Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Essent Group Ltd (ESNT, Financial) reported a net income of $204 million for Q2 2024, up from $172 million a year ago.
- The company's US mortgage insurance in force increased by 2% year-over-year to $241 billion.
- Essent Group Ltd (ESNT) maintains a strong balance sheet with $5.4 billion in GAAP equity and $1.2 billion of available holding company liquidity.
- The company successfully closed a $500 million senior notes offering and upsized its revolving credit facility to $500 million, enhancing financial flexibility.
- Essent Re continues to show strong earnings, driven by third-party business related to GSE, CRT, and MGA services.
Negative Points
- Affordability remains a challenge for consumers due to higher rates and prices.
- The Title business is still in the 'Control' phase and is not expected to have a meaningful impact on earnings in the near term.
- The default rate on the US mortgage insurance portfolio was 1.71% as of June 30, 2024.
- Operating expenses for the second quarter were $56 million, including $12.9 million of Title expenses.
- The company's debt-to-capital ratio increased to approximately 8.5% after the senior note issuance and term loan repayment.
Q & A Highlights
Q: 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?
A: 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 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 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.
Q: 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?
A: It's a good question, Soham. And I agree with you. I think in terms of 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.
Q: 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%?
A: 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 losses go up a little bit. So I think we'll perform quite well through it.
Q: In terms of 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?
A: 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 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.
Q: 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?
A: Our OpEx guidance was $185 million for non-Title expenses excluding Title is the best way to say it. 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.
Q: 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?
A: It's a good question. And I would say it's very balanced. We've talked about per dollar MIs 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.
Q: 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?
A: It's a good question. We said it before, there's kind
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
