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.

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 essentgroup.com. 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.

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…

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…

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?

[Operator Instructions]. Your first question comes from the line of Bose George with KBW.

I wanted to ask just about buybacks. Has your sort of -- tone or view on buybacks changed over the last year? Just -- could we see you being a little more active here? Or just any thoughts there would be great.

Bose, it's Mark. I think you have to think about buybacks within kind of the context of how we manage capital in totality. So generally, you've heard me say this in the past, we're kind of a retain and invest type mentality. So always, we're going to look from our capital position to invest in the core business. We've continued to invest in Re over the years. We've obviously invested entitled this year and in terms of also looking to manage ROEs over the longer term. And the way to do that is obviously increase the numerator. I think given our capital position and growth, there's clearly some excess capital in the system. And part of that, the way we manage ROE is primarily the dividend, right? And we're pretty committed to the dividend. We think that's a good kind of tangible evidence to our shareholders of the cash generation of the business, which is really strong. And I think on repurchases there, I think we've -- it has become a little bit more dynamic. So I think we've changed a little bit over the past kind of year goes. We bought back $250 million back in 2021 over 11 months. And in my view, that was a little fast. And I think now we're going to a little bit more dynamic. We're going to look at it -- we have a 10b5 plan out there, but we look at it every quarter, and then we're looking and saying, where the growth opportunities in the core business is now, what's the outlook for losses, right? Where do we see the portfolio going, right? So you always want to have capital around PMIERs and other potential capital needs. And then finally, where is the stock trading, right? So I think our view is we're all about growth in book value per share, and if we can buy our shares around book value or below book value, we're probably going to be a little greedy there and probably a little less so when it trades up. So I think that depends. So hopefully, that gives you a little bit more context. So it's not kind of a mechanical, let's just remove share count. I think we're going to be a lot more thoughtful about it. And again, it's just our view capital begets opportunities. And given the world is always uncertain and probably a little bit more uncertain over the next 12 to 18 months with what's going on in the world, where rates are, we have an election coming up in less than 12 months. So it served us well in the past to maintain a strong capital position because you never know where the opportunities are going to come from.

Okay. Great. That's very helpful. And then switching, I wanted to just ask about the proposed changes to the Bermuda tax code. Is that something that could impact you? Just any color there would be great.

Well, it's pretty early, right? I mean we've seen potential changes come and go over the past 10 years. So it's too early -- I would say it's too early to tell. There could be some impact to us, but I don't think it's really -- it's not really material longer term to kind of the growth of Essent. But again, stay tuned for more.

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

Maybe to start with on pricing. Obviously, always a big topic for investors. Just how would you characterize the current pricing environment? Anything changed quarter-over-quarter there?

No, I think it's been pretty consistent. Really over the last 6 to 12 months in terms of just where it is in terms of where we see it in terms of our earned premium yield. Like we had mentioned a while ago, here that we wanted to see new pricing for us get closer to where the base premium yield. And we're there now. And so I think the unit economics of the business are good. In terms of pricing, though, again, I'd like to take a step back and just try to give investors a little bit more context because I'm not sure -- the change in pricing has really is appreciated by the investor community. So we always talk about 3 changes to the business model since the GFC, right? You have reinsurance, which has out the mezz risk, which we think is important. There's the regulatory changes that are substantial, right, qualified mortgage, the strength of the GSE systems, forbearance, all those things have helped the business. I think the pricing engines have been a significant change to the industry. And the reason is it's given all of the MIs a lot more flexibility and how they can bring price to the consumer. And I think because of that, I think in the past, investors have said, well, there's not a lot of discipline in the industry. And I think that, again, it's not appreciated just how the pricing was really brought to the consumer 5 years ago, in order for a price change to be made in the industry, you had to refile in all 50 rates, you had to change your card, one card, you had to usually take it to 2 or 3 of the top banks in the country. And really, they…

Got it. I really appreciate that answer. So to take a step back. On the -- maybe switching gears a little bit to the title side. And look, I understand you're building that business. It's a long-term play for you. It's not about a quarter or something like that. But as you position that business for long-term success. Is the idea here in the near term, the focus, hey, we need to build out the infrastructure for the next few quarters, a little bit of an investment period before we start really driving revenue growth. Maybe just talk about what you expect. How you're looking at that business for the next 2, 4 quarters even as you look at the long term?

No, it's fair enough, right? I mean I think that you did hit the nail on the head. It is going to be a longer-term build. Very much like Essent, and I think I alluded to it on maybe the February call. But the acquisition of Title was not dissimilar to us buying the Triad platform back in 2009. It kind of gave us that base to build off. We inherited some exceptional employees. And when you kind of marry the platform and the folks from Triad that came over to Essent with the existing Essent folks, that really laid the foundation for building of Essent. And here, that was in 2009 -- and I was probably 18 -- almost 24 months from starting to raise the money. And that's 2009, we didn't break even in 2012. So when we came public in 2013, we were already fully formed, and that's what investors got to view. This is going to play out differently, right, because it's going to play out in public. We're going to be very transparent. But in order to build out these type of businesses, it's going to take time. We acquired a platform. We've got some really good folks, right, a really good team. But in order for us to build it and have it to like Essent infrastructure, we're going to have to invest. We're very risk and control oriented. I mean, you're talking -- this is a company where we hired our Head of Internal Audit before we hired our first salesperson. So we're very much control oriented. And there's a lot of risk entitled in terms of the search process, the curative process, the closing and funding. I think from the 30,000 feet people think there's not risk in Title and it's entirely bad premise and there's risk and we have to understand it. So we're going to build it from the inside out, and we're going to take our time. It's going to play out. I'm going to be transparent, but we're not going to skimp on investments in order to show quarterly results. So we have to report every quarter. We will report every quarter. We'll talk to you about it, but we're not going to change the approach that build us and taking a step back to me here again, think about it, right? This is a company $150 million a quarter we're earning cash flows, $600 million, $700 million a year for us to take a few bucks to invest in a business that has the potential of on the title side. I think it's a really good risk return trade-off, risk reward trade-off for shareholders. So again, that's how we'll continue to look at it, and we'll certainly -- we'll let you know how the journey goes every 90 days.

[Operator Instructions] Your next question comes from the line of Rick Shane with JPMorgan.

Two questions on 2 pretty different topics. Mark, one of the things in terms of the Title insurance business, and I'm going to draw an analogy here. 20 years ago when Capital One got into the building depository franchise, one of the things that they emphasized was that scale was not -- or efficiency was not a function of being on having a national footprint but being concentrated in particular regions where they could generate substantial market share. How do you guys look at the Title expansion? Do you want to be a national Title Insurance company? Or is the plan to be really concentrated regionally as you build the business?

Yes. I think the answer is both. And the reason why, Rick, really it's the business and as we acquired 2 separate businesses. So we're in the process of putting it into 1 kind of functional organization, as entitled. So we'll have the agency services channel, which will service title agents. And that will be focused on large states, right? I mean it's pretty obvious where the premiums are coming from Florida, Texas, within the Southeast, parts of the Southwest and Northeast -- and there are -- and so we'll focus around that and build around that and build around that. The agency services has 200 agents that they service today. So it's really tiny. We'll grow that out, and we'll scale that out very similar to how we scale out online, right? You go and you hire good salespeople, salespeople go and call on title agents. And again, it doesn't happen overnight, right? This took us a long time on the MI side, but we're slow and steady wins the race. So we'll attack it on the agency services that way. The lender services channel is actually more -- it's a lot more geared at centralized refinance. So it's a lot more geared to lenders. So that is national buy. So it's a 50-state title and settlement services business, it's quite a valuable platform. And I think as we continue to invest in the infrastructure there, we will offer that out to our key lenders. We're not at that phase right now. I mean they do work with lenders. But I think we really want to make sure it's kind of firing on all cylinders. So we'll have kind of 2 channels, agency services, lender services. It will be supported by an operational group. But you can see there, it's going to be regional. It is almost the agency services will be much more regionally targeted where the lender services will be more of a national footprint.

Got it. Okay. That's helpful. And then the other question, and we've been asking this in a few different ways, but very unique time volumes, particularly concentrated in purchase given the limited supply of existing home stock for sale, particularly concentrated in new home sales. That drives mortgage originations, particularly through builder channels and there tend to be some subsidies there in terms of buydowns. Curious how you're approaching that, in particular, the risk associated with buydowns, whether they are short term or permanent?

Yes. I mean, I think with buydowns. One, taking a step back, Rick, it's probably 3% or 4% of our originations has buydowns in and so it's not super material. And remember, we underwrite that at full rate and we've had similar questions around student loans, same thing with student loans, right? We underwrite those assuming they're going to pay back the loan. So there's some concentration, I think, around builders because clearly, they're not building a lot in the Northeast because there's not a lot of land. So it's always going to be more Southwest, Southeast a little bit of on the West. But we don't see any big concentration issues or things like that. I think it's really -- one of the things we've gotten asked this question too is just there's not enough supply in the country. So the fact that homebuilders are putting supply out, I think longer term, that's good, very good for the homebuilders. And clearly -- and most of these are obviously first-time home buyers. So it's good for MI, but certainly, it's the concentration. It's certainly something you had to look at, but it's not something we're concerned about at this time. And Chris has a few words on this, too.

Rick, when you look at the buy down product, that certainly we're ensuring from the builders, the majority of those buydowns are permanent. So in a way, it is beneficial to, I'll call it, the financial makeup of the borrowers, certainly having additional cash flow for them. So that is 1 certainly a benefit of the permanent nature of these buydowns and certainly by extension that will benefit the credit performance as well.

Got it. Okay. And Mark, I think on a personal level, there are some congratulations in order as well.

Thank you. Yes, that's why we're having the call on Thursday because my daughter is getting married on Saturday. I have the rehearsal dinner tonight. So I was not allowed to have the call tomorrow. So that's why I appreciate some of our competitors. They were very gracious in moving their times. But yes, thank you Rick.

Your next question comes from the line of Eric Hagen with BTIG.

Congratulations, Mark. A quick modeling question upfront. You feel like the ceded premium of 5 basis points is a good way to think about modeling that going into next year?

It's Chris. Yes, I think that's a reasonable range. I mean, really, when you look at certainly our history within in that range, so that's reasonable from a modeling perspective.

Okay. Great. There's always kind of 2 dimensions of risk to think about, right? There's the borrower risk and then there's the asset level risk. Like which 1 would you say your may be more sensitive to right now and whether you think -- like how you adjust for that and how it factors into the risk-adjusted return that you think you're picking up right now?

I think it's a good -- it's a really good question. I think on the portfolio, it's clearly around the asset risk, right? It's already you've already underwritten the mortgage home prices can fluctuate, borrowers could not pay and then you have severity issues. So I think we're more focused because you can't control that. So I think we're more focused there on the asset risk. We feel pretty good with that, Mike, because we have 75% mark-to-market, we have a lot of embedded HPA. And clearly, we talked about the persistency angle helping us. And I think also -- so for new originations, clearly, right? I mean it's going to be higher DTI's obvious with 7%, 8% mortgages. So you're much more focused. You're not going to have and certainly not going to have that HPA growth. It's going to be, in our view, probably more flattish over the next 3 to 4 years. So I think it's a little bit more on the borrower risk on that side.

I will now turn the call back over to management for closing remarks.

I'd like everyone to thanks. Thanks, everyone, for joining us, and have a great day. .

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.