Earnings Call Transcript - ESNT Q2 2025

Operator, Operator

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

Philip Michael Stefano, Investor Relations

Thank you, Bella. 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 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 19, 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 Anthony Casale, Chairman and CEO

Thanks, Phil, and good morning, everyone. Earlier today, we released our second quarter 2025 financial results which continue to benefit from favorable credit performance and the impact of higher interest rates on persistency and investment income. Our second quarter performance demonstrates the strength of our business model and the current macroeconomic environment. We believe that our buy, manage, and distribute operating model uniquely positions Essent within a range of economic scenarios to generate high-quality earnings. Our outlook on housing remains constructive over the longer term as we believe that demographics will continue to drive demand and provide home price support. Over the last several years, demand has exceeded supply, resulting in meaningful home price appreciation and affordability challenges. A byproduct of these affordability issues is that higher creditworthy borrowers are being qualified for mortgages, as evidenced by the weighted average credit score of our new business. Also, the increase in home values has resulted in further embedded equity within our insured portfolio, which provides a level of protection and reduces the probability of loans transitioning from default to claim. And now for our results. For the second quarter of 2025, we reported net income of $195 million compared to $204 million a year ago. On a diluted per share basis, we earned $1.93 for the second quarter compared to $1.91 a year ago. On an annualized basis, our return on average equity was 14% in the quarter. As of June 30, our U.S. mortgage insurance in force was $247 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 June 30 was 86%, flat from last quarter. While nearly 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. On the Washington front, our industry continues to play a vital role in supporting a well-functioning and sustainable housing finance system. We believe that access and affordability will continue to be the primary focus in D.C. Essent is supportive and believes that our industry is very effective in enabling homeownership for low down payment borrowers while also reducing taxpayer risk. During the quarter, Essent Re continued writing high-quality GSE risk share business and earning advisory fees through its MGA business with a panel of reinsurer clients. As of June 30, Essent Re had risk in force of $2.3 billion for GSE and other risk share. Essent Re achieves both capital and tax efficiencies through its affiliate quota share with Essent Guaranty and allows us to leverage Essent's credit expertise beyond primary MI. It also provides a valuable platform for potential long-term growth and diversification of the Essent franchise. Essent Title remains focused on expanding our client base footprint and production capabilities in key markets. We continue to maintain a long-term horizon for this business and given persistent headwinds of higher rates, we do not expect Title to have any material impact on our earnings over the near term. Our consolidated cash and investments as of June 30 totaled $6.4 billion, with an annualized investment yield in the second quarter of 3.9%. Our new money yield in the second quarter was nearly 5%, holding largely stable over the past several quarters. We continue to operate from a position of strength with $5.7 billion in GAAP equity, access to $1.4 billion in excess of loss reinsurance, and a PMIER efficiency ratio of 176%. With a trailing 12-month operating cash flow of $867 million, our franchise remains well positioned from an earnings, cash flow, and balance sheet perspective. Earlier this week, we were pleased that Moody's upgraded Essent Guaranty's insurance financial strength rating to A2 and Essent Group's senior unsecured debt rating to Baa2. We believe these actions reflect our consistent strong results, high-quality insured portfolio, financial flexibility, and the benefits of our comprehensive reinsurance program. Our capital strategy is to maintain a conservative balance sheet, withstand a severe stress, and preserve optionality for strategic growth opportunities. We continue to believe that success in our business is best measured by growth in book value per share as we look to optimize returns over the long term. In addition, our strong capital position and slowdown in portfolio growth allows us to be active in returning capital to shareholders. With that in mind, I am pleased to announce that our Board has approved a common dividend of $0.31 for the third quarter of 2025. Further, year-to-date through July 31, we repurchased nearly 7 million shares for approximately $390 million. Now let me turn the call over to Dave.

David Bruce 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 second quarter, we earned $1.93 per diluted share compared to $1.69 last quarter and $1.91 in the second quarter a year ago. My comments today are going to focus primarily on the results of our Mortgage Insurance segment which aggregates our U.S. mortgage insurance business and the GSE and other mortgage reinsurance business at our subsidiary, Essent Re. There's additional information or in corporate and other results an exhibit of the financial supplement. Our U.S. mortgage insurance portfolio ended the second quarter with insurance in force of $246.8 billion, an increase of $2.1 billion from March 31 and an increase of $6.1 billion or 2.5% compared to $240.7 billion at June 30, 2024. Persistency at June 30, 2025, was 85.8% and essentially unchanged from the first quarter of 2025. Mortgage Insurance net premium earned for the second quarter of 2025 was $234 million and included $13.6 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 second quarter was 41 basis points and the net average premium rate was 36 basis points, both consistent with last quarter. Our mortgage insurance provision for losses and loss adjustment expenses was $15.4 million in the second quarter of 2025 compared to $30.7 million in the first quarter of 2025 and a benefit of $1.2 million in the second quarter a year ago. At June 30, the default rate on the U.S. mortgage insurance portfolio was 2.12%, down 7 basis points from 2.19% at March 31, 2025. While we continue to observe a decline in the number of defaults associated with Hurricanes Helene and Milton during the second quarter due to cure activity, we made no changes to the reserve for hurricane-related defaults as this amount continues to be our best estimate of ultimate losses to be incurred for claims associated with those defaults. Mortgage Insurance operating expenses in the second quarter were $36.3 million and the expense ratio was 15.5% compared to $43.6 million and 18.7% in the first quarter. As a reminder, in April, we entered into two excess of loss transactions covering our 2025 and 2026 new insurance written effective July 1 of each year with panels of highly rated reinsurers. In addition, in April, the ceding percentage of our affiliate quota share with Essent Re increased from 35% to 50%, retroactive to NIW starting from January 1, 2025. At June 30, Essent Guaranty's PMIER efficiency ratio was strong at 176%, with $1.6 billion in excess available assets. Consolidated net investment income increased $1.1 million or 2% to $59.3 million in the second quarter of 2025 compared to last quarter due primarily to a modest increase in the overall yield of the portfolio. As Mark noted, our total holding company liquidity remains strong and includes $500 million of undrawn revolver capacity under our committed credit facility. At June 30, we had $500 million of senior unsecured notes outstanding and our debt-to-capital ratio was 8%. During the second quarter, Essent Guaranty paid a dividend of $65 million to its U.S. holding company. As of July 1, Essent Guaranty can pay additional ordinary dividends of $366 million in 2025. At quarter end, Essent Guaranty's statutory capital was $3.7 billion, with a capital ratio of 9.2:1. Those statutory capital includes $2.6 million of contingency reserves at June 30. During the second quarter, Essent Re paid a dividend of $120 million to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $3.9 to shareholders, and we repurchased 3 million shares for $171 million. In July 2025, we repurchased 1 million shares for $59 million. Now let me turn the call back over to Mark.

Mark Anthony Casale, Chairman and CEO

Thanks, Dave. In closing, we are pleased with our second quarter financial results as Essent continues to generate high-quality earnings while our balance sheet and liquidity remains strong. Our outlook for housing remains constructive over the long term, and we believe 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 the 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

Your first question comes from Terry Ma with Barclays.

Terry Ma, Analyst

I wanted to ask about home prices and your expectations going forward. To the extent home prices trend negative, how do you think about pricing on a go-forward basis? And then second, how would you feel about the more recent vintages that the industry has underwritten, which has seen just less home price appreciation overall?

Mark Anthony Casale, Chairman and CEO

I think regarding home price appreciation and where we see home prices heading, it really varies at the MSA level. We have a detailed forward-looking model for all the MSAs. The main driving factors are month supply, recent home price appreciation, and job growth. We anticipate home prices will continue to rise in certain areas, primarily due to limited supply, while some areas may experience a decline, which we have expected for some time, possibly around 5% to 10% in specific markets. Overall, that's actually a positive development. Some markets have experienced rapid growth, nearly a 50% increase over a few years, while income growth has remained at 3% to 4% and interest rates have doubled. This is why we've seen a slowdown in the housing market. We are emerging from what could be termed the COVID bubble, characterized by low rates and high demand. Looking ahead, as affordability normalizes, a combination of job growth, stabilization or slight decline in housing price appreciation in specific areas, and some relief in interest rates will be necessary. In some markets, a decrease in home prices could be beneficial for borrowers. There is significant emphasis in D.C. on affordability, and our lenders are focused on this issue as well. It's challenging to secure a mortgage these days, especially since the average age of a first-time homebuyer has risen to 38, while historically it has been in the low 30s. This indicates that people are struggling to buy homes. If a slight decline in housing price appreciation can help improve affordability, I'm in favor of it. Regarding our embedded equity, I’m not overly concerned. While newer vintages may be more exposed, they are performing fairly normally. Historically, our portfolio was around 81% to 82% mark-to-market before COVID, and currently, it’s slightly below that. If it returns to that level, it's considered normal business. We have consistently priced our new business differently, using a market of focus approach. Strong income growth and low supply in a market can still make it attractive to us, even if home price appreciation has risen significantly. For example, despite warnings about Cape Coral in The Wall Street Journal, the default rates there are similar to our overall portfolio, maybe just slightly higher. In Austin, our default rate is actually lower than the rest of our portfolio. It's important to avoid drawing broad conclusions from a high-level perspective. When examining our individual markets at Essent, the returns remain stable. Furthermore, we have a clear understanding of our credit strategy and how we are managing our capital.

Terry Ma, Analyst

Got it. Super helpful. And I guess maybe on just credit for the quarter. New defaults were up 9% year-over-year. The pace of increase has kind of decelerated markedly in the last few quarters. It seems like it's pretty consistent across the MIs that I cover. So I guess any color on the makeup of new defaults that you've seen in the last quarter or two? And I guess, what's the outlook there?

Mark Anthony Casale, Chairman and CEO

Yes, new defaults are nothing surprising and are consistent with previous quarters. From an investor perspective, it's important to note that we are returning to a normal seasonal pattern regarding defaults, where we typically see a decline in the first half of the year followed by a slight increase in the second half. This normal seasoning pattern was evident last year and caught many off guard when our defaults decreased in the first half. Currently, the default rate is around 2.12% out of approximately 811,000 or 812,000 loans. While it may fluctuate a bit, overall, considering the embedded equity in the portfolio, even those that transition to defaults, depending on their vintage, have a lower probability of causing significant issues. Overall, from a credit perspective, we feel confident about the first loss outlook.

Operator, Operator

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

Bose Thomas George, Analyst

On the buybacks, would you characterize the pace of your buybacks this year as opportunistic? Or is there any change in how you're thinking about excess capital, which has obviously built quite a bit over the last couple of years?

Mark Anthony Casale, Chairman and CEO

It's a bit of both, Bose. We are sensitive to valuation when it comes to buybacks, and we have a framework that we use which varies each quarter based on our outlook for credit and potential investment opportunities. The threshold is quite high considering the returns from our core business. As we've mentioned before, we maintain a retained and investment mindset, but we haven't made any investments in recent years, leading to a buildup of excess capital. We appreciate the current valuation and believe it's beneficial for shareholders, so we consider it a smart use of funds. Following our actions in July, I expect no changes for the rest of the year. It's possible that we won’t change our approach, and we will have additional information next week in an investor presentation regarding the embedded value of our portfolio. One of our competitors showcased something similar a couple of years ago and then stopped, but I think it's a valuable slide that analysts and investors should see. With around $5.7 billion in capital, which is roughly equivalent to our market cap, we're not fully reflecting the $245 billion in insurance in force that earns a 40 basis points yield. If you assume a certain combined ratio over four to five years and consider the investment portfolio valued at $6 billion to $6.5 billion yielding nearly $4 million, there's substantial embedded value there that we didn't have 3 or 4 years ago. Depending on your chosen discount rate, that could translate to an additional $15 to $20 in stock valuation related to book value. This doesn't account for any recognition of our platform's value as one of the six entities in the country aiding low down payment borrowers through top lenders back to the GSEs. Overall, this is something I believe investors should know about, and it's a consideration for all our competitors too, not just us. This aspect merits more attention. Considering the current valuation, we feel confident in repurchasing a significant amount of shares at these prices.

Bose Thomas George, Analyst

That's great. Very helpful. And then just one follow-up on the buybacks. So what was the dollar amount that was spent just during the second quarter?

David Bruce Weinstock, Chief Financial Officer

Bose, it's Dave Weinstock. So we purchased 3 million shares at $171 million in the second quarter.

Operator, Operator

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

Douglas Michael Harter, Analyst

Mark, just I guess following up on that embedded value and the buyback. How are you thinking about sizing it, what are the limitations of kind of cash flow up to the holding company? And just how do you think about holding back for opportunities that may or may not present themselves versus kind of buying back today?

Mark Anthony Casale, Chairman and CEO

No, it's a good question. There's clearly a limit to how much cash can flow back to the group. We get cash back through U.S. holdings, which is the core. We dividend up from Guaranty to Holdings, and then it goes to the Group, and we also have Essent Re. Recently, we've used a bit more of Essent Re because it's more tax efficient. There is a limit to what we can pay out. When thinking about payout ratios, 100 is probably the upper limit in terms of how cash moves through the system, not that we would necessarily reach that. If you look at the upper end, it's just over where it was in the first half of the year, which is a reasonable level. For assessing excess capital, we've received many questions over the years. PMIERs is certainly one aspect we consider, but we also evaluate it from an enterprise perspective, as we include Essent Re. We analyze it with respect to consolidated capital requirements and needs, and we run various stress tests, including the Moody's S4 stress and their severity model, both of which were considered during our recent upgrade. It’s significant that we now have an independent party reviewing our balance sheet and risk, confirming comfort with our single A level. This is positive news for investors and bondholders. We will continue to evaluate it against the Great Financial Crisis as well. We need to remember that we are in an upper tier and own the first loss, so we are very secure in that position. We are focused on earnings versus capital, and we hedge the mezzanine risk. Our real risk comes from what returns to the top, which may have a low probability—and low doesn’t mean zero. Therefore, we need to ensure we have ample capital from a PMIER standpoint, noting that PMIERs can be quite procyclical. There’s a liquidity component to the MIs that not all investors may recognize. We consider both capital and P&L, as well as PMIERs. Our goal is to have sufficient capital to not only withstand potential challenges but also be ready to seize opportunistic moments, similar to our actions in 2020 when we raised capital and took on more business than our competitors, which we are still benefiting from today. We aim to be well-equipped across a range of economic scenarios, so we aren’t caught off guard. Given our buybacks in the first half of the year, we feel assured about our position and still have capital to return to shareholders. Some of our current capacity is due to the buildup over the past couple of years. We have it, we are comfortable, and we are fortunate. While everyone wants their stock price to rise, if you're planning to buy shares back, you generally prefer the current valuation. So we aren't overly concerned about that aspect either.

Operator, Operator

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

Richard Barry Shane, Analyst

I would like to explore the topic of persistency a bit more. When we analyze the persistency by vintage, we see some variation. The persistency in the 2023 vintage is slightly lower, which is understandable given the aging of previous vintages. This likely means that there are borrowers who are attempting to take advantage of the refinancing opportunities. The other vintages, specifically 2020 and 2021, also show a slight decline in persistency. I would like to investigate this further. Is this decline simply due to the natural aging process of those vintages? Can we anticipate that, regardless of interest rates, persistency will continue to trend downward? Or are there outside factors at play, such as borrowers taking second loans and brokers facilitating appraisals to assist borrowers with their PMI?

Mark Anthony Casale, Chairman and CEO

There's a lot to consider in your question. When it comes to persistency, part of it is due to the fact that our persistency tends to be on the higher side because we avoid placing much in the lower range of high loan-to-value ratios, like 80% to 85%. In that segment, we might hold the smallest share in the industry. A higher loan-to-value ratio, while it carries more risk, does contribute slightly to better persistency. Looking at the earlier books from 2021, I believe they are simply maturing. As time goes on, especially for those who purchased homes during that period — particularly as families grow and interest rates shift — they may look to upgrade. This is a natural occurrence as the portfolio matures. Regarding second mortgages, I think there is a lot of conversation about them, but I see them and home equity loans continuing to rise. If a homeowner has a low 3% mortgage and needs more space, taking out a home equity loan can make perfect sense. The last time we checked, only about 3% of our portfolio included second mortgages, so it's not common. Adding a second mortgage becomes more complex with higher loan-to-value ratios, particularly for the government-sponsored enterprises. It's also worth noting the robustness of our business model. From 2014 to 2020, especially in 2018 when rates rose, we faced questions about the performance of our portfolio under increasing rates. We’d respond that there is a hedge in place, with a reduction in new insurance written, and persistency should remain solid. In 2022, this played out even more prominently as we could lock in 3% rates while benefiting from unexpected investment income. For years, our yields were under 2%, and we anticipated they would rise but they never did, until suddenly they reached 5%. This underscores the strength of our portfolio and our business model. We operate in a space we understand well and collect premium payments first, which gives us a cash flow advantage. The next logical question is about the impact of decreasing rates. I think persistency may decline in certain segments, particularly newer ones where rates are in the 6% range, but renewed new insurance written could help grow the portfolio. Timing is uncertain, and it ties back to affordability considerations. It must meet a certain threshold, but I believe there is a pent-up demand for housing. Ironically, the longer the current slowdown persists, the greater the potential upside will be when housing demand returns, which bodes well for Essent and the entire industry.

Operator, Operator

Your next question comes from the line of Mihir Bhatia with Bank of America.

Mihir Bhatia, Analyst

First, I wanted to follow up on the EssentEDGE point you just made, Mark. Specifically, EssentEDGE's next generation has been out for a couple of years. Can you discuss what you've observed so far? I appreciate your comment that we can't really tell how these engines are different given the low default rates, but could you share what you're seeing internally? Are you still investing in EssentEDGE, or is it more about collecting data and waiting for the fairway as you mentioned?

Mark Anthony Casale, Chairman and CEO

We haven't made significant investments over the past year after working to establish the second credit bureau. Given the current industry noise around the tri-merge, we may consider investing in a third bureau. Additionally, while I haven’t mentioned AI yet, it has advanced considerably in the last six months, presenting more opportunities for our IT group and other areas to expedite our processes. We’ve observed lenders making announcements that could inform our improvements over time, which I might not have anticipated a year ago when we felt more comfortable with the existing setup. For our investors, our earned premium yield is higher than the industry average, indicating our success with the credit engine, as our defaults remain comparable. Even a slight increase in basis points on a significant portfolio can add up. This illustrates how effectively our credit engine operates. Moreover, we’re testing pricing elasticity in certain markets to derive better value from individual loans.

Mihir Bhatia, Analyst

No, that is helpful and it's certainly something we see in the data. You mentioned AI, and my second question actually relates to AI, but it feels like it could pose a threat to your business. I was trying to understand the implications. Specifically, I'm referring to the situation where borrowers get an appraisal and cancel mortgage insurance. My understanding is that this is not very common, but as more data becomes available and fintechs try to create personal finance recommendations, do you worry about this becoming a more frequent request, to get an appraisal and cancel mortgage insurance from existing policies? How would something like that impact your business and returns?

Mark Anthony Casale, Chairman and CEO

Yes, it's been a topic of discussion for the past five years since interest rates decreased. It's not very typical in our industry, and there is definitely some resistance to it. However, most major servicers do inform borrowers, so they are generally aware. The amounts involved are relatively small, and refinancing a difference of 30 to 40 basis points requires effort. While it’s possible, it’s not something we worry about excessively. I believe that advancements in AI will have an effect; I would be surprised if they didn’t. Refinancing is already very efficient with our lenders, and I expect it to become even smoother. When you talk to our leading lenders about their technology investments, the overarching theme is that it ultimately benefits the borrower. Currently, mortgage insurance automatically cancels below an 80% loan-to-value ratio, which is beneficial for the borrower. If there is a downturn in rates, and borrowers are stuck with their mortgages while their home values rise and they can easily get an appraisal to cancel their mortgage insurance, that's advantageous for them and indicates they are good borrowers. Overall, while there might be some economic effects, I don't anticipate them to be significant, and we won’t spend much time worrying about it.

Mihir Bhatia, Analyst

Got it. And then just if I could squeeze in one question on just OpEx. Any thoughts on outlook for the year? I think there was a little bit of a downtick this quarter? Any call outs there?

David Bruce Weinstock, Chief Financial Officer

Mihir, it's Dave Weinstock. We feel really good about our guidance. Looking at our performance over the past six months, we believe we are on track for our target of 160 to 165, likely leaning towards the lower end. However, results can vary quarter to quarter due to changes in production volumes and staffing levels. Overall, we are satisfied with where we stand.

Operator, Operator

And I'm showing no further questions at this time. I would like to turn it back to management for any closing remarks.

Mark Anthony Casale, Chairman and CEO

I'd like to thank everyone for their time today and enjoy the rest of your summer.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for attending. You may now disconnect.