Thank you for standing by. My name is Amy and I'll be your conference operator for today. I would like to welcome everyone to the Essent Group Second Quarter 2024 Earnings Call. Please note that 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] It is now my pleasure to turn the call over to Phil Stefano, Investor Relations. You may begin your conference.

Thank you, Amy. 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 second 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.

Thanks, Phil, and good morning, everyone. Earlier today, we released our second quarter 2024 financial results, which continue to benefit from favorable credit performance and the impact of higher interest rates on the persistency of our insured portfolio and investment income. Our results for the quarter continue to demonstrate the strength of our business model and how Essent is uniquely positioned within the current economic environment. Our outlook for housing in our business remains constructive. Favorable demographics continue to drive housing demand while supply remains constrained by a lack of inventory and the lock in effect of previously low mortgage rates. We believe that the supply-demand imbalance should continue to support home prices, which is positive for our business. While housing and the labor markets have demonstrated resiliency, we also recognize that affordability remains challenged and that consumers are being impacted by higher rates and higher prices. As a risk management company, we view Essent is well positioned for a range of economic scenarios, given the strength of our balance sheet and our Buy, Manage and Distribute operating model. And now for our results. For the second quarter of 2024, we reported net income of $204 million compared to $172 million a year ago. On a diluted per share basis, we earned $1.91 for the second quarter compared to $1.61 a year ago. On an annualized basis, our return on average equity was 15% in the second quarter. As of June 30, our US mortgage insurance in force was $241 billion, a 2% increase from a year ago. Our 12-month persistency was approximately 87%, relatively flat compared to last quarter. Over nearly 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 for the…

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the second quarter, we earned $1.91 per diluted share compared to $1.70 last quarter and $1.61 in the second quarter a year ago. Our US mortgage insurance portfolio ended June 30, 2024, with insurance in force of $240.7 billion, up $2.2 billion compared to March 31, and 2% higher compared to the second quarter a year ago. Persistency at June 30 was 86.7%, largely unchanged from 86.9% last quarter. Net premiums earned for the second quarter were $252 million and included $17.7 million of premiums earned by Essent Re on our third-party business, and $16.6 million of premiums earned by the Title operations. Base average premium rate for the US mortgage insurance portfolio for the second quarter was 41 basis points, and the net average premium rate was 36 basis points for the second quarter, both consistent with last quarter. Net investment income increased $4 million or 8% to $56.1 million in the second quarter of 2024 compared to last quarter, due primarily to higher balances and continuing to invest at higher yields than the book yield of our existing portfolio. Other income in the second quarter was $6.5 million compared to $3.7 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 second quarter, we recorded a $732,000 increase in the fair value of these embedded derivatives compared to a $1.9 million decrease recorded last quarter. In the second quarter, we recorded a benefit for losses and loss adjustment expenses of $334,000 compared to a provision of $9.9 million in the first quarter of 2024 and a provision of $1.3 million in…

Thanks, Dave. In closing, we are pleased with our second quarter performance. Our results continue to benefit from strong credit performance and the positive impacts of higher interest rates on persistency and investment income. Our balance sheet capital and liquidity remains strong and will further strengthen through our successful $500 million senior debt issuance. When combined with an amended and extended revolving credit facility, we secured approximately $1 billion in total debt capacity and remain well positioned. Looking forward, we remain confident in our Buy, Manage and Distribute operating model and believe that Essent is well positioned in the current economic environment to generate high-quality earnings and attractive operating returns. Now, let's get to your questions. Operator?

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Terry Ma with Barclays. Your line is now open.

Hey. Thank you. Good morning. If I look at your cumulative cure rates by quarter of default going back to 2021, it's been pretty consistent. It looks like about 90% of your defaults on any given quarter, cure within about a year. So I'm just curious, as we kind of look forward and take into account the macro backdrop and the vintage seasoning math that's occurring and maybe the various amounts of embedded home equity across the different vintages, like does that cumulative cure rate performance change going forward?

Hey, Terry. Thanks for the question. It's Dave Weinstock. It will be something that in the current environment and with what is in our default inventory right now, I would not expect significant changes from that 90% cure rate after about a year. There are a couple of things that are clearly favorably impacting our credit performance. It's been a very favorable credit environment with a high level of cures from the default inventory. The other thing that's really play -- still playing through the default is forbearance. I mean, forbearance ended at the end of November last year, but we still have a handful of defaults that are in forbearance. And you still have the -- we still have not seen the return of pre-COVID normal default patterns even at this point in time. And so, we think it may take a little bit of time to play through. But that said, that should support the roughly 90% cure rate that we're seeing about a year out.

Got it. That's helpful. And is there a similar stat that you can share for maybe kind of pre-COVID vintages? Or like a normalized stat for lack of a better term?

Yes. I'm not sure I have that necessarily at my fingertips, Terry, but I would say because our credit was really very solid prior to COVID, that it would probably be pretty similar.

Got it. Okay. That's helpful. Thank you.

Your next question comes from Soham Bhonsle from BTIG. Your line is now open.

Hey guys. Good morning. So Mark, I think historically the MIs have priced to sort of a 20% through-cycle loss ratio. And obviously, we're well below that today. But is your sense that as an industry, we've sort of moved away from that sort of framework given the sort of tools that every MI has to react to these changes and just the advent of reinsurance or better manufacturing quality? I'm just trying to get a sense for what's embedded in industry pricing today because, look, losses could go up, but as long as we're all sort of pricing for them, the expected returns shouldn't really be that different from what you underwrote them at.

Yes. It's a good question, Soham. And I agree with you. I think in terms of -- when we -- if we think about losses longer-term or just through the cycle, I would really equate it to claim rate. We've always kind of priced it at 2% to 3% cumulative claim rate. It's clearly running below that now. But that's where we price and that's kind of how we look for when we -- where our pricing is today kind of within that 12% to 15% range. Given where the rates or the losses are coming in, clearly, we're at the high end of that range, but nothing lasts forever. So we would expect as we get into a softening economy, whether that's this year, next year, it doesn't really matter. The provision will go up for sure, but we do have the ability with the engines to change pricing relatively quickly, which should, to your point, maintain probably more consistent loss ratios, and more importantly, more consistent returns. And that's a big change, right? We've talked about all the different changes in the business over the years, and you touched on one, right, with the qualified -- the regulatory change with the qualified mortgage, it's just a cleaner book that we're seeing with the GSEs, right? Better credit quality, enhanced performance with DU and LP, good quality control, all those sort of things through the GSEs is bringing a better quality, 746 FICO, which you didn't see kind of pre-crisis. And then the engines, clearly we think we have a bit of an advantage with our credit engine, but the pricing engines with all the MIs have -- do give us the ability to price and change price relatively quickly. We did it during COVID, we did it a…

I just -- I guess just piggybacking off of that, can you just remind us where you'd expect -- how you'd expect the book to perform, or your claims and things like that in an environment that, where say, unemployment goes to, call it, 5%, right? I'm sure you guys have done sort of sensitivity. So any color there would be helpful. Thank you.

Yes. I mean, I know I got to quote like it's not like 5% losses equal X, but I think we can point you back to COVID, right, when losses went, I mean, default rates went to 5%, unemployment was in the double digits, and we still performed pretty well. So I would say at a 5% unemployment rate, yes, the default rate will kick up a little bit. You may see it, the provision go up a little bit just because of, as Dave mentioned forbearance. The old forbearance went away in November, but forbearance is still available to borrowers and that's a little bit of a free put for certain borrowers if they're able to do it. So you see a little bit, you might see still a little bit noise in the provision. But when you just think about 75%, 80% margins that we have now, I'm not particularly concerned if rates -- if losses go up a little bit. So I think we'll -- I think we'll perform quite well through it. I mean, again, I can't -- I don't have the exact stat for you, but you can model it out pretty easily. I mean, if you look at, kind of increase the loss ratio or increase depending on how your model works with claim rates, you can run through. We run through it a lot. And we're not particularly concerned about that. So I might -- we're more concerned about the cat risk, right? At the end of the day, we own the first loss piece, we -- and the rest of the industry have done a really good job of kind of hedging out the mezz piece. The ultimate risk in the business is when we come back at the cat level, right?…

Perfect. Thanks a lot for the thoughts.

Yes.

Your next question comes from the line of Bose George with KBW. Your line is now open.

Hey, everyone. Good morning. In terms of your new -- your provision for new notices, it looked like it went down a little bit. Is that right? And can you just talk about assumptions in there?

Yes. Hey, Bose. It's Dave. What I would actually say is that, we really haven't made any changes on how we're providing for defaults. I think what you're seeing is just a higher level of cure activity for our 2024 defaults. So if you were to look at Exhibit K this year compared to last year and you looked at the first quarter of 2024's cure rate versus the first quarter of 2023, what you'll see is a little bit higher cures in the first quarter of 20 -- from the first quarter of 2024 at this point. And the same thing is really true a little bit even for the defaults that came in in the second quarter. So I think that's what's playing through the numbers.

Okay. So those are sort of intra-quarter cures that essentially get netted out of them?

That's right.

Yes. Okay, great. That's helpful. Thanks. And then can you remind us what your guidance is for OpEx for this year? And just any thoughts on sort of the cadence when you think about 2025 for growth?

Yes, sure. So we -- our OpEx guidance was $185 million for non-Title expenses, excluding -- expenses excluding Title is the best way to say it. So -- and right now if you look at the results, we've talked about this a lot, our team is clearly focused on managing expenses. And so, through the first half of the year, we're in really good shape for that clearly could beat that guidance.

Okay, great. Thank you.

Thank you. Your next question comes from the line of Doug Harter with UBS. Your line is now open.

Thanks. Mark, I know you don't manage to market share, but if you look, the market share, the gap between the high and the low kind of seems the tightest it's been in a while. What do you think that tells us about kind of the competitiveness in the market, and kind of how we should think about kind of market dynamics going forward?

Yes. It's a good question. And I would say it's very balanced. We've talked about per dollar MIs so -- but it really is kind of a pretty prudent market, very constructive in terms of pricing. I think that's for a number of reasons. Again, it's the pricing engines, the ability to make changes quickly. Also with some of these pricing services we can see kind of win rates and where everyone's at. And so there's that discipline there that's and just our ability, Doug, to make those changes has really kind of shifted some of that power from the lenders to the MIs and/or flexibility maybe is a better way to say it. But with the old rate cards, you really were allocated business, and it was kind of done at the highest level or it was done by the secondary marketing manager or the head of underwriting or the head of sales, but there was that relationship part of it, and we fought for business, competed for business, really with service and relationships, soft dollar contract underwriting, training, all those sort of things. And now it's just a fee business. And so someone who may have allocated MI six, seven years ago, I don't even know what their MI -- they look at the MI reports, but they can't really dictate it. It's really being driven by the LOs, and that really allows DMIs. So there's not that difficult conversation where you have to go in and talk to the president, and you tell them why you're pricing so high and you're not his partner anymore, which is the furthest thing from the truth. I think our view is when we talk to lenders today, we say, hey, you should have all six MIs in there, and every…

Great. Appreciate that answer, Mark. Thank you

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

Good morning. It's Melissa on for Rick today. I'm hoping you could touch briefly on how you're thinking about the risk in the 2023 and 2024 vintages in particular, given sort of the affordability challenges right now. It would seem like there would be elevated risk, but I'm wondering with the prospect of potentially lower mortgage rates, do you view that as sort of prime for being disruptive, prime for being repay, and sort of derisking the portfolio that way, should we see lower mortgage rates in the months and quarters ahead?

Yes. Hey, Melissa, It's Mark. It's a good question. We would say -- we said it before, there's kind of the books are really broken into two parts. It's the -- I would call it the pre-June 2022 book, which is before rates really rose, and then there's the post book, post 2022 book when it's at much higher rates, higher HPA. I would say, to your point, it's definitely impacted affordability. I think our response though is and I think it's been the industry response is we've raised rates, right? So from a unit economic standpoint, Melissa, we feel like the unit economics of the business are actually quite strong. I think the pricing when you compare kind of earlier books to where we are in the last 18, 24 months, we feel pretty comfortable with the return. So yes, it's -- you can see it, you may see higher losses come through. But again, I think we're pricing for it. In terms of lower rates, I think it's a really good point. I pointed -- I touched on it within my response to Soham. If rates come down, clearly, that book will have increased refinance activity. I would expect it to be there versus that 2020 and 2021 book where the average rate is 3%, 3.1%, 3.2%, that's really that lock in effect isn't going anywhere, even if rates go, let's call it, into the mid-5s. But I do think -- I think it's actually really beneficial for the borrower, right? They bought a home, they stretched either on DTI, but they're making the payments for sure as we can see it. But if all of a sudden, you get 100 basis-point drop or 150 basis-point drop, that really does help the borrower refinance. And I would say they're going to refinance at kind of lower rates, and really help them on the payment and affordability. That's probably a good thing for the industry.

Thanks, Mark. And I guess as a follow-up question there, are you -- would you expect the sort of normal continued home price appreciation in a lower rate environment? We've seen it sort of stabilize, but on really low volumes right now, with a pickup in volume, would you expect to see sort of continued stabilization, but just better affordability, or would you expect to see home prices just generally migrate higher? And again, knowing that's dependent on the MSA?

Right. I think it's -- I think it depends on what the demand is, right? I know it's hard to gauge right now given the lock in effect if some of those folks do want to move into larger homes. So right now, I think month supply, and it's still at like -- I think it's still four months nationally, right? So it's still -- it's still low and six months is kind of normal. A lot more new homes are coming on board. I think the month supply for new homes is closer to 9 months. So there's a lot of new homes coming on board. So I would say lower rates. I think it gets absorbed. I think I would say more flattish HPA growth. Maybe it's a little bit, picks up 1% or 2%, but I wouldn't see a sudden rise unless the demand is overwhelming again. And that would have to be a real jolt to rates. And we don't see that coming. I think we definitely see rates coming down, but I think it will be in a more orderly fashion, which again, I think will help -- it will help the borrowers because it will -- to your point earlier, if rates go down and HPA goes up, that -- necessarily help affordability. But I don't know if I see that in the cards.

Thanks, Mark.

Yes.

[Operator Instructions] Our next question comes from Mihir Bhatia with Bank of America. Your line is now open.

Hi, Mark. Good morning. Thank you for taking my question. I wanted to start just very quickly on Title. I think you mentioned in your script that you're in -- you view it as currently in the Control phase. And I was wondering if you could expand on that a little bit. Is that driven by just the market conditions or is it more about, hey, we just bought this, we need to make some investments and we need to improve stuff. Like what's driving the -- like, I guess, what's going on with Title right now?

It's a good question. I think it's more us. I don't necessarily -- I think the market gives us -- affords us some time, right? I mean we're -- given on the lender services side, it's really our -- refinance-driven model, and there's not really a lot of refinances. So we'll kind of afford at the time. And we're just going back to the playbook that we used with MI, right? I mean, we build MI. I mean, from the time I started raising dollars until we did our first loan, was like 27 months or something. It was a pretty long period of time. So we're used -- like patients, we do have patients. So I think with us, we're using this to our advantage. So I think our guidance to the team. And we're bringing folks over from MI, we're bringing in new folks. We have a really strong core team that we inherited, both on the lender services and the agency services side. And I think our instructions is, let's build out the infrastructure. So we use a third-party transaction management system. We want to bring that in house along with the rest of IT. I mean, they outsourced all of IT in here, and we clearly don't do that. We like to control it because especially when you think about the future with the new technologies owning, managing your own system allows you to plug in things a lot quicker as opposed to you've kind of outsourced it, and have, I would say, less control over that. So that's not really -- and that's not really how we operate. So we're spending the time doing that. Is it going to take longer? Is it going to cost a few dollars to do it? Absolutely. But we…

Okay. No, that makes sense. Thank you. Maybe just one on -- couple over the MI side. First, the coverage ratio, it's been picking up for a few quarters. I think it's at 27% currently. Is that just a function of you all are writing higher LTV loans, and where do you think that settled out?

Yes. Hey, Mihir. It's Chris. Yeah, the higher coverage ratio is really just a function of certainly the production coming in today as far as the higher LTVs, right? And that's just based on the home prices and some of the, I'll call it, the affordability challenges relative to the higher loan prices and not putting down as much. So I don't know as far as where that goes. I don't expect it to go much higher from where it is today, but certainly, it's just more of a function of what's being originated in the marketplace?

Okay. And is that also a function of the fact that I think you've talked before about EssentEDGE working best, maybe a little bit lower down the -- closer to the low end of the credit spectrum versus the top end? Is that also influencing it or not really?

No, I think it's more -- again, EssentEDGE does operate obviously across the entire credit spectrum as far as how we try to optimize our unit economics and returns. But again, I think the bigger driver is more along the lines of kind of where the market is today with regards to home prices and certainly the LTVs being higher.

Yes. And this is Mark. And there is a -- there is a function of that, which we spoke to last quarter. If we do see, we think with EDGE, if there is a higher DTI or higher LTV, we're able to select out of say 10 of them, the two or three that we think are going to perform better, right? So they have a higher EDGE score, and they're able to given where the market is and so forth and we believe they'll -- it will sign them a -- a higher EDGE score or they'll get a higher EDGE core, which means kind of a lower [indiscernible]. So we're a little bit more comfortable versus one-size fits-all, which again, if you have a more static pricing and you don't like the tails, you're probably going to stay away from all the tails. And I think our view is we're going to try to get a couple -- two or three of them that we think will outperform, and there's little value there. And you can see it in our yield, right? Our yield is still in that kind of 40 basis points, 41 basis points, which I think is again -- back to again to an earlier question, we believe with EDGE, we're able to kind of price for that risk.

Got it. Okay. Thank you for taking my questions.

You're welcome.

Thank you for the questions. There are no further questions at this time, so I would like to turn it back over to the management team for closing remarks.

I'd like to thank everyone for their -- for their attendance today and questions, and have a great weekend.

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