Earnings Call Transcript - ESNT Q1 2025

Operator, Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Ltd. First Quarter Earnings Conference Call. I would now like to turn the conference over to Phil Stefano, Investor Relations. Please go ahead.

Phil Stefano, Investor Relations

Thank you, Regina. 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 first quarter of 2025, was issued earlier today and is available on our website at essentgroup.com. 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 18, 2025, 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, Chairman and CEO

Thanks, Phil, and good morning, everyone. Earlier today, we released our first quarter 2025 financial results, which continue to benefit from the impact of higher interest rates on the persistency of our insured portfolio and investment yields. We believe that our buy, manage and distribute operating model uniquely positions us to operate in a variety of economic environments to generate attractive returns for our shareholders. Our outlook over the long term remains constructive as we believe that favorable demographic trends along with current affordability issues are resulting in pent-up demand for housing. Even though we anticipate some headwinds to consumer spending and economic growth over the near term, given the high credit quality of our insured portfolio and the strength of our operating model, Essent is positioned to navigate this environment. And now for our results. For the first quarter of 2025, we reported net income of $175 million compared to $182 million a year ago. On a diluted per share basis, we earned $1.69 for the first quarter compared to $1.70 a year ago. On an annualized basis, our return on average equity was 12% in the quarter. On the mortgage insurance front, lenders continue to be challenged by lower originations due to the impacts of higher rates, affordability, and overall lack of supply. This, in turn, also impacts the amount of new insurance written that our industry generates. While our industry is competitive in this environment, systematic credit guardrails established by the GSEs continue to mitigate credit box expansion. As such, we remain satisfied with the credit quality and unit economics of our new business. As of March 31, our U.S. mortgage insurance in force was $245 billion, a 3% increase versus 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 93%. Our 12-month persistency on March 31 was 86%, flat from last quarter, while half of our in-force portfolio has a note rate of 5% or lower. We continue to expect that the current level of mortgage rates will support elevated persistency in the near term. Our consolidated cash and investments as of March 31 were $6.4 billion, and our new money yield in the first quarter remained over 5%. The annualized investment yield for the first quarter was 3.8%, while new money rates have largely held stable over the past several quarters and remain a tailwind for investment income. We continue to operate from a position of strength with $5.7 billion in GAAP equity, access to $1.5 billion in excess of loss reinsurance, and a PMIERs efficiency ratio of 172%. With a trailing 12-month operating cash flow of $866 million, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. Our capital strategy seeks to balance a conservative balance sheet, preserving optionality for strategic growth opportunities and optimizing shareholder returns over the long term. With that in mind, I am pleased to announce that our Board has approved a common dividend of $0.31 for the second quarter of 2025. At the same time, we recognize that our excess capital position and stock valuation present us with an opportunity to be proactive in returning capital to shareholders. As previously discussed, we are valuation-sensitive when it comes to buying back shares, believing this strategy will support our long-term goal of compounding book value per share growth. Year-to-date through April 30, we repurchased nearly 4 million shares for over $200 million. Now let me turn the call over to Dave.

David Weinstock, Chief Financial Officer

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the first quarter, we earned $1.69 per diluted share compared to $1.58 last quarter and $1.70 in the first quarter a year ago. In connection with accounting guidance effective as of year-end 2024, public companies with a single reportable segment are required to disclose results by segment. We have one reportable segment, mortgage insurance, which aggregates our U.S. mortgage insurance business and our GSE and other mortgage reinsurance business at our subsidiary, Essent Re. My comments today are going to focus primarily on the mortgage insurance segment results. There's additional information on corporate and other results in the financial supplement in Exhibit O. Our U.S. mortgage insurance portfolio ended the first quarter with insurance in force of $244.7 billion, an increase of $1 billion from December 31 and an increase of $6.2 billion or 2.6% compared to $238.5 billion at March 31, 2024. Persistency at March 31, 2025, was 85.7%, unchanged from the fourth quarter. Mortgage insurance net premium earned for the first quarter of 2025 was $234 million and included $15.5 million of premiums earned by Essent Re on our third-party business. The average base premium rate for the U.S. mortgage insurance portfolio for the first quarter was 41 basis points, consistent with last quarter, and the average net premium rate was 36 basis points for the first quarter of 2025, increasing 1 basis point from last quarter. Our mortgage insurance provision for losses and loss adjustment expenses was $30.7 million in the first quarter of 2025 compared to $37.3 million in the fourth quarter of 2024. As a reminder, our fourth quarter provision included $8 million for defaults that we identified as related to Hurricane Helene and Milton. While we observed a decline in the number of hurricane-related defaults in the first quarter due to cure activity, we made no changes in the reserve for hurricane-related defaults as this amount continues to be our best estimate of the ultimate lawsuits to be incurred for claims associated with those defaults. At March 31, the default rate on the U.S. mortgage insurance portfolio was 2.19%, down 8 basis points from 2.27% at December 31, 2024. Mortgage insurance operating expenses in the first quarter were $43.6 million, and the expense ratio was 18.7% compared to $39.9 million and 17.5% in the fourth quarter. For the full year 2024, operating expenses for the mortgage insurance segment totaled $160 million. We estimate that other underwriting and operating expenses for the mortgage insurance segment will be between $160 million and $165 million for the full year 2025. In April, we entered into two excess of loss transactions effective July 1 of each year, with panels of highly rated reinsurers to cover our 2025 and 2026 new insurance written. These transactions complement the two quota share transactions closed in the first quarter, and we continue to be encouraged by the strong demand from reinsurers for taking mortgage credit risk. In addition, in April, we decided to increase the ceding percentage of our affiliate quota share from 35% to 50% to further leverage our Bermuda platform. This increased session to Essent Re will be effective in the second quarter and will be retroactive to new insurance written starting from January 1, 2025. At March 31, Essent Guaranty's PMIERs sufficiency ratio was strong at 172% with $1.5 billion in excess available assets. Consolidated net investment income increased $1.7 million or 3% to $58.2 million in the first quarter of 2025 compared to last quarter, due primarily to a modest increase in overall portfolio yield. As Mark noted, our holding company liquidity remains strong and includes $500 million of undrawn revolver capacity under our committed credit facility. At March 31, we had $500 million of senior unsecured notes outstanding with a debt-to-capital ratio of 8%. During the first quarter, Essent Guaranty paid a dividend of $65 million to its U.S. holding company. Based on unassigned surplus at March 31, Essent Guaranty can pay additional ordinary dividends of $405 million in 2025. At quarter end, Essent Guaranty's statutory capital was $3.6 billion with a risk-to-capital ratio of 9.6:1. Note that statutory capital includes $2.5 billion of contingency reserves at March 31. During the first quarter, Essent Re paid a dividend of $100 million to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $31.7 million to shareholders, and we repurchased 2.8 million shares for $157 million. In April 2025, we repurchased 1.1 million shares for $61 million. Now let me turn the call back over to Mark.

Mark Casale, Chairman and CEO

Thanks, Dave. In closing, we are pleased with our first quarter financial results as Essent continues to generate high-quality earnings while our balance sheet and liquidity remain strong. Our outlook for housing remains constructive over the long term, and we believe that Essent is well positioned to navigate the current environment, given the strength of our buy, manage and distribute operating model. Our strong earnings and cash flow continue to provide us with an opportunity to balance investing in our business and returning capital to shareholders. We believe this approach is in the best long-term interest of Essent and our stakeholders while Essent continues to play an integral role in supporting affordable and sustainable homeownership. Now let's get to your questions.

Operator, Operator

Our first question will come from Rick Shane with JPMorgan.

Rick Shane, Analyst

Look, March and April have been unprecedented months in terms of volatility and some of the behaviors we've seen. When you think about where we are in the affordability cycle for homeownership, particularly for first-time homebuyers, do you think we are potentially reaching an inflection point where things will start to come the way of the consumer a little bit more? Or do you remain a little bit more cautious? And then delving a little bit more deeply into that, are there certain geographies where you are particularly optimistic or particularly cautious? And how do you adjust for that within your rate cards?

Mark Casale, Chairman and CEO

Thanks for the questions. I think the first one on affordability, I'm not sure where we are in the cycle. And remember, just in context, we've had this anomaly, right? We had the COVID anomaly with super low rates and everyone just buying stuff—houses, boats, cars, bicycles. It drove up home price appreciation in some markets 40%, 60% in others. And then boom, in the middle of 2022, rates shot up and effectively froze people. They call it the golden handcuffs—people with 3% mortgage rates have stayed elevated. Rates went up, and this has really resulted in affordability issues because incomes didn't really grow, and now you have higher home prices and higher rates. It has created a second anomaly that we are still in. Fortunately for Essent, we're well positioned for this environment. We saw tailwinds in investment yields and have seen unprecedented persistency. In addition, the quality of borrower we are getting in this environment is actually quite good because of the affordability issues. Only the best qualify. I do think, and I have said this before, when you think about our insurance in force, it's relatively flattish, which generates a lot of what I call free cash flow to the bottom line. So again, we're well positioned. But this next cycle will really play out or end when incomes catch up. And I think when incomes catch up, I don't really see rates going anywhere. I could see pockets of home price appreciation declining, which I think is relatively healthy, but the consumer really is going to have to catch up. And then you will have life events—people getting married, increasing homeownership formation, having more children, death, divorce—all those sort of things that will unlock some supply. But here's a great metric for where I think the market is a little bit stuck. The average age of the first-time homeowner is 38. That tells me there's a lot of pent-up demand for housing. So growth in our portfolio will renew. And longer term, Rick, for Essent and for the other mortgage insurers, we will grow with housing in this country, which always grows, though not always in a straight line. That's why, when we say longer term, we are constructive that we have been able to wait this period out and continue to generate strong returns. The only problem I have is I'm not sure when that's going to happen. I don't think it will happen this year, but I think we're getting closer to it. I think on your location standpoint, we have our pricing model which has two parts. There's the credit engine part, EssentEDGE, and we can electronically deliver pricing. That allows us to make numerous pricing changes. We have actually raised pricing in certain markets during the first part of the year, trying to test pricing elasticity where we may hold a larger share in certain markets. Generally, we're more concentrated in areas with much more population growth. If you look at our segment, we tend to prefer places where people and jobs are moving. So we are somewhat more invested there. That being said, you're always trying to increase prices in certain areas, and in other places, you're backing off. We look at it that way. And again, like I mentioned earlier, pockets of home price appreciation decline, in the long run, will be healthy for the market.

Rick Shane, Analyst

Got it. No, it's been such an interesting cycle. And one of the things that we always talked about on our team is that not every cycle can be unprecedented. I'm hoping that eventually, we're going to be right on that. It's been sort of from unprecedented to unprecedented to unprecedented—it's almost exhausting. Thank you for your answers.

Mark Casale, Chairman and CEO

You're welcome. Hang in there.

Operator, Operator

Our next question will come from Terry Ma with Barclays.

Terry Ma, Analyst

Mark, I'm just curious. Just given all the uncertainty around macro and the headlines around tariffs, I'm just curious how you're thinking about managing risk overall. And have you done anything on the pricing underwriting side? At what point will you do so to adjust for that?

Mark Casale, Chairman and CEO

It's a good question, Terry. I would say we have. Like I said earlier, we raised pricing in the first quarter in certain markets, but that was more micro-oriented, so to speak, around pricing elasticity. I think on a macro standpoint, we are in a bit of a wait-and-see mode regarding the impact of tariffs. So to give you some background on our pricing, we generally price through the cycle, which could mean good environments and bad environments. We don't particularly look and say, 'Well, we think the next three months could be challenging. Therefore, we are going to change our pricing.' Just like we don't look and say, 'Well, the market is going to be great for the next six months, so let's lower our pricing.' So you have to kind of consider it through the cycle. There needs to be a catalyst, an event, right? Tariffs could be an event. COVID was an event. When COVID was an event, we saw that the economy would slow considerably, and our pricing through this cycle would have to change. We, along with all the mortgage insurers, were able to change our pricing very quickly, another advantage for our engine. But right now, we are not seeing it and we will have to wait to see how it plays out. There are certainly a lot of factors involved. But right now, there are no real changes on the pricing front.

Terry Ma, Analyst

Got it. That's helpful. And then just more broadly speaking, how are you thinking about credit loss expectations? I think you pointed toward a 2% to 3% default rate as still being within expectations last quarter. Is that still the case?

Mark Casale, Chairman and CEO

Yes, very much so. I think we're in the lower end of that right now, and we may not hit 3% depending on where defaults come in through the back half of the year. They tend to increase a little bit more in the back half of the year. And Terry, it’s a bit of just math, right? I mean, roughly 800,000 loans and close to 18,000 defaults. You can kind of do the math and see what the percentage is. I would note two things. One, big picture, we really own that first loss piece. We hedge out the mezzanine and we kind of reattach at the catastrophic level. So we don't get too upset around this range of 2% to 3%. And second, we provide the provision when they miss 2 payments. But depending on the vintage and the home price appreciation, they may not result in a claim. We provision for that because that's our expectations within our model. But as you have seen in the past, if people sell their house, the severity might not result in a claim. Therefore, I wouldn't jump to a default rate necessarily leading to cash out the door for Essent. That’s where it really comes down to whether we write a check and pay a claim. To date, we haven't really had to do much of that.

Operator, Operator

Our next question comes from Bose George with KBW.

Bose George, Analyst

In terms of buybacks, maybe I missed this, but how much of the buybacks occurred in the first quarter versus April?

David Weinstock, Chief Financial Officer

This is Dave Weinstock. $157 million of the buybacks were in the first quarter. And then we purchased about 1 million shares—actually, we purchased 1.1 million shares for $61 million. So it was 2.8 million shares for $157 million in the first quarter, 1.1 million shares for $61 million in April.

Bose George, Analyst

Okay, great. And then just with the comments you made about the new 50% ceding to Essent Re, in terms of the tax rate, I assume the tax rate on the incremental piece goes down over the next few years. Can you just remind us, in 2030, does everything just bounce back to the domestic rate or is there some sort of phase-in at that point as well?

David Weinstock, Chief Financial Officer

Yes. No, Bose. You're right that the incremental will be—we are currently, as we've talked about in prior calls, we have this limited international presence exemption where we are not paying taxes in Bermuda until 2030. But then once that exemption expires, and beginning in 2030, we would expect to pay the 15% tax on earnings in Bermuda.

Mark Casale, Chairman and CEO

And the other thing to note, Bose, just on the change in the affiliate is a bit of efficiency in moving cash from guarantee to the holding company, given that the holding company sits in Bermuda. So that was another consideration. It wasn't necessarily to drive a lower tax rate, but really the efficiency of cash and capital management was a driver there.

David Weinstock, Chief Financial Officer

Yes. And just to add on what Mark said, because we're talking about really just the incremental piece on the current year's new insurance written, it's not going to have any dramatic impact on this year's effective tax rate.

Operator, Operator

Our next question will come from Mihir Bhatia with Bank of America.

Mihir Bhatia, Analyst

I wanted to start actually going back to the comment on pricing and just unit economics in general. I think, Mark, you mentioned you're still happy with new unit economics on new insurance written. But taking a step back, big picture, how have unit economics on new business changed in the last 2 or 3 years? Obviously, interest rates are up. It sounds like you have done some micro movements around pricing. But overall, the gross premium rate has been in this 40, 41 basis points range for 10 quarters. I'm trying to think about how unit economics have changed, if at all, in the last 2 or 3 years between interest rates and your credit expectations or your view on forward credit.

Mark Casale, Chairman and CEO

It's a good question. I would say pricing in general has been steady. I would say it probably increased in the back half of '22 when there was a movement. I think we raised pricing in our engines across different MSAs over 12 times in '22. You don't necessarily see it in the yield on the book as it moves slower. But I would say, in the engine itself, we probably raised pricing by about 30% or more. The overall pricing on new insurance written increased pretty significantly. And again, there was a little bit more risk because you had higher LTVs and higher debt-to-income ratios on some of that '22 business, given some of the affordability issues. But I would say, in general, the unit economics have been strong. We target the 12% to 14% range, and I would say that’s probably on the high end of the range here. It is important for investors to think through this distinction. There's a difference because if you write good unit economics, that eventually shows up in your P&L. Conversely, if you write poor unit economics, that will show up. But for investors at Essent, it's important to differentiate between the unit economics we write and core ROE that’s on the balance sheet. The ROE in the balance sheet—GAAP ROE—has various drivers. You almost want to create a distinction between unit economics and ROE on the balance sheet. Of course, the ROE you report and the GAAP is what it is; however, there’s some optionality in retaining that capital, which is a powerful advantage. Again, thinking from a longer-term perspective, we operate in a catastrophe-driven business. Our catastrophe is a significant economic recession. We manage that expected loss very well, and we hedge out a lot of the mezzanine parts but could reattach. That’s why we run all these different stress tests. And as a management team, we noticed we bought back more shares in the last four months than we have in the history of Essent. Part of that was valuation sensitivity. We saw an opportunity; we believe the market overreacts to certain events, and that’s fine. Having capital allows us to lean in a little bit when we see value. Again, writing unit economics of 12% to 14% when your stock is trading at book or even below book was an easy decision. In the longer term, it’s important. We like maintaining optionality of capital because it provides us both opportunities defensively and in growth. You haven't heard me say this in a while, but with six mortgage insurers and two large mortgage companies consolidating in a slow market, consolidation isn’t necessarily a bad outcome for investors. So we consider a lot of that optionality, and I understand you asked about pricing, but that is the context.

Mihir Bhatia, Analyst

Right, right. That makes sense. Speaking of capital allocation, I want to touch on the title business. You've owned it for a little while now. Any changes in your view of the opportunity there? Can you provide an update on what's going on with that business and how you're thinking about it here as interest rates potentially stay higher for longer?

Mark Casale, Chairman and CEO

Yes, it's interesting. When you take a step back at Essent, the issue we face is we are in this pause for growth. In mortgage insurance, we are very well positioned. Title is a transaction business, which is one of the reasons we were able to purchase it at such a good price; we bought it when rates were already up, and you could see it would likely slow. So I don't want to say this is unexpected. When we think about the business longer term, we believe it will perform similarly to Essent Re, with supplemental earnings. The difference between Essent Re and Title is there’s really no capital against title, so it's relatively ROE accretive. That being said, we have a lot to do in terms of integrating the unit into Essent. I believe we are now in a good position with a strong management team, which we didn't have before. I think we are well-positioned so that when rates come down, more lenders can be activated—a lot of things we did on the mortgage insurance side. Quite frankly, we have work to do to sign up lenders and continue to onboard agents. But I would say that with Title, this is a building business; it takes time. I look at it almost like an investor and feel we are doing the right things in Title at this time. In terms of the management team, I have not spent much time on Title in the last six to nine months. The team is in place, and I feel comfortable with how they will perform.

Operator, Operator

Our next question comes from the line of Geoffrey Dunn with Dowling & Partners.

Geoffrey Dunn, Analyst

Given what you mentioned about the efficiency of the higher seat of Bermuda, can you provide any guidance on how we should think about dividend flows from the underwriting companies up to the holding company? Is this something where—I mean, you've been regular with the Guaranty dividends. Is that something where that probably drops below $50 on a quarterly cadence, or do we see more recurring higher dividends out of Essent Re? Anything you can provide us to give a little framework around that?

David Weinstock, Chief Financial Officer

Geoff, it's Dave Weinstock. Yes, I don't know that I would think about the trade-offs between necessarily Essent Guaranty and Essent Re. I think we look at both entities and try to understand the capital positions for both and the needs of the holding companies. I think we'll continue to see dividends from both entities this year, subject to what happens in the environment, right? So right now, with where credit is and things like that, you can expect to see some continued patterns similar to what we did in the first quarter, depending on how the year plays out based on our expectations with credit tending to stay relatively stable.

Mark Casale, Chairman and CEO

Yes, and I think, Geoff, the way to look at it is we’re going to continue to maximize the dividends out of both entities, right? I think you can see whatever ordinary dividends we can get out of Guaranty. We're achieving that, pushing as much to the holding company as we can. The difference is when it goes to U.S. holdings, we have to move it through different entities, considering the tax implications of getting it to the group. So the more we can just do the reinsurance, it gets it right to Re, and it's frictionless getting it to the group. I don't know how you can model it much differently than that. You'll see it evolve over time as we implement more efficient practices. The bigger decision is whether we execute a special dividend out of Guaranty. That’s really the only lever to get capital at this time, and while it is not in the cards, it’s certainly a lever we could pull if we had an opportunity. We would need the opportunity to put that capital to work to justify it.

Geoffrey Dunn, Analyst

All right. I don’t want to take you too literally, but maximizing dividends indicates you’re aiming to take another $405 million out of Guaranty this year?

David Weinstock, Chief Financial Officer

Yes. With what we have left, there are some...

Mark Casale, Chairman and CEO

Assuming credit remains relatively benign...

David Weinstock, Chief Financial Officer

Yes, I think that's a reasonable view. We would indeed plan to maximize that over the balance of the year, given a benign credit environment.

Operator, Operator

That will conclude our question-and-answer session. I'll turn the call back over to management for any closing comments.

Mark Casale, Chairman and CEO

Thanks, everyone, for participating today, and have a great weekend.

Operator, Operator

Thank you all for joining today's call. You may now disconnect.