Thank you for waiting. My name is Amy and I will be your conference operator today. I would like to welcome everyone to the Essent Group Second Quarter 2024 Earnings Call. Please be aware that all lines have been muted to minimize background noise. Following the speakers' remarks, there will be a question-and-answer session. It is now my pleasure to hand the call over to Phil Stefano from Investor Relations. You may start your conference now.

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 as 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 remainder of 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%. We continue to be pleased with the quality of the new business given the prudent credit box of the GSEs and the high underwriting standards of our lender partners. In our existing portfolio, home price appreciation should continue to mitigate potential claims and support near-term credit performance. In our core mortgage insurance business, we remained focused on activating new lenders and continuing to refine and enhance our proprietary credit engine EssentEDGE through additional data sources in a challenging mortgage origination market. EssentEDGE is an advantage for lenders as their borrowers benefit from receiving our best rates. We remain pleased with the progress that we are making in our Title business as we continue to make investments to leverage the operations and technology expertise from our MI business. In building out Title, we have a longer-term view and maintain a Control, Profitability, and Growth philosophy. From my standpoint, we are currently in the Control phase and do not expect that Title will have any meaningful impact on earnings over the near term. Longer term, however, we believe that Title will generate supplemental earnings for our franchise, similar to what we have demonstrated with Essent Re. As for Essent Re, we continue to be pleased with its strong earnings profile. Essent Re's steady performance is driven by its third-party business, which is primarily related to risk assumed from GSE, CRT and fee-generating MGA services. As of June 30, Essent Re's third-party risk in force was $2.3 billion. We continue to operate from a position of strength with $5.4 billion in GAAP equity, access to $1.3 billion in excess of loss reinsurance, and over $1.2 billion of available holding company liquidity. On July 1, we closed on our initial senior notes offering of $500 million and upsized our revolving credit facility to $500 million. These transactions strengthened Essent's capital structure and enhanced our financial flexibility. In total, we secured approximately $1 billion of total debt capacity while continuing to maintain the lowest financial leverage in the mortgage insurance industry. Effective July 1, we entered into an excess-of-loss transaction with a panel of highly rated reinsurers to cover our 2024 business. We continue to be encouraged by the strong demand from reinsurers for taking mortgage credit risk. Looking forward, we remain committed to a programmatic and diversified reinsurance strategy executed through the quota share, XOL, and ILN channels. Cash and investments as of June 30 were $5.9 billion and our new money yield in the second quarter was approximately 5%. The annualized investment yield for the second quarter was 3.8%, up from 3.5% a year ago. New money rates have largely held stable over the past several quarters and remain a tailwind for investment income growth. With a year-to-date mortgage insurance underwriting margin of 79%, our franchise continues to generate solid returns and remains well positioned from an earnings, cash flow, and balance sheet perspective. Now, let me turn the call over to Dave.

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 the second quarter a year ago. At June 30, the default rate on the US mortgage insurance portfolio was 1.71%, down 1 basis point from 1.72% at March 31, 2024. Other underwriting and operating expenses in the second quarter were $56 million and included $12.9 million of Title expenses. Expenses for the second quarter also included Title premiums retained by agents of $10.2 million, which are reported separately on our consolidated income statement. Our consolidated expense ratio was 26% this quarter. Our expense ratio excluding Title, which is a non-GAAP measure, was 18% this quarter. A description of our expense ratio excluding Title and the reconciliation to GAAP can be found in Exhibit O of our press release. As Mark noted, our holding company liquidity remains strong. At June 30, it included $425 million of term loan outstanding with a weighted average interest rate of 7.07%. At June 30, 2024, our debt-to-capital ratio was 7.3%. On July 1, we closed our first public offering of senior unsecured notes, issuing $500 million of notes with an annual interest rate of 6.25% that mature on July 1, 2029. Approximately $425 million of the proceeds were used to pay off the term loan outstanding as of June 30, with the remainder available for working capital and general corporate purposes. After giving effect to the senior note issuance and term loan repayment, on July 1, our debt-to-capital ratio was approximately 8.5%. Additionally, effective July 1, we entered into a five-year $500 million unsecured revolving credit facility, amending and replacing our previous $400 million secured revolving credit facility. Combined, these transactions provide Essent with access to approximately $1 billion in capital. At June 30, Essent Guaranty's PMIERs efficiency ratio, excluding the 0.3 COVID factor, remained strong at 169%, with $1.4 billion in excess available assets. During the second quarter, Essent Guaranty paid a dividend of $62.5 million to its US holding company. Based on unassigned surplus at June 30, the US mortgage insurance companies can pay additional ordinary dividends of $329 million in 2024. At quarter end, the combined US mortgage insurance business statutory capital was $3.5 billion with a risk-to-capital ratio of 9.9 to 1. Note that statutory capital includes $2.4 billion of contingency reserves at June 30. Over the last 12 months, the US mortgage insurance business has grown statutory capital by $287 million, while at the same time paying $222.5 million of dividends to our US holding company. During the second quarter, Essent Re paid a dividend of $87.5 million to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $29.6 million to shareholders, and we repurchased 396,000 shares for $22 million under the authorization approved by our Board in October 2023. Now, let me turn the call back over to Mark.

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 remain 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.

Thank you. The floor is now open for questions. Our first question comes from 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 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 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, that's a great question, Soham. I agree with you. When we consider long-term losses or cycles, I see them as related to the claim rate. We've traditionally priced it at a cumulative claim rate of 2% to 3%, which is currently below that level. Our pricing is in the 12% to 15% range, and due to the current rates of losses, we are at the upper end of that range. However, conditions change, and as we enter a softer economy—whether that happens this year or next—provisions will increase, but we can adjust our pricing quickly with our engines. This helps maintain more stable loss ratios and, crucially, more consistent returns. We've noted significant changes in our business over the years. For instance, regulatory changes related to qualified mortgages have improved the book we see from GSEs, resulting in better credit quality and enhanced performance metrics. Our credit engine provides us with an advantage, and we can swiftly adjust pricing based on market conditions, as we did during COVID and throughout 2022 and 2023 when we noticed returns to more normalized credit rates. Also, considering events in areas like Texas or Florida where supply is increasing for both existing and new homes, our engine allows us to respond quickly. This flexibility is a crucial tool for us. As we look ahead, potential lower mortgage rates could improve affordability, attracting more buyers to the market and helping to maintain quality standards. Increased production for lenders would be beneficial too. Historically, we've performed well in lower rate environments. When rates surged high in 2022, our originations decreased, but we still benefited from persistence and growth in investment income. If rates decline, we should see an increase in new interest while persistence might slightly decrease. Although investment yields might decline, they won't return to the levels of 2021, when they were below 2%. Our recent yields were 3.8%, and as we extend duration at current rates, we can expect ongoing growth in investment income. Overall, we believe we're well positioned to continue growing book value per share, which is our bottom line.

Can you remind us how you expect the book to perform, particularly regarding your claims, in an environment where unemployment reaches around 5%? I'm sure you have conducted some sensitivity analyses, so any insights on that would be appreciated. Thank you.

Yes, I understand that 5% losses do not directly translate to a straightforward outcome, but we can refer back to the COVID period when default rates reached 5% while unemployment was in the double digits, yet we still managed to perform quite well. I believe that at a 5% unemployment rate, the default rate may slightly increase, leading to a minor uptick in provisions due to the ongoing forbearance options available to borrowers. This situation might introduce some variability in the provision amounts. However, considering our current margins of 75% to 80%, I am not overly worried about a slight rise in losses. Overall, I think we will navigate this well. While I can't provide specific statistics, modeling different loss ratios or claim rates shows manageable outcomes. Our primary focus is on catastrophic risks. Since we hold the first loss position, and the industry has effectively managed the mezzanine risk, the biggest concern is about severe economic downturns. We aren't anxious about moderate losses, as we are well-prepared in terms of capital, balance sheet, and liquidity. Our main goal is to ensure readiness for significant economic stress. At Essent, we perform stress testing regularly from various perspectives including profit and loss, capital, and liquidity measures like PMIERs. When discussing capital, especially excess capital in relation to PMIERs, we recognize that much of it is essential, due to the pro-cyclical nature of the calculations. We also consider growth potential, which is an essential part of our strategy, as seen with Title and our ventures, and we are always exploring new growth avenues. Essent Re contributes to this growth as well. Although we are currently pausing on insurance portfolio growth because of interest rate conditions, we anticipate that the industry, currently at $1.5 trillion, could grow to $2 trillion over the coming years, bolstered by demographic trends and immigration. Our capital distribution strategy involves dividends and repurchasing shares at favorable prices. We adopt a measured approach to capital management, which reflects our overall strategy.

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. Regarding your new provision for notices, it seems to have decreased a bit. Is that correct? Could you please discuss the assumptions behind it?

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 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, our operational expense guidance was $185 million for expenses excluding Title. Our team is focused on managing expenses, and so far this year, we are in good shape and may exceed 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?

It's a good question. I would say the market is very balanced. We've discussed per dollar MIs, and it has become a prudent market with constructive pricing. This is due to several factors, including our pricing engines and our ability to make quick adjustments. With certain pricing services, we can monitor win rates and competitors' positions, which helps maintain discipline. Our capacity to implement these changes has shifted some leverage from lenders to MIs, or perhaps 'flexibility' is a better term. In the past, business allocations were managed at a higher level or by specific managers, and relationships played a significant role in competing for business based on service, contract underwriting, and training. Nowadays, the business model has transitioned to a fee-based system. People who allocated MI years ago may not have the same level of influence; the decisions are now largely driven by loan officers, benefiting the MIs. There are no difficult conversations about pricing anymore, as we've moved away from a partnership model that used to dominate the field. Our stance with lenders is that all six MIs should be included, as each one has unique strengths in various geographies and client profiles, which ultimately benefits the borrower and lender alike. We aim to provide every borrower with our best price—not necessarily the lowest price, but the best price we believe is fair based on unit economics. We're comfortable operating in the middle to lower end of the pricing range if it aligns with our return goals. The industry dynamics have positively shifted, and I don’t believe they will revert. Currently, with a slow market in terms of new originations, we would expect competition to spike, yet it's not apparent. If interest rates decrease and volume increases, I don't foresee a change in this trend. Interestingly, when reviewing MI press releases this week, it took some effort to locate the NIW figures for the quarter. In the past, such figures were boldly highlighted, but now they seem secondary. This suggests that the MI industry is focusing on returns, growth in book value per share, and balance sheet management, as this business is about risk, not market share. I believe this outlook is promising for the industry.

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. That's a great question. We previously mentioned that our books are essentially divided into two segments. The first segment consists of the pre-June 2022 book, which was prior to the significant rate increases, and the second segment is the post-2022 book, which reflects much higher rates and accelerated home price appreciation. As you noted, affordability has definitely been affected. However, our response, and I think the industry's response, has been to raise rates. From a unit economic perspective, we believe that our business remains quite strong. When comparing pricing from earlier books to our current pricing over the last 18 to 24 months, we feel fairly confident about the returns. While there may be an increase in losses, we believe we are well positioned to handle this. Regarding the prospect of lower rates, that's an excellent point. I briefly mentioned it in my response to Soham. If rates decrease, we would certainly see more refinancing activity from that book, especially compared to the 2020 and 2021 book, where the average rates were around 3%, 3.1%, or 3.2%. The lock-in effect will persist, even if rates rise to the mid-5s. However, I think it would be quite beneficial for borrowers. They might be stretching their debt-to-income ratios but are capable of making their payments. A drop of 100 to 150 basis points could really aid borrowers in refinancing, allowing them to secure lower rates, improving their payment situation and affordability, which would likely be positive for the industry.

Thanks, Mark. As a follow-up question, do you anticipate normal home price appreciation in a lower rate environment? We’ve noticed some stabilization, but with very low volumes currently. If volume increases, do you expect continued stabilization with improved affordability, or do you see home prices rising overall? Keep in mind this is dependent on the MSA.

I think it depends on the demand. It's difficult to gauge right now due to the lock-in effect, especially if some individuals are looking to move into larger homes. Currently, the month supply stands at around four months nationally, which is still low compared to the normal six months. A significant number of new homes are becoming available, with month supply for new homes being closer to nine months. If rates decrease, I believe the market can absorb it, and there's a possibility of flat home price appreciation growth, perhaps picking up by 1% or 2%. However, I don't anticipate a sudden increase unless demand surges significantly, which would require a major shift in rates, and we don't expect that to happen. We do foresee rates declining, but I think it will happen in a more gradual manner. This will benefit borrowers because if rates drop and home price appreciation rises, it could improve affordability. Still, I don't foresee that happening anytime soon.

Thanks, Mark.

Yes.

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 quickly ask about Title. You mentioned that you see it as currently in the Control phase. Could you elaborate on that? Is this mainly due to market conditions, or is it more about the fact that we recently acquired it, and now we need to invest and make improvements? What are the current factors affecting Title?

It's a good question. I think it reflects more on us. The market does give us some time. On the lender services side, our model is driven by refinancing, and there aren't many refinances happening. So, we have some time on our hands. We're returning to the approach we used with mortgage insurance, which took us about 27 months from raising capital to closing our first loan. We understand the need for patience, and we're using this situation to our advantage. We're bringing in new team members from mortgage insurance and expanding our core team on both lender and agency services. Our direction is to build out the necessary infrastructure. Currently, we use a third-party transaction management system that we want to bring in-house along with our IT. The company previously outsourced IT, but we prefer to maintain control, especially as we incorporate new technologies, which allows for quicker adjustments. While this process may take longer and cost more, we're focused on where we want to be in the next five years in Title. Our goal is to position ourselves to capitalize when the market rebounds. If it recovers sooner than expected and we don’t take full advantage, that's acceptable; we’re in it for the long term. We’re committed to having the right technology and improving efficiency throughout the process. We're pleased with our progress and expect it will take about 12 to 18 months to establish, acknowledging we might need a little more time. Fortunately, we believe time is on our side given our vision for the business. When we started Essent Re in 2009, we didn’t issue our first policy until 2014, but I don’t anticipate it will take that long for Title since we already have an established business. We've successfully activated approximately 50 new lenders on the mortgage insurance side this year and about 15 clients on the Title side, which is going well. Our senior account managers on the Title side are working closely with the mortgage insurance business development team, benefiting from being part of Essent. This collaboration has also enhanced the MI team's understanding of their clients' businesses, making them more knowledgeable overall. I’ve been interacting with three of the top five lenders in the country in the past few months to understand their perspectives on Title and their pain points, enabling us to tailor our offerings. We’re focused on the long game, and from an investor standpoint, we view it as an investment opportunity that is still in the developmental stage. I’m willing to invest now to achieve larger returns in the future.

Okay. That makes sense. Thank you. I have a couple of questions regarding the MI side. First, the coverage ratio has been increasing for a few quarters and is currently at 27%. Is this primarily due to the fact that you are writing higher LTV loans, and where do you see that settling?

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. Is that also related to the fact that you've mentioned before that EssentEDGE performs better closer to the low end of the credit spectrum rather than the top end? Is that having an influence or not really?

No, I think it's more that EssentEDGE operates across the entire credit spectrum as we aim to optimize our unit economics and returns. However, I believe the bigger factor is related to the current market situation regarding home prices, especially with higher loan-to-value ratios.

Yes, this is Mark. There is a point we discussed last quarter. With EDGE, if we encounter a higher DTI or higher LTV, we can choose two or three out of ten options that we believe will perform better. These options will have a higher EDGE score, which reflects the current market conditions. This gives us more confidence compared to a one-size-fits-all approach. If a pricing strategy is more static and avoids riskier options, it may forfeit potential returns. Our strategy is to select two or three candidates that we expect will outperform, and we see the benefits in our yield. Our yield is currently around 40 to 41 basis points, and we believe that with EDGE, we can adequately 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 would like to thank everyone for their attendance today and for their questions. Have a great weekend.

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