Essent Group Ltd . (NYSE: NYSE:ESNT) delivered a robust financial performance in the second quarter of 2024, with net income rising to $204 million from $172 million in the prior year. The company's US mortgage insurance in force increased slightly to $241 billion, and it maintains a healthy credit profile with a weighted average FICO score of 746.
Essent Group's strategic initiatives, including the optimization of its proprietary credit engine, EssentEDGE, and the expansion of its reinsurance arm, Essent Re, have contributed to its solid returns and fortified capital structure. The company also demonstrated its commitment to shareholder returns through dividends and share buybacks.
Key Takeaways
- Essent Group's net income for Q2 2024 stood at $204 million, an increase from the previous year's $172 million.
- The US mortgage insurance in force reached $241 billion, marking a 2% year-over-year increase.
- The company's credit quality remains strong with a weighted average FICO score of 746.
- Essent Group's core mortgage insurance business continues to grow, while the Title business is still in early development stages.
- Essent Re is performing well, contributing to the company's strong capital structure.
- A dividend of $62.5 million was paid to the US holding company, with potential additional dividends of $329 million in 2024.
Company Outlook
- Essent Group anticipates generating high-quality earnings and attractive operating returns in the current economic environment.
- The mortgage insurance industry is expected to grow from $1.5 trillion to $2 trillion in the coming years.
- The company's capital management strategy focuses on balancing growth, capital distribution, and defense.
Bearish Highlights
- The ultimate risk for Essent Group is a severe economic recession, which they are preparing for by running monthly stress tests.
- The Title business is not expected to significantly impact earnings in the near term.
Bullish Highlights
- Essent Re's strong performance and strategic transactions position the company well for future growth.
- Home prices are expected to stabilize with a potential increase of 1% to 2%.
Misses
- The coverage ratio has increased to 27% due to higher LTV loans, reflecting current affordability challenges.
Q&A Highlights
- The company is prepared for moderate losses and is focusing on significant stress preparedness.
- Interest rate changes may impact borrowers and the housing market, but the "lock-in effect" will benefit those refinancing at lower rates.
- Management expressed gratitude for attendance and questions at the end of the call.
In conclusion, Essent Group has reported a strong second quarter with a focus on maintaining robust credit quality and expanding its core businesses. The company remains well-capitalized, with a forward-looking approach to managing potential economic downturns and capitalizing on industry growth opportunities.
InvestingPro Insights
Essent Group Ltd. (NYSE: ESNT) has demonstrated commendable financial resilience and strategic acumen, as reflected in its recent quarterly results. The company's performance is further bolstered by key metrics and insights from InvestingPro that potential investors and current shareholders may find valuable.
InvestingPro Data shows that Essent Group has a market capitalization of $6.38 billion, underscoring its substantial presence in the mortgage insurance sector. The company's Price to Earnings (P/E) ratio stands at 8.68, which, when adjusted for the last twelve months as of Q2 2024, is slightly lower at 8.58. This favorable P/E ratio suggests that the company is trading at a low earnings multiple, potentially indicating an attractive valuation for investors.
In terms of profitability, Essent Group's revenue for the last twelve months as of Q2 2024 is reported at $1.16 billion, with a notable revenue growth of 15.09%. This growth trajectory is consistent with the company's strong performance mentioned in the article and reflects its ability to expand its revenue streams effectively.
An InvestingPro Tip highlights that Essent Group has raised its dividend for 5 consecutive years, demonstrating a commitment to returning value to shareholders. Additionally, the company's dividend yield as of a recent date in 2024 stands at 1.87%, coupled with a dividend growth of 12.0% over the last twelve months as of Q2 2024. This consistent dividend policy is a testament to Essent Group's financial health and its ability to sustain shareholder returns over time.
Investors seeking more insights into Essent Group's performance and future prospects can find a wealth of additional tips on InvestingPro. Currently, there are 9 more InvestingPro Tips available, providing a deeper analysis of the company's financial health, market position, and potential growth opportunities.
In conclusion, Essent Group's strategic initiatives and robust financial metrics position the company well in the competitive mortgage insurance landscape. The insights from InvestingPro provide a valuable perspective on the company's investment potential and its dedication to shareholder value.
Full transcript - Essent Group Ltd (ESNT) Q2 2024:
Operator: 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.
Phil Stefano: 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.
Mark Casale: 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 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, and 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.
David Weinstock: 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, 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.
Mark Casale: 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?
Operator: Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Terry Ma with Barclays (LON:BARC). Your line is now open.
Terry Ma: 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?
David Weinstock: 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.
Terry Ma: 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?
David Weinstock: 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.
Terry Ma: Got it. Okay. That's helpful. Thank you.
Operator: Your next question comes from Soham Bhonsle from BTIG. Your line is now open.
Soham Bhonsle: 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.
Mark Casale: 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 lot in 2022 and 2023 when we started to really look for ability to kind of -- we saw more normalized credit rates coming or loss rates coming, so we're able to move pricing. And I would expect given -- I mean, when you think about different pockets in the country, whether it's Texas or Florida some softening month supply starting to extend both with existing home and new homes. The engine allows us to react to that fairly quickly. So again, I think with that tool, and I do think it helps us. And as we think about the economy -- potentially beginning to show what does that really mean? It could mean lower rates -- mortgage rates, which I think is actually helps, right? It's starting to lighten up affordability, which will be good. So you'll see -- you'll see more buyers come into the market now, which I think will help keep quality standards really well. Lenders will start to see more production, which I think is a good thing. And I think it will also start to show the Balance business model that we've had, right? We've always been kind of more in a lower rate environment, we performed well. Rates switched they got really high, really fast in 2022. Our originations went down, but we saw kind of the upside with persistency and investment income growth. So if rates start to move the other way, what does that mean? Well, NIW is going to go up, persistency will go down, obviously a bit. Investment yields, that they should tend to go down, Soham, but they're not going to go to the level they were in 2021. Our yields -- our investment yields in 2021 were less than 2% and they clocked in at 3.8% in the past quarter. And as we lengthen duration at these rates, we should see kind of a -- continue to see tailwinds on the investment income growth. So that's when we take a step back. We feel like we're really well positioned. Again, what's the bottom line? Continuing to grow book value per share. And I think we feel pretty good about that.
Soham Bhonsle: 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.
Mark Casale: 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? I mean, at the end of the day, we're a cat business. Our cat happens to be a severe economic recession. And so that's the -- when we think about that, we don't think about the moderate losses, we're well prepared for that from a capital balance sheet liquidity. It's those significant stress that we want to make sure that we're well prepared for. And as Essent we are, right? And we run those -- we run the S4 stress, we run the GSE stress every month, and we look at it from a number of different -- we look at it from a P&L perspective, we look at it from a capital perspective. When we look at it from a PMIERs perspective, which again is really -- that's really the liquidity trigger for the MI industry. And so, when we think about capital in general, people always ask us about excess capital, and PMIERs excess. I mean, a lot of that excess for PMIERs is really necessary given the pro-cyclical nature of how the calculation works. So when we think about capital, we think about potentially growth, right? That's the offensive piece of it. And I think we started to execute upon that with Title. We continue with ventures and continue to look at ways to grow the business. Essent Re is a way to grow the business. We would expect the existing mortgage insurance portfolio to actually reignite growth in certain. And so, we're kind of in a pause on growth on the insurance portfolio now given where rates are, but we would expect given demographics, both existing demographics and potential upside with immigration, we would expect the industry is [$1.5 trillion] (ph) today. We would expect that to grow to $2 trillion over the next X number of years, and potentially a little bit higher. We think about capital distribution, right, that's dividends and that's buying back our shares at attractive prices. And then we think about defense. And so when we think about or explain kind of capital management and we talk about a measured approach. I think right there is kind of an example of how we think through it.
Soham Bhonsle: Perfect. Thanks a lot for the thoughts.
Mark Casale: Yes.
Operator: Your next question comes from the line of Bose George with KBW. Your line is now open.
Bose George: 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?
David Weinstock: 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.
Bose George: Okay. So those are sort of intra-quarter cures that essentially get netted out of them?
David Weinstock: That's right.
Bose George: 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?
David Weinstock: 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.
Bose George: Okay, great. Thank you.
Operator: Thank you. Your next question comes from the line of Doug Harter with UBS. Your line is now open.
Doug Harter: 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?
Mark Casale: 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 different MI has different pockets. Certain MIs like different geographies, different parts of the structure, whether it's higher FICO, lower FICO, the different parts of -- or different credit appetites, I should say, and that's great for the borrower, right? It's great for the lender. And we tell -- we said it in the script, we give every single borrower our best price. That doesn't mean it's the lowest price, it's the best price that we feel for the borrower and we think about in terms of unit economics and all those sort of things. And we're -- when we say we're [106] (ph) we're fine being in that middle range, even at the lower end of the range if we're getting our price, right? I mean, it's all about for us about returns. But I do think the dynamics in the industry have really -- have changed for the good. And I don't think they're going back. And here's the example, right, it's a slow market, right, for -- or a low origination market from an NIW perspective, this is the time when you would expect to see competition and you're not, right? So if rates start to go down and more volume comes in, I don't necessarily see it changing. And one kind of -- one interesting tidbit, Doug, is just look at all of the MI press releases over the last week, you have to hunt for the NIW for the quarter. Like before, it used to be fronting NIW -- record NIW, and you almost have to hunt for it. It took me five minutes to find it on some of the reports, which I think is -- that's a sign. That's a sign that the MI industry, in general, was focused on returns, growth in book value per share, managing their balance sheet, and that's -- because this is a risk business. It's not a market share business, it never was. And I think that bodes well for the industry.
Doug Harter: Great. Appreciate that answer, Mark. Thank you
Operator: Your next question comes from the line of Rick Shane with JPMorgan (NYSE:JPM). Your line is now open.
Melissa Wedel: 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?
Mark Casale: 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.
Melissa Wedel: 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?
Mark Casale: 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.
Melissa Wedel: Thanks, Mark.
Mark Casale: Yes.
Operator: [Operator Instructions] Our next question comes from Mihir Bhatia with Bank of America (NYSE:BAC). Your line is now open.
Mihir Bhatia: 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?
Mark Casale: 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 also look and say, where do we want to be in five years in Title, right? And we've talked about this before. Our goal in Title is to position ourselves to take advantage when the market does come back. And if it comes back a little quicker and we don't take advantage of as much as we could have, that's fine. Going we're in this for the long haul. So I think it's, again, it's making sure we have the technology, building out the infrastructure, making sure we can become more efficient around the whole process. So I would look at it there. And we remain pleased with it. I mean, I think it's -- we said probably 12 months to 18 months to stand it up. We're 12 months in. It may take a little bit longer, but again, that's -- time is on our side given where we ultimately think the business is. Essent Re, we started hiring there in 2009, and we didn't write our first policy till 2014. So it took -- I don't think it's going to take that long with Title because we have an existing -- an existing business. And we started the process even with leveraging our relationships on the MI side. We've -- I think we've signed up 50 new lenders on the mortgage insurance side this year. Like we said earlier, we continue to try to activate clients. For the Title side, it's I think 15 clients that we've been able to activate, and it's really kind of working well. We have, I would say, a core kind of SWAT team on the Title side, like senior account managers that have put really, really, really sharp individuals, and they're really working closely with the MI BD team. So it's not like they're going out on their own, they're really -- they're getting the benefit of being part of Essent, which I think helps them. And for the MI guys, it's actually helping them a lot. They're learning a different aspect of their clients' business. Just makes you smarter at the top of the house, right? It's always -- it's the old saying, You want to know your customer, and for the ability for Chris or for some of the other senior folks on the BD team to go in and have that conversation in Title. And we're learning a lot. I mean, I was out with, I would say, out of the top five lenders in the country, I interacted with three of them over the past few months, just understanding how they think about Title, what are their pain points, and then you try to build for that. So again, we're in this for the long haul. And it's -- and again, I still think we're -- I guess from an investor standpoint, we kind of call to the call option, but I think it's beyond that now. I think we're into the operating part of it, but we're still really in that investment phase, and I'm more willing to invest dollars today to be able to recoup larger returns down the road.
Mihir Bhatia: 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?
Chris Curran: 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?
Mihir Bhatia: 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?
Chris Curran: 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.
Mark Casale: 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.
Mihir Bhatia: Got it. Okay. Thank you for taking my questions.
Mark Casale: You're welcome.
Operator: 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.
Phil Stefano: I'd like to thank everyone for their -- for their attendance today and questions, and have a great weekend.
Operator: Thank you. This concludes today's conference call. You may now disconnect.
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