Essent Group Ltd

NYSE:ESNT

Earnings Call Analysis

Essent Group's Strong Q2 2024 Results Driven by Credit Performance and High Interest Rates

Essent Group reported robust second quarter 2024 results, fueled by strong credit performance and high interest rates, which bolstered their insured portfolio's persistency and investment income. Net income reached $204 million, up from $172 million a year ago, with diluted earnings per share rising to $1.91. The U.S. mortgage insurance in force grew 2% year-over-year to $241 billion, with credit quality remaining high. Essent secured $1 billion in debt capacity, enhancing financial flexibility. The company anticipates sustained high persistency levels and stable home prices due to favorable demographics and constrained housing supply, despite challenges in affordability and higher rates.

Strong Financial Performance

Essent Group reported impressive financial results for the second quarter of 2024. Net income reached $204 million, a marked improvement from $172 million in the same quarter last year. Earnings per diluted share rose to $1.91 from $1.61 a year ago. This performance underscores the company's robust business model, which benefits from favorable credit conditions and higher interest rates that support persistency in the insured portfolio and investment income.

Robust Mortgage Insurance Portfolio

The U.S. mortgage insurance portfolio saw insurance in force increase to $241 billion, a 2% rise from the previous year. Persistency remained strong at approximately 87%. The portfolio maintains high credit quality with an average FICO score of 746 and an original loan-to-value (LTV) ratio of 93%. These metrics indicate ongoing stability and desirability of Essent's offerings in the market, further solidified by prudent credit standards and strong underwriting practices.

Investment Income and Financial Health

Net investment income for the quarter increased by 8% to $56.1 million, driven by higher balances and investment yields. Essent’s cash and investments totaled $5.9 billion as of June 30. The company closed on a $500 million initial senior notes offering and increased its revolving credit facility to the same amount. These actions significantly enhanced Essent’s financial flexibility and capital structure, ensuring liquidity and support for future growth.

Expense and Efficiency Management

Essent maintained a consolidated expense ratio of 26% for the quarter, with a more favorable 18% ratio when excluding title business expenses. These figures reflect effective cost management and operational efficiency, crucial for sustaining profitability in varying market conditions.

Strategic Initiatives and Business Expansion

Essent continues to invest in its title business and the proprietary credit engine, EssentEDGE, despite expecting no immediate significant financial impact from the title business. The company’s strategic approach aims at long-term value creation. Additionally, Essent's reinsurance strategies, including effective reinsurance transactions, provide robust risk management and income stability.

Market Outlook and Confidence in Strategy

Management expressed confidence in the current and future market environment. Favorable demographics and constrained housing supply support home prices, beneficial for Essent’s portfolio. The company is well-prepared for various economic scenarios, backed by a solid balance sheet and a strategic operational model focusing on risk management, buy, manage, and distribute.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Amy, and I will be your conference operator for today. I would like to welcome everyone to the Essent Group Second Quarter 2024 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Phil Stefano, Investor Relations. You may begin your conference.

[Philip Stefano, executive]

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, executive]

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 and 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 U.S. 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. [ And ] 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 remain focused on activating new lenders and continuing to refine and enhance our proprietary credit engine, EssentEDGE, through additional data sources. In a challenging mortgage origination market, EssentEDGE is an advantage for lenders as their borrowers benefit from receiving our best rate.

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. [ And ] 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 strengthen 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 is 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, executive]

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 U.S. 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 U.S. 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 U.S. mortgage insurance portfolio was 1.71%, down one 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 of our press release.

As Mark noted, our holding company liquidity remains strong, and 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 5-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 [ sufficiency ] 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 [ did ] a dividend of $62.5 million to its U.S. holding company. Based on unassigned surplus at June 30, the U.S. mortgage insurance companies can pay additional ordinary dividends of $329 million in 2024. At quarter end, the combined U.S. 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 U.S. mortgage insurance business has grown statutory capital by $287 million, while at the same time paying $222.5 million of dividends to our U.S. 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, executive]

Thanks, Dave. In closing, we are pleased with our second quarter performance. Our results continue to benefit from strong credit performance and the positive impact 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]

[Operator Instructions]. Our first question comes from the line of Terry Ma with Barclays.

[Terry Ma, analyst]

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 cured 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 curate performance change going forward?

[David Weinstock, executive]

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 defaulted inventory.

The other thing that's really still playing through the default. 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, analyst]

Got it. That's helpful. And is there a similar stat that you can share from maybe kind of pre-COVID vintages? Or like a normalized stat for lack of a better term?

[David Weinstock, executive]

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.

[Operator]

Your next question comes from Soham Bhonsle from BTIG.

[Soham Bhonsle, analyst]

So Mark, I think historically, the MIs have priced to sort of a 20% through-cycle loss ratio. 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 the 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, executive]

Yes. I think it's a good question, Soham. And I agree with you. I think in terms of -- when 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 to that 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 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 less forever. So we would expect, as we get into a softening economy, whether that's this year or 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 ratio is 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 qualify -- the regulatory change with a qualified mortgage. It's just a cleaner book 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-prices.

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 '22 and '23, when we started to really look for ability to kind of -- we [ sold ] more normalized credit rates coming or loss rates coming, so we're able to move pricing. And I would expect given -- 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 homes and new homes the engine allows us to react to that fairly quickly.

So again, I think with that tool, I do think it helps us. And as we think about the economy is potentially beginning to slow. What does that really mean? It could mean lower rates, mortgage rates, which I think it actually helps, right? It's starting to lighten up affordability, which will be good. So you'll see more buyers come into the market, 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 balanced 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 '22. 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 '21. 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, analyst]

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 where I 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.

[Mark Casale, executive]

Yes. I mean I'm not going to [ quote, right? ] It's not like 5% loss is 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. 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 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 that they're able to do it. So you see a little bit, and you might see still a little bit of noise in the provision.

But when you just think about 75%, 80% margins that we have now, I'm not particularly concerned if losses go up a little bit. So I think we'll perform quite well through it. And 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 think 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 a ] GSE stress every month. 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. And we look at it from a PMIERs perspective, which again is really -- that's really the liquidity trigger 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 procyclical 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 to, 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 portfolio to actually reignite growth in certain -- it's kind of on 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 -- it's [ $1.50 ] trillion 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, and I think right there is kind of an example of how we think through it.

[Operator]

Your next question comes from the line of Bose George with KBW.

[Bose George, analyst]

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, executive]

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 from 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 is cure rate versus the first quarter 2023, what you'll see is a little bit higher cures in the first quarter -- 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, analyst]

Okay. So those are sort of intra-quarter cures that essentially get netted out of that?

[David Weinstock, executive]

That's right.

[Bose George, analyst]

Okay. Great. That's helpful. 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 '25 for growth?

[David Weinstock, executive]

Yes, sure. So we -- our OpEx guidance was $185 million for nontitle expenses, excluding -- expenses, excluding titles, 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 and we clearly could beat that guidance.

[Operator]

Your next question comes from the line of Doug Harter with UBS.

[Douglas Harter, analyst]

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, executive]

Yes, it's a good question. And I would say it's very balanced. We've talked about -- heard other MIs [ say it ], 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 is at. And so there's that discipline there that's in -- 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 word to say it.

With the old rate cards, you really were allocated business and kind of done at the highest level or it was done by the second marketing manager or the head of underwriting or the head of sales but there was that relationship part of it and we thought for business [indiscernible] 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 6, 7 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 [ the MI ]. 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 said, "Hey, you should have all 6 MIs in there. And every different MI has different pockets, certain 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 and 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 one of 6, 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, from -- 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. Before, it used to be [ fronting ], NIW, record NIW, and you almost have to hunt for it. It took me 5 minutes to find it on some of the reports, I think 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 because this is a risk business. It's not a market share business it ever was. And I think that bodes well for the industry.

[Operator]

Your next question comes from the line of Rick Shane with JPMorgan.

[Melissa Wedel, analyst]

It's Melissa on for Rick today. Hoping you could touch briefly on how you're thinking about the risk in the '23 and '24 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 repaid, and sort of derisking the portfolio that way, should we see lower mortgage rates in the months and quarters ahead.

[Mark Casale, executive]

Yes. 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 2 parts. It's the, I would call it, the pre-June '22 book, which is before rates really rose and then there's the post book -- post '22 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 -- 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 with in 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 '20 and '21 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 a 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 that kind of lower rates and really help them on the payment and [ affordability ]. That's probably a good thing for the industry.

[Melissa Wedel, analyst]

And I guess, as a follow-up question there. Would you expect the sort of normal continued home price appreciation in a lower rate environment. We've seen it sort of stabilized 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? Again, knowing that's dependent on the [ MSA ]?

[Mark Casale, executive]

Right. I think it depends on what the demand is, right? 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 like -- I think it's still 4 months nationally, right? So it's still low when 6 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%. 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 gilt 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 it will help the borrowers because it -- to your point earlier, if rates go down and HPA goes up, that [indiscernible] necessarily help affordability. But I don't know if I see that in the cards.

[Operator]

[Operator Instructions] Our next question comes from Mihir Bhatia with Bank of America.

[Mihir Bhatia, analyst]

I wanted to start just very quickly on title. I think you mentioned in your script that 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, we need to improve stuff. Like what's driving the like, I guess, what's going on with title right now?

[Mark Casale, executive]

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 -- [ even ] on the lender services side, it's really a refinance-driven model, and there's not really a lot of refinances. So we're 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 patience, we do have patience. 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 outsource all of [ IT ] team 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 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 5 years in title, right? And we talked about this before. Our goal on 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 it as much as we could have. That's fine. 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 to 18 months to stand it up, we're 12 months in. 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, we didn't write our first policy [ until ] 2014. So it took I don't think it's going to take that long at title because we have an existing business. And we started the process even with leveraging our relationships on the MI side. We've -- I think we -- 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, I think it's 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 swap team on the title side of senior account managers that have -- 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? So 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, we're learning a lot.

I mean, I was out with -- I would say, out of the top 5 lenders in the country, I interacted with 3 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 -- 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, analyst]

Okay. So that does make sense. Maybe just one on -- a couple of the MI side. First, the coverage ratio is [ still ticking ] up for a few quarters. I think it's at 27% currently. Is that just a function of your [indiscernible] [ LTV ] loans? And where do you think that settles down?

[Christopher Curran, executive]

Yes. Mihir, it's Chris. 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 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, analyst]

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?

[Christopher Curran, executive]

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 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, executive]

Yes, and this is Mark. And 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 [ that ] say, 10 of them, the 2 or 3 that we think are going to perform better, right? So they have a higher age score and they're able to given where the market is and so forth, and we believe they'll -- it will [ assign ] them a higher edge score or they'll get a higher edge score, which means kind of a lower [indiscernible] rate.

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 tail, 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 2 or 3 of them that we think will outperform. And there's a little value there. And you can see it in our yield, right? Our yield is still in that kind of 40, 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.

[Operator]

There are no further questions at this time. So I would like to turn it back over to the management team for closing remarks.

[Mark Casale, executive]

I'd like to thank everyone for their attendance today and questions, and have a great weekend.

[Operator]

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