Essent Group Ltd. (ESNT) Q3 2025 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Ltd. Third Quarter Earnings Call. [Operator Instructions] And I would now like to turn the conference over to Phil Stefano with Investor Relations. You may begin.

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.

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.

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 apple 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 notes -- 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.

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 Instructions] And our first question comes from the line of Terry Ma with Barclays.

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?

Yes. Terry, it's Mark. I wouldn't say there's nothing really to read out in terms of geography or trends. The one thing for you guys as analysts, we pointed this out a few quarters ago is just our average loan size continues to increase. I mean ever since for years, it was like $230,000. And when the GSEs started raising their limits and it really kind of picked up post-COVID. So our average loan size, if you just look through the stat supplement for the insurance force is close to $300,000. So again, larger loans when they come through kind of into default, it's going to be a larger provision. So I wouldn't read any more into it than that. I think the -- again, the default rate is relatively flattish. And I think from a credit position, there's nothing we're really seeing that concerns us at the current time.

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?

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.

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

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?

Bose, it's Dave Weinstock. Yes, it's going to bounce around a little bit based on default and provision activity. So it's seasonal. I think you saw the ceded premium being a little bit lower in the first half of the year, similar to where you see our defaults being more favorable and lower. And this is the seasonal second half of the year, as we've talked about, we definitely -- you generally see an uptick. And so you're going to see a little bit of an uptick in the ceded premium.

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.

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?

Yes. I mean I think Dave alluded to it in the script, a lot of it is just a little bit of the tax friction moving from kind of guarantee to U.S. up to Bermuda and out to shareholders. So I think 16 and maybe a touch higher going forward. I would think through that with your models, I'd be relatively conservative those. And it really gets back to the fact that we're just distributing a lot more capital back to shareholders. And that's kind of a little bit of a signal that we don't really see it changing much, given where sitting with still $1 billion of cash at the holdco and kind of where the stock is right around bookish value. And I think we pointed this out last time in our investor deck, which will come out kind of post earnings, like the embedded value of the business, we believe, is much higher than kind of where we are today, right? And just again, it's simple math, it's nothing revolutionary. We have $6 billion of cash, $6 billion of equity. We trade right around $6-ish billion. It doesn't really give credit for the $250 billion of insurance in force that we have. And there's a significant embedded value. I think we've proven that over the past 10 years in terms of the cash flow. And just look, again, just we generated $854 million of cash flow over the last 12 months. So based on that and where we're -- just given the capital position, and we're still generating unit economics kind of in that 12-ish to 14-ish range. We think it's the best value. So I think we'll continue to do that. But there, again, it just getting the cash out is -- creates a little friction. But I think from a shareholder perspective, we'll pay a couple of extra bucks on the tax rate. But I think from lowering the share count and kind of delivering value to shareholders, it's a little bit of a no-brainer.

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

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 are we -- should we expect that to continue to rise?

Yes. I mean I wouldn't -- I don't know if you would expect it to rise. Again, we -- the provision is at 100, Rick, just so you know. The embedded HPA in the book is still kind of 75-ish. So I mean, in terms of mark-to-market LTV. So some of it is just timing, right? If somebody from the later vintages kind of call it, '23 or '24 goes into default, there's going to be a higher provision or if they go into claim, we're going to pay a higher claim there because they have less embedded value. But taking a step back just at the portfolio level, we're not going to get too fussed about it, Rick. I mean, again, you're talking about a relatively low losses. And remember, just -- and we point this out every quarter or 2, just what the real risk is in our business, right? Take from my seat, Rick, we own that first loss position, right? So call it 2 to 3 claims out of 100. We hedge out from above that kind of into that 6, 7 range, and we reattach above that. That's the risk in the business, right? We are a specialty insurance type business, almost like a cat where our catastrophe is a severe macroeconomic recession. And that's when we hold capital when we think about PMIERs, we think about the different stress tests that we run, whether it's Moody's Constant severity S4, the GFC, that's when we come in and think about it week-to-week or month-to-month. That's -- we're focused really on making sure we're fine there, and we clearly are given the amount of capital that we're using to repurchase share. So getting back to this, again, we clearly look at it. I think we're conservative in how we provision just from a severity standpoint because I think that's -- the severity is an actuarial -- I mean, the provisions is an actuarial-based model. So we don't really mess with it quarter-to-quarter, even year-to-year that much. So again, I'm just trying to -- from a big picture standpoint, sure, you're going to try to point out trends. And Terry pointed out the trends around the new notices, those are all good. That's like you guys have to do that for your models. But I think taken like a step back, the biggest metric for the quarter, Rick, is we produced $854 million of cash over the last 12 months. So again, not trying to get too high level, but I mean, I think it's important to kind of put context around some of these numbers.

No. Look, it's a fair point, Mark. Given how low losses have been for so long, a modest dollar movement looks like a larger -- looks like a significant percentage movement. And I think we're all sensitive to that and trying to sort of, I think, understand what the normalized returns on the business are? And do you think we are approaching those levels? Or -- and look, you've enjoyed an extraordinary period for a long time, for a whole host of reasons that we've all talked about. But as the business normalizes and sort of reverts to the return levels that the two of us spoke about a decade ago? Or do you think we're getting there now?

No, it's a good question. And Rick, we've been studying this. So let's go back in time, right? Let's start with 1990, which is really the beginning of the modern day Fannie and Freddie. And let's just go with the last 35 years. If you take away the GFC, which it's hard to do, but just to stick with me here for a second, the average loss rate on Fannie and Freddie back loans is less than 1%. That, I believe, is actually -- so it's not this, "Oh my goodness, we have such a good run, when is it going to end?" This is it. This is the business. It's a great business. You're talking about, and again, and some of the things that caused the great financial crisis because you don't want to ignore that. And the reason we like the business, coming out of the crisis, you had the Dodd-Frank qualified mortgage rules. So 35% of the loans that were done during the crisis, they no longer qualify. They literally got the RIF-wrapped out of the industry. So that is now either going, it's going to either FHA or it's going to kind of non-QM or they're not being originated, which is the most case. A lot of those borrowers are ending up in single-family rental. It's a great outcome for them, right? So then all of a sudden then you add in the increased, I would say, sophistication of DU and LP at the GSEs, their quality control has gotten significantly better. I mean, over the last 15 years. So all of a sudden, the credit guardrails around our business are exceptional, and we don't see it changing. Unless there's something happens with GSE reform, and clearly, we look at that. But as long as the market is where it is today, this is a very narrow fairway. And so we don't see really credit changing that much. It's hard. I mean, actually, our credit for this -- the last 2 quarters, Rick, was the best FICO's we've had since we started the company. So -- and part of that's affordability, part of it is affordability, like just folks are having a harder time qualifying. But the credit quality in this business is exceptional. And just from a public policy standpoint, 65% of our borrowers are first-time homeowners. I mean, I was with a young guy last week who just got mortgage insurance through one of our clients. He's paying like $65 a month. You put 10% down. I mean you can't beat it. It's a great value to the customer, which you always want to have, right? The borrowers is our ultimate customer, and then I think the math for us. So I would say from -- and some of our longer-term investors kind of know this clearly, I would stop and one of our other analysts has always asked me, Mark, is this as good as it gets? Guys, It's been good for a long time. I mean -- and I don't really -- again, there's going to be some volatility Rick, quarter-to-quarter or year-to-year. Look, If unemployment goes up, we're probably going to pay some losses. But remember, we're kind of capped until we hit until we go through that mezz piece. So it's relatively well boxed. Hence, our confidence in paying the quarterly dividend and right now in terms of where we are returning capital to shareholders has been quite a shift the past 12 months, but part of it was we've just continued to accumulate cash and we've had this retain and invest mentality. We just haven't invested in anything. And so we look at it now and say the best investment we can make is in the company. And if we keep this pace up, Rick, every time you repurchase shares, our long-term owners, which include the senior management team, we own a little bit more of the company. And if I'm going to own a business, this is my favorite business. So we'll see. So sorry for the long-winded answer, but I want to again try to give some of the investors on the phone some context.

No. Mark, look, I appreciate it. And I suspect there are some folks who are listening to this call imagining the 2 of us on rocking chairs debating the stuff. And that's okay, too. I appreciate the answer.

[Operator Instructions] And our next question comes from the line of Mihir Bhatia with Bank of America.

I actually want to follow up on Rick's last question there about just about the guardrails, around underwriting currently. I think there was news yesterday about Fannie removing the minimum credit score requirements. There's been some noise out of Washington about trying to do -- play a more active role in housing or lower increased housing demand, if you will. And I was just wondering from your seat, are you seeing any signs of that? Are originators trying to get more stuff underneath, gets more stuff approved that maybe wouldn't have been -- they wouldn't have tried a couple of years ago. Just wondering what that looks like.

It's a good question. There is a lot of noise around kind of credit scores and Vantage and Fair Isaac and Vantage can qualify more borrowers, all those sort of things. The reality is, Mihir, the GSEs haven't changed their systems yet. So until that happens, there's really not going to be changed. So like a lender would be unable today to kind of "get something past the GSEs." It gets back to my point, the GSE's, their systems are fantastic. And in terms of DU and LP, very sophisticated. And if they do get through it, they're most likely their QC and repurchase program, they're going to put that back to lenders. So lenders have I think lenders have really understood that the game today, and you're seeing some of the bigger lenders do it, the game today is all about lowering and being efficient on origination cost. That hasn't always been the case. So if you go before the crisis, what would happened is if you get a small or midsized mortgage banker, and all a sudden production is down, they immediately go to credit expansion right? I wouldn't normally do that loan, but I have fixed costs, I'm going to try to get that loan in either through the GSEs or to whole loan buyers. You can't do that today. I mean, whether it's -- you're trying to get it through the GSEs, you're trying to go through some of the larger correspondent purchases like PennyMac, whose systems are also excellent. And it's not going to happen. So you're almost -- you have to either you have to manage costs. And again, from a credit provider, that's exactly where we want it. So we're not too worried about it. And if it were to go, we mentioned this last call, if it were to change, right, and I'm not saying it's going. If it were to change and you could have like kind of a wider fairway, so to speak, so more things qualify. The fact that our credit engine doesn't really rely on FICO, we're really -- we're almost credit score agnostic. We're looking at the 400 kind of variables underneath that along with things in the 1003, we're not too worried. We can see through that. In fact, our model works better when things are a little bit more disparate, so to speak. It doesn't work as well in a market like this. It kind of works more from a premium standpoint, picking and choosing, but credit, not -- you almost don't really need it from a FICO standpoint. So again, I think I would look at it that way. I think it's something that we're pleased with, but I don't see any kind of chink in the guardrails to date.

[Operator Instructions] And our next question comes from the line of Doug Harter with UBS.

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?

I think it's pretty consistent with the dividends. It might be a little bit larger in the fourth quarter for sure. I think, again, as we look at kind of PMIERs, Doug and credit and where it's going, we feel comfortable continuing to upstream cash from Guaranty to U.S. Holdings. And as I said earlier, there's a little bit of friction getting it back to the group level, but that's -- and that's not the worst problem to have. And also, we have the quota share reinsurance, that's one of the reasons we took it up to 50% earlier this year. That's another kind of backdoor way to get cash up to the holdco.

And then you -- obviously, you bought Title a little while ago. Can you just talk about how you're thinking about the benefit of the great business that is MI versus looking to further diversify and have other avenues of growth?

Yes. I mean I think right now, it's a good question. I think Title has performed pretty much in line with what we thought, if we would have thought rates would be this high, to try to be honest with you. I think if rates go lower, we're very levered to rates given the lender focus of the business. We have an underwriter. It's really kind of in it's still small stages growing primarily in Texas and Florida and a bit of the Southeast. That's kind of the purchase angle of the business, but it's small. So the real lever is lenders and refinance. And we've continued to add lenders, we're working on developing a new system. We're still building the business out per se, and we're fine with that. So it's kind of in corporate and other, Doug. And think of that almost as like an incubator. So again, if it gets big enough, it will pop up as its own segment. If it stays small, it stays small. And that could happen. And clearly, Essent Re has some opportunities outside of mortgage. We haven't really done anything yet, but there's things that we look at. So I would look at it as another "incubator". We kind of call them call options. But for the time being, clearly, the focus and where the cash flow is coming in from the MI business. And when we look at investment opportunities whether it's title, other acquisitions that come to us, we still feel at this time, our stock is the best value, and we're kind of voting with our feet there. And I don't really expect it to change absent like some large movement in the stock. And then if there's a large movement in the stock, which it's -- it would be nice per se, but not necessarily. If you're in the business of buying back shares and shrinking ownership, this isn't the worst place to be in. If the stock were to move outside of our range, we would probably do like a special dividend. We'll continue to look for ways to get capital back to shareholders. But given just how good the MI business is today we would need to -- again, there's going to have to be a good reason for us to do it. And I look at it, if you're looking at a way to kind of quantify it, our book value per share today is right around $60. It's a tad below 58-ish. It will finish -- my guess is it will finish the year around $60 Doug. So if we look and say, hey, we're going to grow it, 10%, 12% a year, which we've been doing, that book value per share over the next 4 or 5 years is going to be $85, $90, right? It's big picture, right? Just looking at the numbers. So as we look at an acquisition, it's going to have to either help us increase that book value per share target or achieve that book value per share target sooner, all else being equal or making us a stronger company and things like that. There's other factors in there. That's a pretty high bar. That's a pretty high bar. We kind of know this business well. And like what I've said, just in my response to Rick earlier, this is such a good business. We're a little bit spoiled and in terms of how good the business is, again, there's going to be some bumps along the road. There always are, but that's why you have capital, right? You have capital to withstand those bumps and reinsurance is another form of capital. We expect kind of those expected losses per se. And then you have capital on reinsurance for unexpected losses, they'll come, but that's what we're prepared for. We don't necessarily try to sit down and say, where is the market going? We try to prepare for every different avenue that the market potentially could go down. I mean, that just comes with experience. We've been doing this for quite a while. But that being said, so to sum it up, the investment right now continues to be an asset. I don't expect that to change absent something really special comes along.

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

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

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