Essent Group Ltd. Q3 FY2024 earnings call

• Highlighted strong financial results despite lower mortgage originations, benefiting from high-quality portfolio and impact of higher interest rates on persistency and investment income.
• Long-term outlook for housing constructive due to supply-demand imbalance and favorable demographics.
• US labor market and consumers resilient, supporting economic growth and credit performance.
• US mortgage insurance in force reached $243 billion, a 2% increase year-over-year.
• Persistency was approximately 87%, relatively flat; credit quality of in-force insurance remained strong.
• Monitoring potential fallout from Hurricanes Helene and Milton, with potential delinquency uptick but mortgage insurance policies excluding property damage claims as principal cause for default.
• Reinsurance program with $363 million of fully collateralized excess of loss coverage, showing strong investor demand.
• Cash and investments totaled $6.4 billion, new money yield nearly 5%, and investment yield for available-for-sale investments was 3.8% in Q3.
• Strong capital position with $5.6 billion in GAAP equity, $1.7 billion in excess of loss reinsurance, and PMIER deficiency ratio of 186%.
• Dividends paid: Essent Guarantee $58 million, SMRE $87.5 million, Essent Group $29.5 million, and share repurchases of $9.6 million.

For the third quarter of 2024, Essent Group reported net income of $176 million compared to $178 million a year ago. Diluted per share was $1.65 vs $1.66 prior year. US mortgage insurance supports $243 billion, a 2% increase from a year ago. Persistency was approximately 87%. Credit quality of in-force insurance had a weighted average FICO of 746 and weighted average original LTV of 90%. Premiums earned for Q3 were $249 million, including $17.1 million from S and Re on third-party business and $17.7 million from title operations. Investment income increased to $57.3 million in Q3 2024. Other income was $7.4 million. Provision for losses and loss adjustment expense was $30.7 million. Default rate on US mortgage insurance portfolio was 1.95%, up 24 basis points. Expense ratio was 27%, excluding title 18%.

• Revised other underwriting and operating expenses excluding title from $185 million previously to approximately $180 million for full year 2024 due to disciplined expense management and higher ceding commissions from quota share reinsurance transactions.
• Committed to the buy-manage-distribute operating model and well-positioned to deliver strong operating returns to shareholders in current economic environment.

• Potential uptick in delinquencies due to Hurricanes Helene and Milton, but mortgage insurance policies exclude property damage claims as principal cause for borrower default, mitigating ultimate P&L impact.
• Seasonality and portfolio seasoning affecting default rates, with portfolio average age at 32 months vs historical 18 months.
• Uncertainty around economic conditions and labor market impacting credit performance.

Q: Impact of hurricanes on default rate?

A: There was minimal impact, mostly from Beryl, with noise expected in Q4.

Q: Default rate increase and vintage seasoning?

A: Portfolio is seasoning, ~70% defaults from 2021 and prior vintages, low probability of claim leading to cash outflow.

Q: Change in claim rate assumptions?

A: No real change in claim rate assumptions in the quarter.

Q: Loan size impact on provision?

A: Loan sizes are growing, affecting the provision amount.

Q: Risk in force from Helene, Milton?

A: Not quantified yet, likely to see impact in Q4, with update in February.

Q: Forbearance timeline impact on numbers?

A: COVID forbearance ended in November, less friction now, leading to normalization of defaults and cures