Earnings Call Transcript - ESNT Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for joining us. My name is Abby, and I will be your conference operator today. I would like to welcome everyone to the Essent Group Ltd. Third Quarter Earnings Call. I will now turn the conference over to Phil Stefano with Investor Relations. You may begin.

Philip Stefano, Investor Relations

Thank you, Abby. 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 third 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 Casale, CEO

Thanks, Phil, and good morning, everyone. Earlier today, we released our third quarter 2025 financial results. Our performance this quarter again underscores the resilience of our business as we continue to benefit from favorable credit trends and the interest rate environment, which remains a tailwind for both persistency and investment income. These results reflect the strength of our buy, manage, and distribute operating model, which we believe is well suited to navigate a range of macroeconomic scenarios and generate high-quality earnings. For the third quarter of 2025, we reported net income of $164 million compared to $176 million a year ago. On a diluted per share basis, we earned $1.67 for the third quarter compared to $1.65 a year ago. On an annualized basis, our year-to-date return on equity was 13% through the third quarter. As of September 30, our U.S. Mortgage Insurance in force was $249 billion, a 2% increase versus a year ago. Our 12-month persistency on September 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. 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 portfolio default rate increased modestly from the second quarter of 2025, reflecting the normal seasonality of the Mortgage Insurance business. Meanwhile, we continue to believe that the substantial home equity embedded in our in-force book should mitigate ultimate claims. Our consolidated cash and investments as of September 30 totaled $6.6 billion with an annualized investment yield in the third quarter of 3.9%. Our new money yield in the third 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 $1 billion in cash and investments at the holding companies. With a 12-month operating cash flow of $854 million through the third quarter, our franchise remains well positioned from an earnings, cash flow, and balance sheet perspective. We remain committed to a prudent and conservative capital strategy that allows us to maintain a strong balance sheet to navigate market volatility while preserving the flexibility to invest in strategic growth. Thanks to our robust capital position and strength in earnings, we are well positioned to actively return capital to shareholders in a value-accretive fashion. With that in mind, year-to-date through October 31, we have repurchased nearly 9 million shares for over $500 million. At the same time, I am pleased to announce that our Board has approved a common dividend of $0.31 for the fourth quarter of 2025 and a new $500 million share repurchase authorization that runs through year-end 2027. Now let me turn the call over to Dave.

David Weinstock, CFO

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the third quarter, we earned $1.67 per diluted share compared to $1.93 last quarter and $1.65 in the third 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 is additional information on corporate and other results in Exhibit O of the financial supplement. Our U.S. Mortgage Insurance portfolio ended the third quarter with insurance in force of $248.8 billion, an increase of $2 billion from June 30, and an increase of $5.8 billion or 2.4% compared to $243 billion at September 30, 2024. Persistency at September 30, 2025, was 86% compared to 85.8% at June 30, 2025. Mortgage Insurance net premium earned for the third quarter of 2025 was $232 million and included $15.9 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 third quarter was 41 basis points, consistent with last quarter, and the average net premium rate was 35 basis points, down 1 basis point from last quarter. Our U.S. Mortgage Insurance provision for losses and loss adjustment expenses was $44.2 million in the third quarter of 2025 compared to $15.4 million in the second quarter of 2025 and $29.8 million in the third quarter a year ago. At September 30, the default rate on the U.S. Mortgage Insurance portfolio was 2.29%, up 17 basis points from 2.12% at June 30, 2025. Mortgage Insurance operating expenses in the third quarter were $34.2 million, and the expense ratio was 14.8% compared to $36.3 million and 15.5% last quarter. At September 30, Essent Guaranty's PMIERs sufficiency ratio was strong at 177% with $1.6 billion in excess of required assets. Consolidated net investment income and our average cash investment portfolio balance in the third quarter were largely unchanged from last quarter due to our share repurchase activity. In the third quarter of 2025, we increased our 2025 estimated annual effective tax rate, excluding the impact of discrete items from 15.4% to 16.2%. This change was primarily due to withholding taxes incurred on a third quarter dividend from Essent U.S. Holdings to its offshore parent company. As Mark noted, our holding company liquidity remains strong and includes $500 million of undrawn revolver capacity under our committed credit facility. At September 30, we had $500 million of senior unsecured notes outstanding, and our debt-to-capital ratio was 8%. During the third quarter, Essent Guaranty paid a dividend of $85 million to its U.S. holding company. As of October 1, Essent Guaranty can pay additional ordinary dividends of $281 million in 2025. At quarter end, Essent Guaranty's statutory capital was $3.7 billion with a risk-to-capital ratio of 8.9:1. Note that statutory capital includes $2.6 billion of contingency reserves at September 30. During the third quarter, Essent Re paid a dividend of $120 million to Essent Group. Also in the third quarter, Essent Group paid cash dividends totaling $30.1 million to shareholders, and we repurchased 2.1 million shares for $122 million. In October 2025, we repurchased 837,000 shares for $50 million. Now let me turn the call back over to Mark.

Mark Casale, CEO

Thanks, Dave. In closing, we are pleased with our third quarter financial results as Essent continues to generate high-quality earnings, while our balance sheet and liquidity remains strong. Our performance this quarter reflects the strength and resilience of our franchise, while Essent remains well positioned to navigate a range of scenarios 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. We believe this approach is in the best long-term interest of our stakeholders and that Essent is well positioned to deliver attractive returns for our shareholders. Now let's get to your questions.

Operator, Operator

And our first question comes from Terry Ma with Barclays.

Terry Ma, Analyst

Just wanted to start off with credit. New notices were a bit lower than what we had, but the provision on those notices were higher. So any color on kind of just the makeup from a vintage or even geography perspective this quarter?

Mark Casale, CEO

Yes, Terry, it's Mark. I wouldn’t say there’s much to discuss regarding geography or trends. One point I’d like to highlight for you analysts is that our average loan size has been increasing. For years, it was around $230,000, but it really picked up after the GSEs raised their limits post-COVID. Currently, our average loan size is close to $300,000. As a result, when larger loans enter default, it will require a larger provision. However, I wouldn’t read too much into it beyond that. The default rate appears to be relatively stable, and from a credit perspective, there’s nothing that raises any immediate concerns for us.

Terry Ma, Analyst

Got it. That's helpful. And then maybe just a follow-up on the claims amount. The number was higher and also the severity. So like anything to call out there, like anything idiosyncratic? Or is there more of a trend?

David Weinstock, CFO

Terry, it's Dave Weinstock. Yes, there's really nothing to point out there. A lot of that is going to depend on when we get documents in and when the claims are fully adjudicated and ready for payment. And so you're going to see fluctuations based on what the underlying claims are. But at the end of the day, there are not a lot of claims there. And the biggest takeaway really is that the severity continues to be well below what we're reserving at. So we're getting favorable results there.

Operator, Operator

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

Bose George, Analyst

First, just on the ceded premiums, it was kind of the high end of the range. Is that a good level going forward? Or does that just bounce around depending on the timing of when you're doing the reinsurance transactions?

David Weinstock, CFO

Yes, it will fluctuate somewhat based on default and provision activity, which is seasonal. In the first half of the year, you may have noticed the ceded premium was slightly lower, coinciding with our more favorable and reduced defaults. As we've mentioned, the second half of the year typically sees an increase, so you can expect to see a bit of an uptick in the ceded premium.

Mark Casale, CEO

Yes. And also keep in mind, Bose, we raised the quota share this year to 25%. So that is going to create a little bit more volatility. At the end of the day, it comes through the wash, right? So in terms of the mix between the provision and expenses and ceding commission, but yes, it will bounce around a little bit more. So I'd be conscious of that in your models.

Bose George, Analyst

Okay. Great. And then just in terms of the tax rate, what drove the higher tax rate? And then just can you remind us just based on how much you're ceding, et cetera, where you think the tax rate is going to be over the next, say, 12 months?

Mark Casale, CEO

Yes, I believe Dave mentioned it in the script. A significant factor is the tax friction as we move from guarantees in the U.S. to Bermuda and then out to shareholders. I anticipate a tax rate of around 16% or perhaps slightly higher moving forward. I would recommend being relatively conservative with your models regarding this. Ultimately, we are returning much more capital to shareholders, signaling that we do not expect significant changes, especially since we still have $1 billion in cash at the holding company and our stock is trading near book value. As noted in our investor deck, which will be released after earnings, we believe the intrinsic value of the business is much greater than our current valuation. The calculations are straightforward; we have $6 billion in cash and $6 billion in equity, and we are trading around $6 billion, which does not account for the $250 billion in insurance we have in force. There’s significant embedded value, which we have demonstrated over the past decade through our cash flow. In the last 12 months, we generated $854 million in cash flow. Given our capital position and the fact that we are still generating unit economics in the range of 12% to 14%, we believe we offer great value. While distributing cash does create some friction, from a shareholder’s standpoint, we may incur a slightly higher tax rate, but reducing the share count and delivering value to shareholders makes it a straightforward decision.

Operator, Operator

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

Richard Shane, Analyst

I'm looking at Exhibit K, and one trend that is pretty consistent is the increase in severity rates, and that makes sense given slowing home price appreciation and vintage mix. It was 78% this quarter. I'm curious, long-term where you think that could go? Are we sort of asymptotically approaching the limit there? Or should we expect that to continue to rise?

Mark Casale, CEO

Yes. I mean, I'm not sure if you would expect it to rise. The provision is at 100, just so you know. The embedded home price appreciation in the book is still around 75. In terms of mark-to-market loan-to-value, some of it is just timing. If loans from the later vintages, say '23 or '24, go into default, there will be a higher provision, or if they go into claim, we will pay a higher claim there because they have less embedded value. But looking at the portfolio level, we’re not overly concerned. We are dealing with relatively low losses. Remember, the real risk in our business is that we own the first loss position. You can think of it as two to three claims out of 100. We hedge above that, into the 6 to 7 range, and we reattach above that. That's the risk. We operate like a specialty insurance business, with our major concern being a severe macroeconomic recession. That's when we hold capital and consider the PMIERs and various stress tests, like Moody's Constant severity S4 or the Global Financial Crisis. We focus on ensuring we are solid in those areas, and we clearly are, as evidenced by the capital we are using to repurchase shares. Back to the matter at hand, we are careful in how we provision based on severity since provisions are based on an actuarial model. We don't typically make significant adjustments quarter-to-quarter or even year-to-year. I understand you’re trying to identify trends, and Terry mentioned the trends around new notices, which are all valid for your models. But taking a step back, the key metric for the quarter, is that we produced $854 million in cash over the past 12 months. So, while not trying to be too high-level, I think it’s essential to provide context around these numbers.

Richard Shane, Analyst

No. It's a valid point, Mark. Given how low losses have been for such a long time, a small dollar change appears more significant in percentage terms. We are all aware of this and are trying to understand what the normalized returns for the business might be. Do you think we are approaching those levels? You've experienced an exceptional period for many reasons we've discussed. As the business normalizes and returns to the levels we spoke about a decade ago, do you believe we are getting there now?

Mark Casale, CEO

No, that's a valid question. Rick, we've been analyzing this. Let’s reflect on the past 35 years, starting from 1990, which marks the beginning of modern Fannie and Freddie. If we set aside the Great Financial Crisis, which is a tough task, the average loss rate on Fannie and Freddie back loans is under 1%. This is the reality of our business; it’s solid and dependable. We’ve seen significant changes since the financial crisis, particularly with the introduction of Dodd-Frank qualified mortgage rules, which eliminated 35% of the loans made during that time from qualifying anymore. These loans are now either going to FHA, non-QM, or not being originated at all, often resulting in those borrowers moving into single-family rentals. That's a positive outcome for them. Additionally, there has been an improvement in the sophistication of the DU and LP systems at the GSEs, enhancing our quality control markedly over the last 15 years. As a result, the credit standards in our business have become exceptionally strong, and we don’t anticipate any alterations unless there’s GSE reform. Provided the market remains where it is now, we expect little fluctuation in credit quality. In fact, our credit metrics over the last two quarters have shown the best FICO scores since our company’s inception. This reflects a tougher qualification landscape, but overall, the credit quality remains outstanding. From a public policy perspective, it’s noteworthy that 65% of our borrowers are first-time homeowners. I recently met a young man who secured mortgage insurance through one of our partners for only $65 a month with a 10% down payment, which is an excellent value for customers. Our borrowers are our primary focus. Some of our long-term investors often ask me if this is the peak, and I would say it has been favorable for quite some time. Yes, there might be some quarter-to-quarter or year-to-year variability. If unemployment rises, we may incur some losses; however, our risk is relatively contained until we hit a certain threshold. This gives us confidence in maintaining our quarterly dividend and adjusting our capital return strategy to shareholders significantly over the past year. We have gathered cash and maintained a philosophy of retaining and investing, but we haven't made substantial investments elsewhere. We're now looking at investing in our company itself as the best use of our resources. If we maintain this repurchase pace, our long-term shareholders, including senior management, will own a greater share of the company. Personally, if I’m going to own a business, this is my preferred choice. Apologies for the lengthy response, but I aimed to provide some context for the investors on the line.

Richard Shane, Analyst

No. Mark, look, I appreciate it. And I suspect there are some folks who are listening to this call imagining the two of us on rocking chairs debating the stuff. And that's okay, too. I appreciate the answer.

Operator, Operator

And our next question comes from Mihir Bhatia with Bank of America.

Mihir Bhatia, Analyst

I want to follow up on Rick's last question regarding the current underwriting guidelines. There was news yesterday about Fannie Mae eliminating the minimum credit score requirements. There has also been some discussion in Washington about taking a more active role in the housing market to increase housing demand. I’m curious if you are observing any signs of that from your perspective. Are originators attempting to approve more loans that they might not have considered a couple of years ago? I’d like to know what that situation looks like.

Mark Casale, CEO

It's a good question. There is a lot of discussion around credit scores and how different scoring models can qualify more borrowers. The reality is that the government-sponsored enterprises haven't changed their systems yet, so there won't be any changes until that happens. Lenders cannot currently bypass the GSEs’ systems. The GSEs have robust systems, and their underwriting processes are very sophisticated. If loans do get approved, the quality control and repurchase programs will likely revert those costs back to lenders. Lenders understand that the focus now is on reducing origination costs, unlike before the crisis when smaller mortgage bankers would expand credit when production dipped. Currently, getting loans approved through the GSEs or larger correspondent lenders is challenging. Therefore, lenders need to manage their costs effectively, which aligns with our goals as a credit provider. We're not particularly concerned about changes. If some changes were to occur, we are not reliant on FICO scores since our credit engine assesses many variables in addition to those scores. In fact, our model performs better in more varied market conditions. It thrives when we can choose selectively rather than strictly relying on credit scores, so I believe we are in a good position without any noticeable weaknesses in the system as of now.

Operator, Operator

And our next question comes from Doug Harter with UBS.

Douglas Harter, Analyst

Can you talk about your plans to upstream capital from the MI subsidiary? It sounds like you have a lot of capacity left for the year. Do you plan to kind of spill that over or do a large dividend in the fourth quarter?

Mark Casale, CEO

I believe that the dividends will remain fairly consistent, with the possibility of a slightly larger amount in the fourth quarter. As we evaluate PMIERs, Doug and the credit situation, we are confident in our ability to continue transferring cash from Guaranty to U.S. Holdings. There is a bit of difficulty in bringing it back to the group level, but that's not a significant concern. Additionally, the quota share reinsurance, which we increased to 50% earlier this year, provides another avenue to channel cash up to the holding company.

Douglas Harter, Analyst

Can you discuss your thoughts on the benefits of MI as a robust business compared to exploring further diversification and other growth opportunities, especially after acquiring Title some time ago?

Mark Casale, CEO

Yes, that's a good question. So far, Title has performed largely as we anticipated, considering the current high rates. If interest rates decrease, we are positioned to benefit significantly due to our focus on lenders. We have an underwriter that is still in early growth stages, mainly in Texas, Florida, and parts of the Southeast. This aspect of our business, which is focused on purchases, remains small. The true leverage lies with lenders and refinancing. We have been adding lenders and are developing a new system while continuing to build the business. It’s still in corporate and other categories, and you can think of that as an incubator. If it grows enough, it could emerge as its own segment; if not, it may remain small. Essent Re has opportunities beyond mortgage as well, but we haven't acted on those yet. I see it as another incubator or call option. For now, our focus is on the MI business for cash flow. When considering investment opportunities like title or other acquisitions, we believe our stock currently offers the best value, and we are acting accordingly. I don't anticipate that changing unless there is a significant shift in the stock price. If such a movement occurs, we might even consider a special dividend. We're consistently looking for ways to return capital to shareholders but need substantial justification to do so, given the strength of the MI business. Our current book value per share is approximately $60, slightly below $58. I expect it to finish the year around $60. If we project a 10% to 12% annual growth, that book value per share could reach $85 to $90 in four to five years. When we look at acquisitions, they need to either enhance our book value per share target or help us reach that target more quickly, while also strengthening the company. That sets a high bar. We're well-versed in this business and, as I mentioned earlier, it’s a solid industry. We acknowledge that there will be challenges along the way, but that’s why we have capital, to navigate those challenges, and we also have reinsurance as an additional safety net. We anticipate regular losses and prepare for unexpected ones as well. We do not try to predict market directions; rather, we prepare for various potential outcomes based on our extensive experience. In summary, the investment remains valuable, and I do not foresee any changes unless something truly exceptional arises.

Operator, Operator

And there are no additional questions at this time. So I will now turn the conference back over to management for closing remarks.

Mark Casale, CEO

Thanks, everyone, for their time and questions. And have a great weekend.

Operator, Operator

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.