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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Ltd. First Quarter 2022 Earnings Call. [Operator Instructions] Thank you. It’s now my pleasure to turn today’s call over to Mr. Phil Stefano, Vice President of Investor Relations. Please go ahead.
Thank you, Brent. Good morning, everyone and welcome to our call. Joining me today are Mark Casale, Chairman and CEO and Larry McAlee, 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 first quarter of 2022 was issued earlier today and is available on our website at essentgroup.com.
Prior to getting started, I’d 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, 2022 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. Today, we released our quarterly financial results, which continued to reflect the favorable credit performance of our portfolio.
For the first quarter of 2022, we reported net income of $274 million as compared to $136 million a year ago. Our first quarter results benefited primarily from the release of approximately $100 million of our COVID reserves associated with defaults from the second and third quarters of 2020. On a diluted per share basis, we earned $2.52 for the first quarter compared to $1.21 a year ago and our annualized return on average equity was 26%.
From a macro standpoint, while rising rates and strong home price appreciation have started to challenge affordability and housing demand, we believe the structural outlook for the housing market is positive. The undersupply of housing should support home prices in the short-term, while favorable demographic trends should continue to bolster housing demand in the long-term.
At March 31, our insurance in force was $207 billion, a 5% increase compared to $197 billion a year ago. The credit quality of our insurance in force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 92%. Strong home price appreciation in recent years has enabled the accumulation of embedded home equity for a material portion of our book. While home price growth is likely to moderate going forward, this embedded value should mitigate the risk of future claims.
Our 12-month persistency at March 31 was 69%, while 3-month annualized persistency was approximately 80%. In addition, 78% of our insurance in force is comprised of 2020 and later vintages with a weighted average note rate in the low 3% range. As a result, our in-force portfolio is well-positioned in a rising rate environment as higher rates should translate to higher persistency.
We continue to edge upon our diversified and programmatic reinsurance strategy. In the first quarter, we closed a 20% quota share transaction with a panel of highly rated re-insurers to provide forward protection for our 2022 business. Also, we are currently in the market to execute in excess of loss transaction, which is expected to provide forward reinsurance coverage on an additional 20% of our current year business. As of March 31, approximately 90% of our portfolio was reinsured.
We operate from a position of strength with $4.2 billion in GAAP equity, access to $2.6 billion in excess of loss reinsurance and approximately $1 billion of available liquidity. For the trailing 12-month underwriting margin of 93% and operating cash flow of $702 million, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. As evidence of this, Essent Guaranty remains the highest rate of monoline in our industry at single A by A.M. Best, A3 by Moody’s and BBB+ by S&P.
As of March 31, our book value per share was $38.98, an increase of 12% from $34.75 a year ago. Since going public in 2013, our annualized growth rate in book value per share is 21%. We continue to believe that success in our business is best measured by growth in book value per share. Our reinsurance entity, Essent Re, continues to write profitable GSE business supporting our MGA clients and taking advantage of the increased supply and improved pricing in the GSE with share market. Ever to date, Essent Re has earned over $200 million of income from its third-party business.
We continue to make investments through Essent ventures and generating informational and financial returns. The carrying value of other investment assets on our balance sheet is $213 million, of which $187 million relates to ever-to-date investments through the first quarter of 2022. These investments have created $82 million of value, of which $56 million have been returned to us as realized proceeds.
We remain committed to managing capital for the long-term taking a measured approach to distribution and exhibiting patience to maintain strength in our balance sheet. In general, we favor attractive investments over share repurchases as the better value creator for shareholders and the company over the long-term. However, we also recognize that returning capital to shareholders generates meaningful returns for investors.
Finally, given our financial performance during the first quarter, I am pleased to announce that our Board has approved a $0.01 per share increase in our dividend at $0.21. This is the fifth consecutive quarterly increase and represents a 24% increase from a year ago, which we believe is a meaningful demonstration of stability in our earnings and cash flow. I am also pleased to announce that our Board has authorized a new $250 million share repurchase program.
Now, let me turn the call over to Larry.
Thanks, Mark and good morning, everyone. I will now discuss our results for the quarter in more detail. For the first quarter, we earned $2.52 per diluted share compared to $1.64 last quarter and $1.21 in the first quarter a year ago. Net premium earned for the first quarter of 2022 was $215 million and included $12 million of premiums earned by Essent Re on our third-party business. The average net premium rate for the U.S. mortgage insurance business in the first quarter was 39 basis points, a decrease of 1 basis point from the fourth quarter.
Net investment income increased $1 million or 4% in the first quarter of 2022 compared to the fourth quarter of 2021 due to an increase in the average balance of our investment portfolio and an increase in yield. The net yield on new money invested in the first quarter of 2022 was 2.4% compared to 1.9% in the fourth quarter of 2021. Income from other invested assets in the first quarter was $25 million, including $15 million of net unrealized gains, compared to $15 million, including $12 million of net unrealized gains recorded in the fourth quarter of 2021.
The provision for losses and loss adjustment expenses was a benefit of $106.9 million in the first quarter of 2022 compared to a benefit of $3.4 million in the fourth quarter of 2021 and a provision of $32 million in the first quarter a year ago. As a reminder, we provided reserves for the defaults reported to us in the second and third quarters of 2020 using a 7% claim rate assumption.
During the first quarter of 2022, as these defaults continue to cure at elevated levels and exceeded the cure rate implied by our 7% claim rate assumption, we revised our estimate of the ultimate claim rate for these defaults from 7% to 4%, which resulted in a benefit being recorded in the provision for losses on the U.S. mortgage insurance portfolio of $101.2 million or $0.78 per diluted share. The provision for losses in the first quarter of 2022 also includes a benefit of $28.9 million associated with prior year favorable development for defaults reported to us principally in 2021 and in the fourth quarter of 2020.
Other underwriting and operating expenses in the first quarter were $41 million, consistent with the fourth quarter of 2021. The expense ratio was 19% for the first quarter of 2022 roughly in line with both the first quarter of 2021 and the full year 2021. We estimate that other underwriting and operating expenses will be in the range of $170 million to $175 million for the full year of 2022.
During the first quarter, Essent Group Ltd. paid a cash dividend totaling $21.6 million to shareholders and repurchased $69.9 million of shares. In April of 2022, we repurchased an additional $22.3 million of shares, completing our $250 million authorization from May of 2021. As a reminder, Essent has a credit facility with committed capacity of $825 million. Borrowings under the credit facility accrue interest at a floating rate tied to a short-term index. As of March 31, we had $425 million of term loan outstanding with a weighted average interest rate of 1.99%, up from 1.79% at December 31. Our credit facility also has $400 million of undrawn revolver capacity that provides an additional source of liquidity for the company. At March 31, our debt to capital ratio was 9%.
During the first quarter, Essent Guaranty paid a dividend of $100 million to its U.S. holding company. Based on unassigned surplus at March 31, the U.S. mortgage insurance companies can pay additional ordinary dividends of $382 million in 2022. As of quarter end, the combined U.S. mortgage insurance business statutory capital was $3.1 billion with a risk-to-capital ratio of 9.9:1. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $281 million, while at the same time paying $347 million of dividends to our U.S. holding company. Note that statutory capital includes $1.9 billion of contingency reserves at March 31, 2022.
Now let me turn the call back over to Mark.
Thanks, Larry. In closing, our business continued to generate high-quality earnings and robust returns, while our balance sheet and liquidity remains strong. We believe that our measured approach in deploying excess capital is in the best long-term interest of our franchise and stakeholders. Looking forward, we remain confident in the strength of our operating model and view Essent as well positioned to play a critical role in affordable and sustainable homeownership.
Now let’s get to your questions. Operator?
[Operator Instructions] Your first question comes from the line of Mark DeVries with Barclays. Your line is open.
Yes, thanks. So Essent was really, I think, the only MI that didn’t grow in terms in force this quarter in what was like an expanding market which I’m assuming reflects at least a somewhat differentiated view on the risk-adjusted returns available in certain pockets of the market. Is that a fair interpretation? And is there any color you can provide us on where you might be a little bit more under-indexed to the current market? And what it is about these pockets you find maybe a little less attractive than competitors?
Hey, mark, I would say – I wouldn’t go into any – I don’t think there is a particular pocket that we don’t like. I would say our pricing has been relatively consistent over the past 12, 15 months, and you’ve seen our market share kind of steadily decline. So I would look at it a little differently. I think we’re a little bit of a bellwether for pricing competition in the market. And we’ve been kind of around that 12% range the last two quarters. It’s kind of bottoming out in my view. So as you look forward this year, if our share continues to decrease that probably is a good indicator that pricing is going to continue to compress somewhat. And if our share increases, maybe folks are increasing pricing, as I’ve heard from a few other of the competitors. So we will see. It’s not – we still like credit. I do think that – like I said, we think the pricing is tight. And we’re starting to have other areas where we can allocate the capital, right? I mean I think that’s a differentiator for us. We have Essent Re, and we probably allocated $50 million, $60 million to that business in the first quarter. Essent ventures, close to $25 million of capital allocation. So I wouldn’t look at it as there is pockets of credit. Again, we think credit is relatively strong. I mean there is less visibility given where the market is going. I mean you have HPA, so you’re putting on new business at higher HPA, 30% higher. And so that’s always – that provides you a little caution and then clearly just in terms of the economy where we’re going. So for us, we just didn’t feel like it’s the market. And we felt this way for a while, it’s been in the last 6, 9 months. We don’t feel like this is the market to lean into, so to speak. So I’m not sure we want to be the market share leader. Give you history, Mark, right? In 2020, when pricing was, I would say, materially higher, we led the industry in market share. 20% market share, I believe. I think that was the one and the only time we led in market share, but it just shows you that’s how we think through it.
So in terms of insurance in force, again, we do have a lot of the tailwind there, Mark, in terms of persistency. We have said, I think, the last quarter, we thought it could get mid to high 70s. It’s already a 3-month annualized of 80. So I think given where mortgage rates are, 5.25% I believe it is today, we feel pretty good about persistency. Probably more of a tailwind than we would have thought a few months ago. So the insurance in force, it will grow. It will grow this year. I mean, normally, there is been a number of quarters, first quarters where we didn’t grow. So we feel pretty confident it will grow throughout the year. And like I said in the script, the duration, the extension of the duration of the portfolio is important for investors to understand. So we don’t have to work as hard to add on to the portfolio, we have that kind of embedded kind of growth just with the increased persistency. And then just from a credit standpoint, Mark, I mean just with the embedded HPA in that portfolio, we’re very comfortable. And remember, this is all about our portfolio. So again, I know we get hung up on share and so forth. But the portfolio is strong, and we’re pretty pleased and we’re expecting continued performance out of it.
Okay, great. Thanks Mark.
Your next question is from the line of Rick Shane with JPMorgan. Your line is open.
Hey, guys. Thanks for taking my questions this morning. Mark, over the years, we’ve really come to appreciate your willingness to call balls and strikes. Curious what you’re seeing both by either among mortgage originators or among your competitors in terms of what you consider to be rational or irrational behavior.
I would say on the originator front, not too much. I mean – and we’re well protected here, Rick. I mean when you think about QM, the strength of kind of DU and LT and just the strength of the QC from the GSEs, and there is some really good guardrails. And the fairway is for most originators, it’s in their best interest to keep the ball in the fairway. That’s the biggest part of the market. That has the easiest, from a credit standpoint, from a funding standpoint, if they go off the fairway, which is really kind of, I would say, non-GSE, so call it non-QM or jumbo. A much smaller market, it doesn’t impact us because we don’t insure that. So in this market, we’re not saying you’re always going to see a little bit of reaching when the market slows down. But again, I just think there is a lot of good controls both at the MIs and at the GSEs to protect us.
In terms of our competitors, no, I don’t see anything irrational at all. I think it’s just a different view perhaps in terms of where credit is or just in terms of return. So I think for us, we’re fortunate, and that’s why we’ve been making the moves to continue to build and grow other outlets to put our capital. So I don’t have to sit here every quarter and talk to you all about why share went up or down. I mean having more capital choices I just think makes you a better company and better returns for the shareholders long-term. And so I wouldn’t read into it. I think the competitors are smart. I think they are rational. And I think they’ll be watching. If our share is lower, there is a reason and people can take that for what they want.
I feel the same way about my peers. So I appreciate the comments.
Your next question is from the line of Bose George with KBW. Your line is open.
Yes. Good morning. Actually, just wanted to ask about the returns in the capital you’re allocating to the CRT market. How comparable are they to the returns in your – the core business?
Are you talking about Essent Re, Bose?
Yes. Do you have the [indiscernible]
The third-party. Actually the returns are better because of the – there is just been an imbalance in the reinsurance market. The ILN, you’ve seen a lot of issuers. Even the GSEs switch more business to the reinsurers. So, the pricing has widened out there. So we’ve seen nice returns. I mean that’s – there is only so much capital we can allocate to it. So it’s not like we can take all the capital and allocate it to Essent Re. And so we like – we enjoy the returns. But I would say that it’s a material – I think we’re a material player in that side of the market. I think between what we write and what our MGA clients write, we were in excess of 15% of that market, the GSE risk share market in the first quarter. So and that’s why I just put it into the script, too. Bose, when you can see over time, we’ve earned $200 million. So when we hear Essent can’t get into other businesses, I think it’s pretty good evidence that we’ve done it. It’s a tangential business to our core franchise. It’s mortgage risk, but it’s not primary MI. And I think we’ve executed upon that pretty well. In addition, obviously, we get the utility quota share. So I think from that business, it’s good. But we’re not looking to – I think the market, that kind of the addressable market, so to speak, is somewhat limited. So we’re pleased with it, but we’re not looking to have any outsized growth there.
Okay, great. That makes sense. Thanks. And then just a few one on the expenses, I think your earlier guidance was a little higher, it was 175 to 80. So just an increased focus on costs, anything to call out there?
Yes. I mean, again, I think we try to give a little bit of a wider range when we do this in February. And I just think the first quarter came in a little light, especially compared to last year. And as we look forward, just this year, we continue to make investments really in the core infrastructure of the business. So whether that’s building out, continuing to modernize our tech stack, a big initiative around self-service. And clearly, the tech stack meaning moving to the cloud. There is a few other initiatives that we are working on around our pricing engine and extensions of that. But in addition, yes, I think we are – like we said, the best risk managers are the best cost managers. So – and that’s of all the things that we talk about on the call today, that’s the one thing we can control. So, we want to make sure we obviously continue to invest for the future. But I think we certainly look at our expenses pretty closely.
Great. Thank you.
Your next question is from the line of Mihir Bhatia with Bank of America. Your line is open.
Hi. Good morning and thank you for taking my questions. Just maybe to start with just on the new delinquency formation, has that normalized now? And like what’s the driver from here? Is it unemployment rates mostly that we should be looking at?
No, I don’t think so. I think they are relatively – I mean they were a little higher this quarter than last quarter. But generally, we haven’t seen much difference. I think again – I mean here you read about it and you – and we can see it in our portfolio, but employment remains strong, wages continue to grow. If anything, again, the story really for the quarter, I think for investors, is really the reduced delinquencies in that COVID cohort, right. That was the one where we estimated back in, I think we released it in August of ‘20, but we had that second quarter or third quarter cohort where we had that 7% estimated claim rate. And over time, as we have seen just kind of more of a precipitous drop in delinquencies over the last three months, four months, our reasonable best estimate for that is 4%. So, we are seeing a lot of those borrowers continue to modify. And it’s important in another event – I mean in another note here. Just the fact of just how important forbearance is to the MI franchise, I think that’s missed a little bit. So, when you think about the improvements of the MI franchise from a risk perspective, clearly the pricing engines, our ability to price risk on a sharper focus. The reinsurance piece of the business is obviously the biggest transformational change. We have now offloaded that mezz piece of the balance sheet. And we take back, kind of we were in the past in this business that we are in is a macroeconomic cat business. And that’s always the concern as you flow through the mezz into that upper layer where we are unprotected. And I would say just with forbearance, it helps a lot, right. So, keeping borrowers in their homes and giving them a chance to get back on their feet, it clearly lowers our expected loss, which is less. So, there is now less of a probability that it hits the mezz piece, which helps us – helps our reinsurers, helps our ILN investors get more comfortable with the risk. And it further protects us from the cat piece. So, this is great evidence of how it played out. So, if you think about the Great Recession, a lot of the GSE tools were done kind of after the fact. And here, the GSEs just responded light and quick. They took – and they took the tools out and they put them to work very quickly and that kept a lot of borrowers in their homes. And I think when you keep borrowers in their homes, that’s the best thing, obviously, for borrowers and for lenders and certainly helps the mortgage insurers.
Right. No, absolutely. We agree with that. I am just curious on that point. Do you know how most of these delinquencies resolve before balance – do people just – like do you get that information from the services? Is it just adding it to the back end of the loan that’s what’s happening most of the time, or is there some other solutions also?
No. I mean obviously, some pay off, but the majority of the time is modifications.
Okay. And then just…
Hey Mihir, it’s Chris. Just real quickly on that. Certainly, as we get to kind of the tail of what’s remaining from the two cohorts from 2020, probably the majority of those are going through the modifications. However, prior to that, when you look at the majority of our cures, they are really the update – they took advantage of the ongoing payment plans.
Got it. Okay. That makes sense. And then just last one, I guess for me. Just any thoughts on like just industry NIW outlook for the year, obviously, rates have moved a fair amount. Just how are you thinking about that for the rest of the year?
Well, the first quarter came in $100 billion plus, $104 billion, $105 billion, I think when I last looked at it. It’s going to be a reach to get to kind of the upper 400s. And typically, second quarter and third quarter are strong, right. So, that’s the peak of mortgage origination market. And given where rates are kind of the lack of supply, I mean it could happen for sure. But I don’t think it’s – my gut is it’s not going to – it’s not going to perform like a typical spring and summer season. I could be wrong for sure, and I hope I am. But I do think it’s going to be – I think it’s going to be a little tighter than maybe some expect. And that’s alright. We had – we are just coming off like two historical years of NIW. And also here, again, go back to, it’s correlated to persistency. So, we have always said when rates go up, the book will extend. We will get some lift on the investment portfolio. But NIW is going to be reduced. So, I think that’s playing out. It’s not like we haven’t seen it before. I mean rates did go to 5% in the fourth quarter of 2018, which we obviously tend to forget a little bit. So, it’s a little different now, because rates are higher and home prices are significantly higher. So, I think what we saw in the first quarter, I mean if you just look at our first quarter, I think we were at 3.6 were the rates on our NIW in the first quarter, well below the 5.25% where they are today. So, a lot of that stuff was locked in the fourth quarter. So, I do think it’s – I think it’s going to be tough to get to like kind of that upper 400 range.
Alright. Thank you. That’s helpful. Thank you.
Your next question comes from the line of Doug Harter with Credit Suisse. Your line is open.
Thanks. Just hoping to understand that the current period losses in the quarter, those were up more than $10 million from last quarter on the NODs didn’t move that much. Just wondering if there is anything behind that or any noise in that number?
Hey, Doug. A couple of things. One, you might notice is the – this is Larry, the provision for new default is about $4,000, which is getting to the range that we were in pre-pandemic. And then the other thing is just sort of the mechanics of how the disclosure works. In the fourth quarter of last year, in the current period, you basically get the benefit of favorable development from the earlier quarters of that year. As you get to the fourth quarter of the next year, you don’t get that benefit. It’s just really the current quarter provision that’s in there. So, just sort of the mechanics of the disclosure, but we saw no unusual trends from our perspective in terms of the new defaults this quarter.
Got it. Appreciate that Larry. Thank you.
Your next question comes from the line of Ryan Gilbert with BTIG. Your line is open.
Hi. Thanks. Good morning everyone. I wanted to go back to, Mark, to your comments on production and challenge getting to the upper 400s in 2022. Is that – I mean is there anything that you are seeing in your pipeline in April that leads you to reach that conclusion, or is it just a function of looking at the speed at which mortgage rates have gone up and making an assumption that this is going to lead to some demand destruction?
Yes. I think it’s more looking forward of April. April was actually pretty good in terms of new insurance written. So, I think it’s just kind of just putting the pieces together, Ryan. Again, it could be if there is such – you could see a pull forward as everyone looks and says, “Hey, I want to get that house today at 5.25% because I don’t want to wait till 6%.” Alright. So, you have seen – you may see some of that. So, again, I am just – I don’t have any particular information, I am just saying it’s we have heard different guidance and it just wouldn’t surprise – I think it would just be tougher to get there. If it does, that’s good. But again, I think you have to get back to balancing it with insurance in force. We are so focused on NIW, which is an important metric. But at the end of the day, the cash – and remember, Ryan, just take a step back, the cash, we produced $700 million of cash over the last 12 months in the portfolio and 93% underwriting margins. Not too bad, right. So, the NIW market is a little smaller than it was the last 2 years. I think we are okay with that.
Okay. Great. And then related to Essent Ventures, $25 million of capital allocation, can you talk about how, I guess pricing in private markets or the opportunity set has changed in 1Q ‘22 relative to ‘21 or prior years?
No. Again, I think it’s – a lot of it is being deployed through our funds. So, we are putting – we are allocating capital to the funds. We did make a smaller direct investment in the first quarter. We thought the valuation was actually relatively fair. They haven’t really worked their way down, though, from kind of the public markets to the private markets. There is usually a lag with that. And it’s been pretty heated in some of the ventures areas. And I can tell you – just remember, we have been looking at this for a while. We have actually invested in some of our funds 3 years, 4 years ago. It’s picking up more steam this year as we build out the unit. But there are some companies that are public today, three or four, that we passed on, very low valuations. And they went public at very high valuations and they are working their way back down to low valuation. So, I think we have a pretty good sense of the intrinsic value of these businesses. Just again because we understand, I would say, the real estate mortgage ecosystem pretty well. So, we can assess it. And given that we started up on pretty good at assessing start-ups and their ability to kind of execute. And again, it’s limited, really, in my view, is just in terms of more financial services. I don’t have a much of – I don’t have that type of insight into tech companies because that’s not really my background. But I would say anything kind of real estate or consumer-oriented, we have a pretty good understanding of it. And we will continue to make those investments both in the funds and companies. And what we are seeing is we are probably seeing more opportunities. And again, this is over the next 3 years to 5 years, Ryan. This is a unit that will continue to invest excess capital into both the funds and into the companies. And we said before, the informational return is good. In fact, I have said this before, one of the meetings we have had really helped us develop that next generation of Essent EDGE. So, I kind of saw it with my own eyes. But we are also producing pretty good financial returns. So, when we talk about kind of 12 to 15-ish returns in the core business, we can say with a straight face that we have those returns both in Essent Re and in the Ventures unit. So, we will continue to allocate capital to it as long as we can get those type of returns.
Okay. Great. Thank you. I appreciate it.
There are no further questions at this time. I will turn the call back over to management for closing remarks.
Okay. Well, thanks, everyone, for joining us, and have a great weekend.
Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect.