we make our best estimates, but based on the favorable prior year development we’ve been having, yeah, I think that’s a fair statement.

Bose George: Okay. Great. Actually, that’s all I had. Thanks a lot.

David Weinstock: You’re welcome.

Operator: That concludes our question and answer session. I will now turn the call back over to management for closing remarks.

Mark Casale: Thanks, everyone, for joining. Nice questions from the analysts. I thought you guys did a great job and have a great weekend.

Operator: This concludes today’s conference call. Thank you for your participation. You may disconnect.