Good morning, my name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Fourth Quarter and Year-End 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. Phil Stefano, Vice President, Investor Relations, you may begin your conference.

Thank you, Rob. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and David Weinstock, Interim 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 fourth quarter and full year 2022 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 Form10-K filed with the SEC on February 16, 2022, 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, Phil, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2022 financial results. Our strong performance, which reflects the earnings power of our business benefited from better-than-expected credit performance, along with increased persistency and investment income as a result of higher rates. These results demonstrate the strength of our economic engine in generating high-quality earnings. Heading into 2023, we remain confident in our buy, manage and distribute operating model despite some economic uncertainty. While our franchise is levered to the economy in housing, we continue to manage the business considering a range of scenarios. As for the economy, the consumer has shown resilience and unemployment has been relatively stable. With regards to housing, we remain constructive over the longer term as we continue to believe that low inventory and demographic-driven demand should support home prices. And now for our results. For the fourth quarter of 2022, we reported net income of $147, million as compared to $181 million a year ago. On a diluted per share basis, we earned $1.37 for the fourth quarter, compared to$1.64 a year ago. For the full year, we earned $831 million or $7.72 per diluted share, while our return on average equity was 19%. At December 31, our insurance in force was $227 billion, a 10% increase compared to a year ago. Our 12-month persistency on December 31 was 82% and the weighted average note rate of our book is approximately 3.8%. While there has been some relief to affordability pressure since rates peaked last November, recent mortgage rates should continue to translate to an elevated level of persistency. At the same time, 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…

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the fourth quarter, we earned $1.37 per diluted share, compared to $1.66 last quarter and $1.64 in the fourth quarter a year ago. We ended 2022 with insurance in force of $227.1 billion, an increase of $4.5 billion from September 30, and an increase of $19.9 billion or 10%, compared to $207.2 billion at December 31, 2021. Persistency at December 31, 2022 increased to 82.1%, compared to 77.9% at the end of the third quarter. Net premium earned for the fourth quarter of 2022 was $207 million and included $14.6 million of premiums earned by Essent Re on our third-party business. For full year 2022, our net earned premium rate for the U.S. mortgage insurance business was 37 basis points. The average net premium rate in the fourth quarter was34 basis points, a decrease of one basis point from the third quarter. We expect that the net earned premium rate for the full year 2023 will be largely unchanged from the fourth quarter rate of 34 basis points. Net investment income increased $5.2 million or 16% in the fourth quarter of 2022, compared to last quarter due primarily to yields on new investments and floating rate securities resetting the higher rates. Other income in the fourth quarter includes a $6.5 million loss due to a decrease in the fair value of embedded derivatives and certain of our third-party reinsurance agreements, which compares to a $5.2 million gain on the valuation of embedded derivatives last quarter. The provision for loss and loss adjustment expenses was $4.1 million in the fourth quarter of 2022, compared to 3. - excuse me $4.3 million in the third quarter and a benefit of $3.4 million…

Thanks, Dave. In closing, we are pleased with our fourth quarter and full year 2022 financial results, which reflect our focus on optimizing unit economics to generate high-quality earnings and strong returns. Looking through the one-time tailwind of COVID reserve development on earnings, the underlying results for 2022 are solid. The high credit quality of our portfolio and strong employment drove credit performance and higher interest rates benefited the persistency of our in-force book and investment income. Our strong operating performance continues to generate excess capital, which we will deploy in a balanced manner between investment and growing our franchise and distribution to our shareholders. We believe this measured approach is in the best long-term interest of Essent and our stakeholders. Now let's get to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Mark DeVries from Barclays. Your line is open.

Yeah, thanks. I was hoping to get some color, if you can provide any, on the title acquisition kind of what your expectations are for earnings contribution? And how you think about investing in that business and growing it from here?

Yes, Mark, I would take a step back. I think our – I would say shorter term, I am not going to project any kind of earnings around this over a period of time and we'll obviously update everyone every quarter. I would – we look at this very similar to the platform we bought off of Triad back in 2009 it really, it was like our ticket into the mortgage insurance business and we see similar parallels with the acquisition of both BNC and Ante. They are good platforms, really strong talented people, relatively small, obviously, in terms of the industry. And we look at – first off, we're going to invest – continue to invest in the infrastructure in both, put more capital into the underwriter, try to improve the ratings, invest in people and then look for ways where we can provide some synergies. Clearly, a lot of synergies just in terms of back office, right, in terms of finance and legal and some of those things, which were – we have a pretty good handle on, And then over time, in terms of our technology platform and digging in on the operational side to look for ways to grow. So it's settled, Walter Wisden is saying control profitability growth. So we're going to look at it over – this is like a 3, 5, 10 year plan, Mark. It's not something we're going to come out of the gate with earnings. It's a new industry for us. It's an industry we understand well because it's an adjacent sector, but we're going to take our time. We're going to continue to apply kind of that hard work and operational expertise to it. And I think over time, we'll be able to grow it. But it's definitely, from our standpoint, big picture, it's complementary to the MI business. So the MI business has credit risk, regulatory risk, operational risk, titles more operational risk, regulatory risk and kind of capital and credit are on the lower end. So longer term, we think it's very complementary. There is clearly some overlap with lenders, but it's – you are looking at – as we look to grow Essent, right, you heard say over the years, we want to grow Essent. We love the mortgage insurance business and we've grown it, and we think we can continue to grow it as housing grows, but the pond is only so deep. So when you look at Title with annualized revenues in the $20 billion to $25 billion kind of range, it's a big market and our view is it's something for us to – as we look at that next phase of Essent and building other operating engines, we thought this was a good pond to go into.

Okay. That's helpful. And I know – I think in the past, Mark, you've also expressed interest you thought about diversification in consumer credit-related businesses. Is that something that's still kind of on the table? Are you going to be really focused on those continuing to execute within the MI business and building out this new title venture?

Yes, I would say for the foreseeable future, we're going to be digging into title a lot. So, not that that's off the table. Remember, we really have – when you think about the core business, we have Essent Re, which continues to grow. Title is kind of our third kind of area. I would say around the consumer credit and analytics, most likely, if we were to make an investment there would be via the Ventures group, right? So that's kind of teed up to do direct investments, but I would say, for the foreseeable future, we are going to be pretty focused on that title.

Okay. Makes sense. Thanks.

Your next question comes from the line of Rick Shane from JPMorgan. Your line is open.

Thanks for taking my question. Just really one thing. You recently completed the negotiation of your 2023 quota share agreement, I am curious in your conversations with the panel of reinsurers, how investors in the space are looking at the outlook for '23. Do you think that it is coherent with your views or connect – in line with your views? And how do you feel about pricing?

Yes. I mean it's – I think in speaking with the reinsurers, we actually had one of the large brokers in the office, I think in the last three or four weeks to kind of give us a deep dive just on that market or at least an update on that. We feel pretty good about the market and I would say I thought the sustainability of reinsurance, Rick, both with reinsurers and with the capital markets. The pricing is going to ebb and flow, right? So we paid a little bit higher pricing on both over the past 12 months, but if you think of us three or four years before that, we've had excellent pricing. So it's really the sustainability in those markets are going to remain open. I think we feel pretty confident on both. The reinsurer market is really now, even though they've had hardening on different parts of the business, they clearly look at mortgage is kind of countercyclical to that and good diversification and what happens with these reinsurers, they continue to invest in teams. It becomes like another business line. So we believe it's pretty sustainable. And again, the pricing is going to go up and down depending on the market or their views on credit, just like we have our views on the front end. So, again, I think the pricing is adequate, sustainability is very good and just to throw in there, on the Essent Re side, we've been kind of – we've been fortunate to – we've been able to capitalize on that increased pricing. So we wrote the most business that we've had ever in 2022 and we're able to move up the capital structure. So we're able to get more premium for less risk, which is always a…

Got it. Well, it's a specialty finance analyst who's enjoyed covering your company, so Mark can do what it wants, but I'm going to still continue to look at you as a specialty finance company. There obviously is a real-time feedback loop with pricing in that market and it's not just Essent who is participating, and you have alluded to a harder market. Again, I am assuming that you are seeing that that is weaving its way through into the competitive environment in terms of pricing for you and that there is continued pricing power.

Yeah, I mean I guess if you look at just the reinsurance side, just to put it in context, right? In general, we pay 4 to 5 basis points of our premium for reinsurance. So in the last year, it's gone up 1 point, maybe a little bit more, right? We've raised pricing on the front end more than that. So, again, if you think about, again, just the sustainability of the reinsurance and put it in context of the premium we charge, we still think it's a pretty good value.

Got it. Thank you very much.

Sure.

Your next question comes from the line of Mihir Bhatia from Bank of America. Your line is open.

Good morning and thank you for taking my questions. I wanted to start on the insurance side, first, right? Just, I understand your net premium rate guidance is flat. But I did want to ask about the in-force yield or the base premium rates that you report on Slide 16. This needs to be a real stabilization there. Some of your competitors have talked about increasing premiums on new business. So should we expect that base premium rate to maybe start blending higher and then it's like really insurance costs that are driving the net premium rate to be flat?

I think that – I don't know that I wouldn't necessarily say they are going to turn up. But in terms of have they bottomed, we feel like they are getting pretty close to the bottom, if they haven't already bottomed. So yes, that base premium rate of around 40, when you think about the business on the new insurance written, we're getting pretty close. So there is – there is - and then obviously, then it does have the chance to go up from there. But I think Mihir, the other point of this is, it’s just the value of the pricing engines, right and in terms of our ability and the industry's ability to kind of price adequately for the risk. So we saw in COVID where things were unclear and the industry was able to kind of pivot and change the pricing. And then clearly, the pricing, in our view, kind of bottomed out last year and that probably first quarter, maybe near the end of it and that was reflected in our share as we talked about this on the call. We started increasing pricing. Others have increased pricing and that continues today. And in short, there's a couple of reasons for that. There I was a few reasons for that, a little bit of there insurance cost that we alluded to in my answer to Rick. Second, clearly is kind of some of the clouds forming around the economy. I will say most importantly, though, Mihir, it's the normalization of credit, right? So this is below 1% default rate, our view is all the time, it's been more like 2% to 3% and if you're going to have adequate returns at a 2% to 3% claim rate, the pricing needs to come up. And we…

Right. Got it. That makes sense and thank you for that. We would agree about that. The premium conversations have certainly been quite encouraging this quarter. Maybe just turning to the deal, and I understand you don't want to talk about short term, like one, two years, what you're seeing in terms of financial benefits or targets or anything at this early stage. But maybe like you mentioned, this is a long-term play for you three years, five years down the line. How are you going to be judging success of the deal from a financial standpoint? Do you think it's like 20%, 30%, 40% of total profits for the combined Essent Group? Or is it a much slower longer tail than that where there's like –it takes a while to just build up that kind of momentum? Like how are you thinking about like – give us at least a long term something about how you're thinking about judging the success of this acquisition ?

Yeah, I mean it's a fair question, right? I would say, again, I would go to -- and we're going to be disclosing separately, right? I mean just given the revenues of the title business relative to the revenues of the MI business, it would most likely be a separate segment. So this is going to play out for everyone. As you know, we're going to be pretty transparent. I would say, we really look at returns at the end of the day. So we have these core return targets of 12% to15% in a core business. We have it within Essent Re. And I would remind you, when – Essent Re, we break it out, I think folks are going to be pleasantly surprised as to kind of the returns of the business. And just you saw – it's in the script. I mean you're looking at almost $70 million of revenues, and there's expenses assigned to that for sure, but there's also investment income. So there's -- it's a good business. It has. It's right within that 12% to 15% return profile. The ventures, which is – it's not really a business, but it certainly is a unit that we manage separately. That also has return targets. So we've had – we've returned – we've had pretty good return on that initial investment. I believe the IRR since inception is 17%. So it's right again within that 12% to 15% target. And I think with title it's going to be the same thing. It's a little bit capital-light, so the returns should be higher. In terms of the growth, I mean, Mihir, we're going to have – it's going to be – business is an iterative process. So we're going to get in there. We have two, and…

Got it. Great. I think we look forward to hearing more as you finally close the acquisition and start providing more detail. Thank you.

You are welcome.

[Operator Instructions] Your next question comes from the line of Bose George from Keefe, Bruyette, &Woods. Your line is open.

Yes, good morning. Actually, just one more on the title. When you think about sort of the long-term growth trajectory, do you think it's more driven by M&A or organic or just how is the combination there?

Yes, it's too early to tell. I think we're always going to favor organic growth, Bose. That's how we build Essent. The title industry has different dynamics, however. So we're well aware of both. There is an opportunity to use our balance sheet. I would say from a – we have a pretty large capital position but we're not going to be in the business of just buying title agents left and right. I think we're going to -- we could eventually get to the point where we're acquisitive, but we really want to understand the operations of both and the potential to grow them organically. And there is going to be a limit to that. But it's kind of baby steps. So first, get close on the transaction, right? And that's probably not going to be to the third quarter and then really think through how do we strengthen the infrastructure of both businesses and then look for ways to grow organically and my guess is we'll end up doing both. You'll grow organically and you'll complement that with acquisitions, but that's down the road.

Okay. Great. Thanks. And then just in terms of financing it, can you give cash at the insurance company for buying title insurers?

I am sorry, could you repeat that?

Like, is it’s funded with HoldCo cash? Or I mean, is it possible to buy title insurers at the insurance company itself?

Good question. This will be – the acquisition will be at Essent U.S. Holdings. So, just to remind everyone, Essent U.S. Holdings, is a sub of Essent Group. And Essent Guaranty is under Essent U.S. Holdings. So this will be a sister company to Essent Guaranty. So, different pots of capital, for sure.

Okay. Great. Thanks and then just one last one. On the expenses for next year, I didn't know if you said that, but did you give guidance for what we should expect for OpEx for next year?

We're right around $175 million, but that does not include title. So it's just the MI business and obviously, we'll include title upon the close and we'll add that. But – so it's pretty much business as usual in terms of expenses. Little noise in the fourth quarter due to the deal and there will be a little noise with some of the transaction costs, but in terms of the core business, we feel pretty good about that number.

Okay. Great. Thanks.

Your next question comes from the line of Geoffrey Dunn from Dowling & Partners. Your line is open.

Thanks. Good morning.

Good morning.

Wanted to look at the credit this quarter a little bit in terms of the current period provision, so ex the development. The average provision there is up a bit. So I was just curious, did you change your claim rate at all? Is that a seasoning of the early-stage delinquencies? Can you provide a little bit more detail?

Yes, Jeff, it's Dave Weinstock. On the whole, we haven't really made any significant changes. We have a model – an actuarial model that we feel really good about. I think we've talked about in the past that our expectations on early claims is somewhere in that 8% to 9% range. And if you look at where our reserves are at December 31, we are at 8% for those early delinquencies. So really nothing significant there as it relates to what came in, in the fourth quarter.

So probably more just geography and average loan size?

Yes, I think that's fair. Yeah, I think that's a fair assessment.

Okay. And then, Mark, you brought up the cash flow for '22 in your prepared remarks. And obviously one of the things that's helping that is, the industry doesn't really have any paid claims. I was expecting out of COVID once forbearance plan started ending you have a jump in paid claims as you could proceed with those. But it seems like that hasn't been happening. So is that something that we're just waiting for the spike to happen? Or has the embedded equity really taken that spike out of the recovery? And if it's just going to gradually phase up as the notice inventory continues to build out?

Yeah, I think that's actually a good assessment of it, Jeff. I mean, this is one, most of the guys in forbearance originally in COVID cured. A lot of times, they cured because they sold the house. I mean – and we can see that now. I mean with the technology, you can see when we want your defaulted loans is listening and we could see like where was that – where we have it, marked at and where they're selling it at. So in that market, they were able to kind of get out of that, which we'd assume was going to be part of it. And I think it's the same thing here, just the embedded equity in the mark-to-market that we have on the book has really helped that. And then in terms of just I'm not sure – and this is longer term, but the forbearance and the tool as it is with the GSEs, I actually think that's going to be a common occurrence around events. Clearly, it happened with –it happens with hurricanes. It happened with COVID. So other significant recessions, I would not be surprised. It's a very effective tool of keeping borrowers in their homes and allowing to work it out, right? And in the post crisis, we had [Indiscernible] HARP, but there the milk kind of already spilled on the floor, and it was a way to help mitigate that with COVID right out of the gate. GSEs were extremely responsive. This is - it was really a smart move. I mean it hurt us, right, because we had to post reserves for it and in terms of people were defaulting because they were allowed to. But long term, keeping borrowers in their home is really good for everyone, except maybe for those who live in a default type world and things like that. So, I think it's a common tool and I think it's going to – I think it's a real benefit to the industry that is maybe a little bit underappreciated.

Okay. Great. Thank you.

You are welcome.

And there are no further questions at this time. I will turn the call back over to management for some final closing remarks.

I would like to thank everyone for calling in today and their interest in Essent and have a great weekend.

This concludes today's conference call. Thank you for your participation. You may now disconnect.