Essent Group Ltd (ESNT) 2015 Q1 法說會逐字稿

Good morning. My name is Angel and I will be your conference operator today. At this time, I would like to welcome everyone to the first-quarter 2015 for Essent Group Limited conference call.

(Operator Instructions)

Chris Curran, Senior Vice President, you may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer.

Our press release, which contains Essent's financial results for the first quarter of 2015, was issued earlier today and is available on our website at essentgroup.com in the Investor section. Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in our press release in Exhibit L.

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, 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 27, 2015, 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, Chris. Good morning, everyone, and thank you for joining us. Earlier today, we reported our financial results for the first quarter of 2015. These strong results reflect our continued execution on building a high credit quality and profitable mortgage insurance portfolio. In addition, they represent our 10th consecutive quarter of profitability and delivering high-quality earnings to our shareholders.

The outlook for our franchise in the MI sector remains positive, based on the improving fundamentals of the US housing market and the economy. Given our solid market presence, we remain excited about our prospects in the core MI business. Furthermore, we continue to be cautiously optimistic about our Bermuda-based reinsurance opportunities. Essent Re creates incremental value for our shareholders by expanding the use of our mortgage credit risk expertise and leveraging our Bermuda-based holding company structure.

Also contributing to our positive outlook is the issuance of the final PMIERs. We believe that strong and transparent standards increase confidence in our industry. We also believe that they provide opportunities for a well-capitalized and investment-grade company like Essent to play a larger role in housing finance. Based on our analysis, the final PMIERs line up well with our economic capital framework and the risk to capital that we have been managing our business to. As we previously reported, Essent had sufficient assets in its insurance companies to meet the PMIERs required asset amount as of March 31, 2015. We commend the FHFA and the GSEs for all of their work in finalizing the PMIERs and are pleased to have these standards behind us.

Now, let me discuss our strong results. For the first quarter, we earned net income of $34.8 million, representing a 132% increase from $15 million earned for the first quarter a year ago. On a per diluted share basis, we earned $0.38 for the quarter, compared to $0.18 for the first quarter a year ago. Our results for the quarter were fueled by our growing insurance in force, which was $53.3 billion as of March 31, 2015. Compared to $34.8 billion at the end of the first quarter a year ago, we grew our insured portfolio 53%. As you know, growth in insurance in force drives top-line revenues and further operating leverage.

For the first quarter, earned premium was $75 million, a 68% increase compared to $45 million for the first quarter a year ago. Including the strong credit performance of our insured portfolio for the first quarter, our combined ratio was 39.3%, down from 54.4% a year ago. For the first quarter, we generated $5.3 billion of NIW and grew our active customers to 1,025, representing a 30% increase compared to 787 as of the first quarter a year ago. We continue to be pleased with the expansion of our franchise, the number of active customers, and our position in the marketplace.

On the Bermuda front, we continue to make progress regarding our affiliate quota share and our third-party reinsurance business. During the first quarter, we ceded 25% of our GSE-eligible NIW to Essent Re. Also during the quarter, Essent Re participated in two Freddie Mac ACIS transactions where we reinsured $21 million of risk. Including the two ACIS deals that we participated in during 2014, our total ACIS risk in force is $64 million as of March 31, 2015.

Turning our attention to Washington, the other recent news pertains to FHFA's update on LLPAs. We believe that the removal of the 25 basis points adverse market fee is positive, and slightly improves borrower execution on loans with private mortgage insurance. Overall, we share our industry's view that G-fees should reflect the appropriate level of credit for private mortgage insurance, and anticipate that our industry will continue to pursue this discussion with the FHFA and GSEs.

Now, let me turn the call over to Larry to cover more of the financials.

Thanks, Mark. And good morning, everyone. As Mark noted earlier, for the quarter, we reported net income of $34.8 million, or $0.38 per diluted share. This compares to $28.9 million, or $0.33 per diluted share, for the fourth quarter of 2014.

Our effective tax rate for the first quarter of 2015 was 31%, compared to 34.5% for the fourth quarter of 2014. As a reminder, we began writing business in Essent Re effective July 1, 2014. For the full-year 2015, we expect the contribution to consolidated earnings from Essent Re to increase over 2014 as a result of the revenues generated on the growing in-force book. The accounting rules generally require that an estimated annual effective tax rate for the year be utilized to provide taxes for interim periods. This quarter's effective tax rate of 31% represents our current estimate of the annual effective tax rate for the Company for the full-year 2015, based on the forecasted amount of earnings to be generated in the US versus Bermuda.

Our provision for losses and loss adjustment expenses for the first quarter was $2 million, compared to $3 million in the fourth quarter of 2014 and $902,000 in the first quarter a year ago. Our provision for the quarter is in line with the number of defaults and aging of our inventory. Note that, for the first quarter, new defaults net of cures were 61, compared to 153 for the fourth quarter. This is, in part, due to the seasonal increase in cures historically experienced by the industry in the first quarter of a calendar year. Our default rate as of March 31, 2015, was 21 basis points, as compared to 20 basis points last quarter and 12 basis points as of the end of the first quarter of 2014.

Earned premium for the first quarter was $75 million, an 11% increase, compared to $67.8 million for the fourth quarter, and a 68% increase compared to $44.8 million for the first quarter of 2014. Our average premium rate for the first quarter of 2015 was 58 basis points, compared to 56 basis points in the fourth quarter and 54 basis points for the first quarter a year ago. The increase in our premium rate was primarily due to an increase in single-premium policies canceling during the quarter.

Our expense ratio for the first quarter was 36.6%, a decrease from 37.8% last quarter and 52.4% for the first quarter a year ago. Other underwriting and operating expenses for the first quarter were $27.5 million, up from $25.7 million in the fourth quarter and $23.5 million for the first quarter a year ago. For the full year, we continue to believe that other underwriting and operating expenses will be in the $110 million to $115 million range.

The consolidated balance of cash and investments at March 31, 2015, was $1.1 billion. The cash and investments balance at the Holding Company at March 31 was approximately $124 million as compared to $126 million at December 31. Note that there were no capital contributions to our insurance units during the first quarter.

The combined statutory capital of the US mortgage insurance companies was $748 million, reflecting an increase of approximately $42 million compared to $706 million at December 31, 2014. This increase was driven by statutory earnings during the quarter. The combined risk-to-capital ratio of the US mortgage insurance business was 15.8 to 1 at the end of the quarter.

Finally, as of March 31, 2015, Essent Group's total consolidated GAAP equity was $996 million. Also as of March 31, Essent Re had GAAP equity of $159 million and total risk in force of $1.1 billion, as compared to $155 million of equity and $836 million of risk in force as of December 31, 2014.

Now, let me turn the call back over to Mark.

Thanks, Larry. In closing, we had another strong quarter of operating performance and producing high-quality and growing earnings for our shareholders. The underlying drivers of this performance continue to be solid, and we remain pleased with the pro forma returns of our business.

Our operating platform remains strong on all fronts, and our team continues to deliver best-in-class service to our customers. Essent is well positioned within our industry and in housing finance, and we remain optimistic about the future of our franchise.

Now, let's turn the call over to your questions. Operator?

(Operator Instructions)

Jack Micenko.

Good morning guys. It's kind of an unanswerable question, but your loss ratios obviously remain well below what would be historical numbers. And some of your peers have begun to put out what some of their 2011, 2012 loss ratio numbers look like.

Just curious as an updated thought on where the 2.7 ultimately we think could get to on a normalized basis? I know it is hard to say, but the credit quality here I think surprised even the biggest skeptics so far to date.

Jack, I think we're going to sound like a broken record here but in terms of our performance we continue to be pleased with how the loss is progressing. And more importantly really the underwriting quality that's being generated by our lender partners. The caution is our book is just relatively young so it's still very early in the process. But, again, pleased with the performance to date but really tough to pin where we think they are going to end up longer term.

Okay. And then just curious, your updated comments on some of the LPMI discussions that are going on. I think the GSEs may be thinking about maybe disincentivizing that business or at least some of the pricing.

I know you guys have not been as active there on the lender paid. Any updated thoughts on what we could potentially see around either capital requirements for anything on the lender paid stuff?

I don't have any real insight into the capital requirements that the GSEs may add. I would just point to what we are doing which is really just growing the portfolio.

We are really happy with how the portfolio is shaping up in terms of our average premium rate and credit quality. So, we are not participating as much. But again, we are real concerned with our portfolio and how we are growing it, so no real insight to what the GSEs are doing.

Okay, fair enough. I will get back in the queue. Thanks.

Mark DeVries.

Yes, thanks. Mark, I was hoping you could comment at least qualitatively, and possibly, if you can, quantitatively about the success you continue to have, both adding accounts and also deepening wallet share with the existing accounts that may be a little bit newer.

Yes, Mark, we really break it up between activation and utilization. So, as a younger company we continue to build breadth and depth of our customer base. And then as we get them over time, your best case you want to increase utilization.

Very pleased with the growth rate in the active customers. We are still a big priority within the Company.

And I think utilization is really reflected just in how the portfolio is going. I couldn't be more pleased with again how the portfolio is growing. I think it grew 53% year-over-year so that's the real output. Obviously it is the customers and the quality that goes into that, but we are very pleased on both those fronts.

Okay. So you are still seeing good progress, getting utilization up, even at some of the accounts you've had on for a couple years now?

Yes. It is obviously different clients have different utilization rates. It takes a while to go out to the different branches depending if they are centralized or if they're decentralized. But, yes, I think we are very pleased with how we continue to grow with our clients.

Okay. And then, Larry, I think you indicated you expect OpEx of about $110 million to $115 million for the year, which is actually your run rate this quarter. Is that an indication that you are nearing the end of having to invest in some of the fixed cost in the business? And maybe we will see even some acceleration in the improvement of the expense ratio relative to risk going forward?

Yes, good question. I think we have seen an improvement in the expense ratio over the period of time but we will continue to look for opportunities to invest. We think as we look at the year and the run rate we have that there is some opportunities to continue to invest where see some opportunities.

Okay. Thanks.

Bose George.

Good morning. I just wanted to go back to follow-up on the single premium question.

This quarter it appears you grew share by a fair amount and you kept your share relatively stable. Was that a conscious decision to reduce your exposure there given profitability? Or any color you can provide there.

Bose, we're very pleased. We've always said the range of market share would be in the 12% to 15% range.

I think with singles, yes, I think it was a conscious effort. We are very focused on returns and shaping our portfolio. This is where you see the output.

We've talked about it before, but we're, again, focused on growing the portfolio, making sure it has appropriate premium and credit characteristics against which capital we have to stack against. This is a long tail business and we think about it in the longer-term basis. And from certain pricing and certain lenders around that we're going to be cautious.

Okay, great. That makes a lot of sense.

On the FHA price guide, do you think that's had much impact on MI industry volume this quarter or do you think it's really led to more streamlined FHA refis?

That's a good question. I think more on the streamlined FHA the refis, we have not really seeing an impact in the market, from what we could see, in the first quarter.

Okay. Then actually just one more. The PMIER comments you made earlier on the LLPAs, does it suggest that debate is not over, that it's something that's going to be ongoing?

Yes, now that PMIERs are in place and we begin as an industry to show good returns on the capital, I think there's room for further discussion.

Okay, great, thank you.

Mackenzie Kelly.

Thanks. Good morning.

Mark, can you provide some perspective on your total views of NIW opportunity for the industry relative to the guidance that you laid out last quarter, just based on what you have seen thus far in the year on the FHA competition and just total purchase growth overall on? Is anything there that's caused you to change your views?

I think we said $175 billion to $185 billion on the last call. I would say it is probably towards the upper end of that now given some of the results of the first quarter. So, we feel comfortable with the upper end of that range.

Okay, great. Then, secondly, on the high LTV is above 95%, the share the NIW moves slightly higher this quarter as the GSEs new product took effect. I just wanted to get some color on, is it lenders that are finally now starting to offer those?

And what's been the response from lenders? And what kind of borrowers are taking advantage of those? And going forward how would you expect the demand there to go?

I still think the demand is pretty muted, Mackenzie and it is across lenders. There's no real specific lender. The execution still doesn't really work at that level versus FHA.

It was really small before. The GSEs took it away then brought it back. I would say it is very, again, muted in terms of the growth. It has always been a pretty small part of our originations and I would expect it to remain relatively small.

Okay, thanks.

Doug Harter.

I'm hoping you could talk about the returns on the ACIS risk in force that you have and maybe size that market opportunity.

Doug, it is Mark. The returns are consistent with the returns, really, in the rest of our portfolio. We say cautiously optimistic just because the future of the programs you really never know.

We've been pleased obviously. We've seen over the past six quarters that the GSEs have been out there, maybe a bit longer.

Again, it is not like the primary business where we can gauge market size and share and get a sense of originations. It is a little difficult to quantify on that part, so stay tuned quarter-by-quarter.

We're happy, we are pleased with it because it allows us, it's really another platform for us to leverage our mortgage credit risk expertise. It is in the below 80 business, which is a nice growth to it. In the future it could have nicer opportunities but we are still relatively cautious at this time.

Just to be clear, so if you said you had $64 million of risk, how should we think about how much capital you would hold against that risk?

It is a little harder because there are different structures, I would say. We use the same economic base capital methodology that we use on the primary business. So it is hard to give you a dollar for dollar or a risk-to-capital because it is different.

But I would just say, again, the capital allocated to that is relatively small at this point relative to the capital that we deploy in Essent Guarantee. But, again, it does have the opportunity longer term for us to allocate more capital to that business.

Great, thanks, Mark.

Eric Beardsley.

Hi, thank you. Just wondering if you could help us quantify what the impact was of the elevated cancellation on the premium rate? Would we be back closer to the 56 basis points that we had in the fourth quarter?

Yes, Eric, that's a good rate, it's a couple basis points.

Okay. Then, just as we are looking out at your affiliate quota share now that you've had a few quarters under your belt, how often do you expect to revisit the percentage that you see to Bermuda?

There is no set timeline. I would say we are at the 25%, we remain comfortable with it, so no plans for the foreseeable future.

Okay, great, thank you.

Amy DeBone.

Thank you. Just to follow-up on industry NIW expectations, the $175 billion to $185 billion, does that reflect an increase in private MI penetration?

Maybe a little bit. That's good question. Maybe a touch higher on the penetration.

Okay. What's driving the other income line? It looks like it decline in the quarter relative to the previous run rate by a pretty significant amount.

Amy, this is Larry McAlee. Included in that line are the results of our ACIS contracts. As we talked about previously, we account for them as derivatives. And during the quarter we recorded a loss on those contracts as a result of an increase in the prepayment fees associated with the underlying mortgages.

Okay. So, going forward is it going to fall in the middle of where it fell between this quarter and 2014? Or how should we think about projecting that line?

Amy, again, it's still relatively small, if you think about this $64 million of risk in force versus the entire portfolio. It will be based a little bit on the market opportunity and additional transactions we may book. And also, as it relates to derivative accounting, you will see a little bit more volatility there just because of the nature of the accounting model.

Okay, thank you.

Geoffrey Dunn.

Thank you. I actually wanted to follow-up on that question. When you say that there was a negative mark for accelerated prepayments, was that an actual impact or are you talking a mark-to-market impact?

Yes, it was a mark-to-market impact, Geoff.

Is that something you might be willing to break out going forward just so we can take out the noise of the market movements and just try to look at the fundamentals?

Sure, we can look at that. We do disclose it in our 10-Q. But we can look at that, Geoff, and see what may make sense for purposes of the supplement, as well.

Great, thank you.

Sean Dargan.

Thanks. Mark, I wanted to get your thoughts, with PMIERs out of the way and regulatory risk, I think, largely behind the industry, given that new product ROEs still seem fairly attractive, do you think we will see any new entrants or capital enter the space?

Sean, it is hard for me to say. It is a pretty crowded space at this time so it is tough for me to predict. It is pretty long cycle to build a company, but the returns are attractive so you never know.

Capital does get attracted to returns. But tough for me. I have no real insight into it.

Okay. And to the point that it is crowded, do you think we will see any consolidation?

Again, it is hard for me to predict that. It is crowded but it was crowded when we started. We lost a few and a few more came in, so it's still crowded.

I think it is a good mix. But I have no real insight in the consolidation.

Okay. I'm just wondering about if you could shed any light on the credit quality of the new stacker pools. I know they're below 80, but is there anything else you can give us, the credit quality of these pools versus your additional business?

It is very similar. It is on the Freddie Mac websites, you can actually see. They break out the FICOs and all. But it is very similar to what you will see in our book, just obviously lower LTVs.

Okay, great, thank you.

(Operator Instructions)

Mike Zaremski.

Good morning. A question on capital.

Now that you guys had some time to digest the finalized PMIERs rules, could you update us on how you think about leverage levels so we can best understand whether additional equity under debt make sense over time as risk in force grows?

There are actually two separate questions, I think, with the PMIERs behind us. Remember, we've always deployed our own models to set capital. We run a few different stress models and PMIERs actually lines up quite well with that.

But in terms of capital we feel pretty good in terms of the capital required for Essent Guarantee throughout the year and probably into next year. The additional need for capital would really be growth capital, to EssentRe and opportunities that we see there. Should we require more capital down the road, we would obviously look at debt and equity or whatever is better at the time depending on market conditions.

Just to clarify, the EssentRe would be the subs -- is that the Bermuda sub? So it would depend on the growth.

EssentRe is the Bermuda sub and Essent Guaranty is our US-based primary insurer.

Okay. So I need to think about how much business you would be pushing into that sub over time to determine whether additional capital makes sense.

Yes. And as I said, I think we are comfortable with our capital position as we are today, really through 2015.

But, again, we will see, depends on -- again, as we said earlier in response to Doug's questions, we don't have a lot of great visibility into some of the opportunities. And if we see a good opportunity that meets our return hurdles, we would probably deploy capital to take advantage of that.

Got it, thank you.

There are no further questions at this time. I turn the call back to the presenters.

Thank you, operator. We would like to thank everyone for participating in today's call,. And enjoy your weekend.

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