Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited Fourth Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Phil Stefano, Investor Relations. Please go ahead.

Thank you, Eric. 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 fourth quarter and full year 2023, 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 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 fourth quarter and full year 2023 financial results. Strong credit quality and resilience in the housing and labor markets continue to drive favorable credit performance, while higher interest rates drove investment income growth and elevated persistency during the year. Heading into 2024, we remain constructive on a long-term outlook for housing as the supply and demand imbalance and favorable demographic trends should provide foundational support to home prices. Even though sentiment has improved for a soft landing on the back of strong employment and consumer spending, we continue to manage our business for a range of economic scenarios. Given the strength of our balance sheet and our Buy, Manage and Distribute operating model, we believe Essent is well positioned. And now for our results. For the fourth quarter of 2023, we reported net income of $175 million, compared to $147 million a year ago. On a diluted per share basis, we earned $1.64 for the fourth quarter, compared to $1.37 a year ago. For the full year, we earned $696 million or $6.50 per diluted share, while our return on average equity was 15%. As of December 31st, our book value per share was $47.87, an increase of 16% from a year ago. As of December 31st, our mortgage -- U.S. Mortgage Insurance In-Force was $239 billion, a 5% increase versus a year ago. Our 12-month persistency on December 31st was 87%, and nearly 75% of our In-Force portfolio has a note rate of 5.5% or lower. Despite the recent shift lower in rates, we expect persistency will remain elevated in 2024. The credit quality of our Insurance In-Force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 93%. Regulatory guardrails implemented…

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 $1.64 per diluted share, compared to $1.66 last quarter and $1.37 in the fourth quarter a year ago. Our U.S. Mortgage Insurance Portfolio ended 2023 with Insurance In-Force of $239.1 billion, an increase of $417 million from September 30th, and an increase of $12 billion or 5% compared to $227.1 billion at December 31, 2022. Persistency at December 31, 2023 increased to 86.9%, compared to 86.6% at the end of the third quarter. The net premium yield for fourth quarter 2023, excuse me, net premiums earned for fourth quarter 2023 was $246 million and included $17.2 million of premiums earned by Essent Re on our third-party business and $17.4 million of premiums earned by the title operations. The average base premium rate for the U.S. Mortgage Insurance Portfolio for the fourth quarter was 40 basis points and the net average premium rate was 35 basis points in fourth quarter of 2023, with both consistent to last quarter. We expect that the average base premium rate for the full year 2024 will be largely unchanged from the fourth quarter rate of 40 basis points. Net income increased $3.5 million or 7% in the fourth quarter of 2023 compared to last quarter, due primarily to an increase in yields on new investments and higher yields on cash and equivalents. Other income in the fourth quarter was $6.4 million, compared to $5.6 million last quarter. The largest component of the increase was the change in fair value of embedded derivatives in certain of our third-party reinsurance agreements. In the fourth quarter, we recorded a $412,000 increase in the fair value of these embedded derivatives, compared to an $898,000…

Thanks, Dave. In closing, we are pleased with our fourth quarter and full year 2023 financial results, which continue to reflect the strength of our operating model. Our high credit quality portfolio, combined with resilience in housing and employment, continues to translate to strong credit performance, while our franchise benefited from the impact of higher rates on investment income and persistency. Our strong operating performance continues to generate excess capital, which we will approach in a measured manner between retention, investment and distribution to our shareholders. We believe this approach is in the best long-term interest of Essent and our stakeholders, while Essent continues to play an integral role in supporting affordable and sustainable home ownership. Now let’s get to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Rick Shane with JPMorgan. Please go ahead.

Hey, Mark. Thanks for taking my questions and I appreciate your enthusiasm for taking the questions this morning. I suspect it’s from my peers, not from me, that you’re so excited that you want to hear the questions.

You were first on the list. Got us excited.

Oh! There you go. That’s a rough day, Mark. So it’s a kind of a high level question. I was on a call yesterday where the theme of the call was rates higher for longer and we’re clearly at a crossroads, and I don’t think anybody really knows what’s going to happen. One of the things that I’m really wrestling with is when I think of Essent and when I think of the sector, what are the scenarios that you think are the best and what are the scenarios that you think are the worst? I mean, it can’t be a heads I win, tails I win scenario. What do you worry about and what’s the ideal path forward from here?

Well, remember, Rick, I mean, taking a step back, right, rates get all of the press, but really credit is what drives our performance longer term. So if you just think through and forecast out our business over the next three years to five years, the real expenses are we manage them well and you can kind of see where the Insurance In-Force is going to grow relative to the industry. Investment income, that’ll ebb and flow depending on kind of where rates are. It’s the provision that really has the most volatility in it. So when I think of kind of 2024, it’s hard to tell with rates in terms of the markets going. I’m not sure it’s, everyone said it was higher for longer until the Fed spoke in December, then it became rates are going lower. I think from an Essent perspective, right? I think, we’re well positioned in that, we’re probably levered a bit positively to rates going down. If they don’t, and the reason why is 45% of our book, Rick, is still in that 2021 vintage, which is, it’s a little bit over 3%. So it’s not really going anywhere. So if rates go down, NIW increases, I’m not sure the persistency goes down in tandem the way kind of a normal hedge, just because of the unusual kind of lock-in effect of that portfolio. If rates stay higher for longer, yields stay high, cash continue -- the persistency in the book stays higher. We continue to generate cash flow. And the important thing for investors is we continue to grow book value per share, right? So I’ve heard a lot of things around growth. We’re growing book value per share. And if you just think about investment income for a second, Rick, we grew that $60 million year-over-year. If you were to equate that to Insurance In-Force, it’s close to like a $20 billion increase in Insurance In-Force. Just say $20 billion at 40 basis points, so base yield at a 35% combined ratio, which again, just shows you there’s different avenues for us to grow at Essent versus just kind of looking at the Insurance In-Force. So I’m not going to say there’s a hedge we win, tails we win scenario. I would just say from a, what are we concerned about? It’s still credit. It’s always credit. I’m not too worried about rates because I think, again, a lot of this is going to balance out. Credit is what we have our eye on, and I think there, as long as employment stays strong, I think, we’re in relatively good shape going into 2024.

Got it. Okay. Very helpful. Thanks, Mark.

Sure.

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

Hey. Good morning, everyone. This is actually Alex [ph] on for Bose. Firstly, just wanted to get a little more color surrounding why the cure rate of 28% was lower this quarter. Looked like it -- it looked like it had been trending down from 90% in the fourth quarter of last year to 62% in 3Q. Is there anything specific that led that to decline sharply this quarter?

No, Alex. And again, I would caution investors to dig too far into new default rates, cure rates, percentage growth. We’ve seen -- we have heard a lot of the questions. And just big picture, Alex, we’re at 14,000 defaults on 820,000 policies and we’ve been relatively consistent around defaults. There’s a lot of noise in the defaults and the claims, more on the default side, because of the effect of forbearance, right? So take a look at forbearance. Really, the frictionless forbearance just ended a month ago. So what you’re seeing is you’re seeing defaults come in. There’s certain strategic defaulters that they’re getting a year extra on forbearance and then they’re curing. So there’s a lot of noise between the cure rates and the default rates, is -- what it really is is noise and now that there is more of a friction with forbearance in terms of what borrowers have to show, I would expect that to normalize in the coming 12-ish months to 18 months, it remains to be seen. But I think the message for investors is defaults are still the absolute level of defaults and even the default rate is pretty low. I think it’s 1.8 at the end of the fourth quarter. It was 1.6 something the quarter before, but still relatively good and I think that the credit performance continues to be strong.

Got it. That makes sense. And then maybe just one more. I’m wondering if you could provide any updated color on pricing in the industry. I know you mentioned earlier that you all expect the base premium to be stable over the course of the year. But in the event, the economy does have a soft landing and remains strong. Is there any chance we see some downside pressure on premiums or not really?

No. I wouldn’t expect that. I think, again, given the flexibility of the pricing engines, it really has given the entire industry, again, I think, I mentioned this last quarter, a lot of the pricing power per se has moved to the industry versus the lenders, right? In the old rate cards, the lender had a lot of control, whether it was bidding things out or allocating based on other services. Now, it’s really the best rate for each borrower. All the MIs have picked their spots. And given where some of the pricing engines and data that we get in the industry, we can see a lot of the movements and the percentages and I think everyone else can too. So we all have a pretty good beat on it. And I think we price for unit economics and the industry kind of reached a pretty low point in early 2022. Pricing came up and we generally look at 12%-ish to 15% returns on unit economic basis. I would say they’re probably closer to the upper end now. It’s pretty good. But I think it’s well-priced and given kind of the nature of the risk. So I wouldn’t, in a small market -- that relatively smaller market, we see pretty consistent pricing. I’m not sure as the industry starts to -- if there is a soft landing and the market starts to grow, I wouldn’t see a lot of change in pricing. In fact, it’s rarely a discussion point anymore, even at the lender level, because it’s -- and that used to be all about pricing because they saw it. They don’t really see it. They’re focusing on other things. And like I said, it really allows the Essent and the rest of the industry to price on risk, delivering our best rates to borrowers and it’s kind of removed that a little bit from the equation around from our standpoint.

Great. Thanks for taking the questions, Mark. Appreciate it.

Sure.

[Operator Instructions] The next question comes from the line of Doug Harter with UBS. Please go ahead.

Thanks, Mark. Kind of hearing what you said about the risk of reading too much into kind of one quarter, but can you talk about how kind of the recent vintages are performing and how delinquencies and those trends are performing versus kind of more historical vintages?

Well, again, I think, there’s a lot of noise, Doug, with kind of the forbearance. We don’t see -- I’ll give you -- I’ll tell you one thing that we see, early payment defaults, right? Early payment defaults post-COVID are higher than they were pre-COVID. We assign most of that to forbearance, because a lot of those, they’re all curing and they’re not going to claim. So it’s back to what I said earlier about that frictionless cost or ease of forbearance is really creating some noise in the numbers. But again, step back, Doug. Our Insurance In-Force average FICO is 746. I mean and I know you cover a lot of different businesses, specialty finance, 746 is a pretty strong credit score. And also I would like to point out just in the context of time, right? If you think about when the GSEs really start -- the modern day GSEs started in right around the early 90s, right? That’s when DU and LP started the process and you had the standardization of the mortgage business. So if you go back from say 1990 to 2023, 33 years, Doug, and you look at losses on GSE mortgages, generally outside of the 2005 to 2007 vintage, they’re less than 100 basis points. So in the context of time and this is what we ensure every day. And then remember post-crisis, you had the advent of QM, you had the strengthening of the models, you had stronger QC, you had forbearance, you brought on PMIERs, which is good capital standards for the MI industry. We ensure boring GSE mortgages. It’s --and it’s a boring business and it’s great and we like it that way. But that’s why when people are looking at these type of quarter-to-quarter or trends, it is a…

I appreciate it, Mark. Thank you.

I’ll now turn the call back over to management for closing remarks. Please go ahead.

Yeah. Thank you everyone for your time today and have a great weekend.

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