Essent Group Ltd. ($ESNT)

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited First Quarter Earnings Call. [Operator Instructions] And I would now like to turn the conference over to Phil Stefano, 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 first quarter of 2026 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, 2026, 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 first quarter 2026 financial results, which continue to benefit from favorable credit performance and the impact of interest rates on both persistency and investment income. Our core MI business continues to generate strong cash flow, supporting a balanced approach to capital allocation that funds growth opportunities across our franchise and returns capital to shareholders. . For the first quarter of 2026, we reported net income of $172 million, or $1.82 per diluted share. On an annualized basis, our return on average equity was 12% year-to-date through the first quarter. As of March 31, our book value per share was $61.20, an increase of 11% from a year ago. Our outlook on housing is that it remains in a pause as affordability and higher rates continue to temper purchase and refinance originations. However, we believe that favorable demographics, supply constraints and increasing pent-up demand will be positive for housing and our MI business when affordability improves. As of March 31, our mortgage insurance in force was $248 billion, a 1% increase versus a year ago. 12-month persistency was 84.7%, reflecting the ongoing impact of the rate environment. Nearly 50% of our in-force portfolio carries a note rate of 5.5% or lower, a dynamic that will be -- we believe, will support persistency at elevated levels. Credit quality of our insurance in force remains strong, with a weighted average FICO of 747 and a weighted average original LTV of 93%. Our portfolio default rate was effectively flat quarter-over-quarter, and we continue to believe that the embedded home equity of our in-force book should mitigate ultimate claims. Outward reinsurance in our MI business continues to play an integral role in managing credit risk and capital. During the first quarter of 2026, we entered into an excess of loss transaction with a panel of highly rated reinsurers providing forward protection for our 2027 business. We remain pleased with the execution of our reinsurance strategy, ceding a meaningful portion of our mezzanine credit risk and diversifying our capital sources. On the Title front, we continue to transition the business from a stand-alone operation to an adjacency of our mortgage insurance franchise by leveraging our customer base and providing Title Solutions. The coordination between our MI and Title teams continues to build momentum in expanding the number of Essent Title customers, but we know this business is rate sensitive and results will continue to improve as origination volumes recover. On the Essent Re front, we expanded our P&C reinsurance platform in the first quarter. Our Lloyd's program will generate approximately $120 million of written premium in 2026, against a $50 million deposit at returns comparable to our MI business. During the first quarter, we also executed a whole account quota share covering cedent's Casualty and Specialty book, which will generate approximately $200 million of written premium in 2026. Combined, we expect that the near-term earnings impact will be immaterial while over the longer term, growing income and the capital benefits of rating agency diversification will be key drivers in generating shareholder value. Our consolidated cash and investments as of March 31 totaled $6.6 billion with an annualized aggregate yield for the first quarter of 4.2%. New money yields on our core portfolio in the first quarter were 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 $1.1 billion in excess of loss reinsurance and $1.1 billion in cash and investments at the holding companies. With a trailing 12-month operating cash flow of $827 million, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. We remain committed to a measured and diversified capital strategy that looks to optimize shareholder returns over the long term while preserving optionality for strategic growth opportunities. With that in mind, year-to-date through April 30, we repurchased approximately 3.5 million shares for over $200 million. Furthermore, I'm pleased to announce that our Board has approved a common dividend of $0.35 for the second quarter of 2026. 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 first quarter, we earned $1.82 per diluted share compared to $1.60 last quarter and $1.69 in the first quarter a year ago. Our consolidated net premium earned and operating expenses each increased from last quarter due to our P&C reinsurance activity, which began effective January 1. . The consolidated provision for losses and loss adjustment expenses also include amounts related to P&C activity. My comments today are going to focus primarily on our mortgage insurance segment results. There's additional information on our Reinsurance segment and Corporate and Other results in Exhibits D, E and O of the financial supplement. Our mortgage insurance portfolio ended the first quarter with insurance in force of $247.9 billion, essentially flat compared to December 31 and an increase of $3.2 billion, or 1.3% compared to $244.7 billion at March 31, 2025. Persistency on March 31, 2026, was 84.7% compared to 85.7% at December 31, 2025. Mortgage insurance net premium earned for the first quarter of 2026 was $216 million. The average base premium rate for the mortgage insurance portfolio for the first quarter was 41 basis points, consistent with last quarter and the average net premium rate was 35 basis points, up 1 basis point from last quarter. Our Mortgage insurance provision for losses and loss adjustment expenses was $37.6 million in the first quarter of 2026, compared to $55.2 million in the fourth quarter of 2025 and $30.7 million in the first quarter a year ago. At March 31, the default rate on the mortgage insurance portfolio was 2.54%, essentially unchanged from December 31, 2025. Mortgage insurance operating expenses in the first quarter were $37.6 million and the expense ratio was 17.4% compared to $34.3 million and 16.1% last quarter, and $40.9 million and 18.8% in the first quarter last year. Consistent with prior years, operating expenses in the first quarter of each year are typically higher due to payroll taxes on incentive compensation as well as higher stock-based compensation expense. At March 31, Essent Guaranty's PMIERs sufficiency ratio was strong at 174% with $1.6 billion in excess available assets. Turning to our Reinsurance segment. Net premium earned provision for losses and loss adjustment expenses and acquisition costs each increased from last quarter due to the P&C reinsurance activity, which began effective January 1. Consistent with Mark's comments, the pretax earnings for our P&C activity was immaterial for the quarter, and the pretax earnings for the Reinsurance segment in the first quarter predominantly reflect the underwriting results for our GSE and other mortgage risk share activity. Consolidated net investment income and our average balance of cash and available for sale investments in the first quarter were largely unchanged from last quarter due to the use of operating cash flows to repurchase shares. Income from other invested assets was $10.2 million in the first quarter of 2026, compared to $3.9 million last quarter and $7.4 million in the first quarter a year ago. Higher results this quarter are primarily due to increased favorable fair value adjustments in the quarter. As Mark noted, our total 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 and our debt-to-capital ratio was 8%. At quarter end, Essent Guaranty's statutory capital was $3.7 billion with a risk-to-capital ratio of 8.6 to 1. Note that statutory capital includes $2.6 billion of contingency reserves at March 31. As of April 1, Essent Guaranty can pay ordinary dividends of $330 million in 2026. In April, Essent Guaranty paid its first dividend of 2026 to its U.S. holding company of $50 million. 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 $32.6 million to shareholders, and we repurchased 2.6 million shares for $157 million. In April 2026, we repurchased 934,000 shares for $57 million. Now let me turn the call back over to Mark.

Thanks, Dave. In closing, Essent is a well-capitalized, high-quality franchise with a strong and consistent cash flow generation. Our core mortgage insurance business remains well positioned to serve our lender partners throughout this period of housing market transition, and our Reinsurance segment continues to create value by deploying capital efficiently across both mortgage and non-mortgage risk. . We remain confident in our ability to grow book value per share, return capital to shareholders and invest in opportunities that build a stronger franchise for the long term. Now, let's get to your questions. Operator?

[Operator Instructions] And our first question comes from the line of Bose George with KBW.

Actually, first, can we just talk about just your updated thoughts on what you're seeing in terms of consumer credit? Any signs of -- early signs of weakness on higher gasoline prices? Or is it things you're keeping an eye on?

Bose, it's Mark. I would say right now, we are not seeing any real kind of cracks. You're seeing it a little bit in the lower end consumer, right? I mean take a peek at the FHA delinquencies. But keep in mind, our book much higher FICO, so kind of 747 average FICO average income, $130,000 per household. So these are the consumers that are really driving the economy, the upper end consumer, along with significant AI spending. So we're not seeing it. And clearly, we look at it. And when you think about like our defaults have gone up, take a step back and really look at just the seasoning of the book, Bose, 39 months. I believe the book is seasoned, peak default is 36% to 60%. So you're seeing there is really a normalization of the credit. We're not really seeing an acceleration of that. Again, it's roughly 20,000 defaults, and the book is not really growing in terms of policy. So I would say the consumer is looking really good. And we're not really even seeing anything if I look at different geographies. If I look at lenders, if you look at servicers, right, that's an important thing to look at. when things start to bend a little bit. So no, I would say, in general, we think the consumer is in good shape. When you mentioned inflation, again, that's much more likely to hit the lower-end consumer. So certainly something we're watching.

Okay. Great. And then can you just give us an update on competitive trends in the market?

I mean no real differences in terms of the competitive trends. You're starting to see just with the lack of affordability, some of the lenders starting to reach a little bit. I think on the MIs, it's a small market, and the books aren't growing. So you're starting to see a little reach here and there. There was a card -- a bid card that we passed on recently, where we saw a little bit of an extension of credit, and we priced for it and we didn't get it. So you're seeing a little bit around the edges, but nothing real alarming. And you just given the longer this pauses, right? I mean, this pause started probably back half of '22, so now '23, '24, '25 and now it's into this year, I think the industry has done a good job, to be quite honest, being patient and thoughtful around this stuff. But you're always going to see a crack here and there. I think from our standpoint, Bose, we look at it a little bit differently in terms of really -- we're really focused on the unit economics. So when you look at where our NIW was for the quarter versus the #1 mortgage insurer, the difference is relatively small. Our view is that additional NIW is probably at the lower end of our return hurdles. So we look at other options too to allocate that capital. Lloyd's was a good example, right? I mean the Lloyd's leverage and the returns there are comparable. And I'll also point you to our other invested assets. I mean, we were able to put money to work there in the first quarter that we think will be easily mid-teen returns over the next few years. So again, it's a choice. And I think from a competitive standpoint, nothing really alarming and it's just -- it remains a small market. So it's difficult really to separate much when it's such a small market.

And our next question comes from the line of Terry Ma with Barclays.

Just wanted to follow up on credit. As we look at the results of the quarter, like anything to kind of call out new notices were at least sequentially a little bit more muted compared to the seasonality that you saw the last few years. So I guess anything to call out there. And as we look out to the rest of the year, should we kind of assume normal seasonality holds?

I would. I would. I would expect again, Terry, as you -- and this is the thing for investors to focus on is just, again, back to my earlier point, the seasoning of the portfolio given where it is and peak default being 36 to 60, you're going to see defaults continue to increase. And again, I don't think the rate is accelerating per se, but it is a seasoning aspect of it. The thing to keep in mind though, at the end of the day, Terry, is I think we paid $13 million of claims in the first quarter. So just to try to put this in perspective, going into default doesn't necessarily mean they're going to roll the claim. So I would, again, nothing big picture, 800,000 policies, 20,000 defaults. It's normal given the age for the defaults to season and start to see the kind of the new notices tick up a little bit.

Great. And then just a housekeeping question. I think I missed it in the prepared remarks, but the provision on the Reinsurance segment that was related to the net premiums written in the quarter, right? As we kind of look forward, that should, kind of, in the sense, normalize compared to the past few quarters?

Yes. It's a big change this quarter, right, because we wrote Lloyd's, which hit in the first quarter. We also wrote the retro quota share, which also was kind of -- we wrote in the first quarter, but it's back to quarter 1. And remember, these are run at more high combined ratio. So you're going to -- and you're combining with mortgage. So it's going to be a little -- we can help you offline a little bit on the modeling. But I would -- the bottom line is it's not going to drive a lot of income in 2026. But we do -- it does set the stage for a little bit down the road. The counter to that is just the mortgage book within Essent Re is not really growing. Same kind of, we have a pause for growth on the MI side. It's actually the way the GSEs are buying Reinsurance these days. They're moving higher up in the capital structure. They're in the capital model a bit for sure, so good for them, but they're buying higher in the capital structure. So we're getting less rate online, right, because there's less risk. And they're also really not -- they're not reinsuring a lot. So I would expect, again, if there's a change around when we think about privatization of the GSEs, and they become more normal in terms of risk share back to where they were. We could see that growth resume again. But right now, it's going to be a little bit of the P&C earnings replacing the mortgage earnings over the next few years.

[Operator Instructions] And our next question comes from the line of Geoffrey Dunn with Dowling & Partners.

Unfortunately, I think you just said you do it offline, but I was going to ask you if you could break down the loss ratio in the Reinsurance business between the P&C and the mortgage business?

Yes. The loss, I mean, we'll break it off offline. But high level, the loss ratio on mortgage is basically 0. So most of the losses are flowing through. I think from a modeling perspective, Geoff, I would look at mid- to high 90s for the P&C together, right? It's Lloyd's and quota share, but to mix it together, it's mostly -- I would say the majority of it is Specialty and Casualty. There's a little property in there from Lloyd's, but it's D&F, it's not property cat. So the Lloyd's combined ratio will probably be mid-90s, but the quota share is probably in the higher 90s. So it will kind of balance out. The key there is like -- and again, for a company that writes a 35% combined ratio, we were -- it's definitely an adjustment for us to write at those higher levels, but there's a different leverage, right? So there's a lot more premium leverage within P&C. And clearly, when rates went up a couple of years ago, that really the asset leverage in P&C makes a lot more sense. And we're fortunate that we have the franchise in Essent Re to do it. And just the way the S&P capital model works, Geoff, as you know, I mean, I think our AAA excess that we write to is something on the order of $850 million. So for us to write $200 million, there's really no additional capital and probably helps us from a capital diversification rate. So it's not like we're taking capital from repurchases and putting it into P&C. It's really, we're kind of double levering the capital a bit within Essent Re, which is -- which will be over time accretive to earnings.

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

I wanted to start by just asking on the cure rate. I know the number of defaults is small, but the cure rate really fell off the cliff this quarter? And I don't know if like, I'm just missing something update?

And Mihir, it's Dave Weinstock. Thanks for your question. I don't know that I would have characterized it that way. I mean, I think, if you look and we have some good information in the supplement and you look at our -- how much of our new defaults are curing, it's been pretty consistent quarter after quarter. With one quarter end, we're in that 30-ish percent range, and actually, it was actually higher. I think -- well, I think it's been very consistent, I guess, is what I would say, quarter-over-quarter.

Okay. Okay. Maybe I'll take that up offline. And then just...

Here, I think, you may be missing something. So let's take that offline because that's pretty -- didn't really fall off the cliff. It's actually relatively normal if you go back and look at our past Essent. So we're probably going to have to dig in there with you a bit.

Yes. No, I appreciate that. And then just in terms of the reserve releases. I was just -- given the commentary you've had about it being stable, there being some portfolio seasoning mostly and the way you reserve like your claim rate assumption, like what would have to change for the prior period reserve releases to go down? Like what are the indicators we should be looking for in the macro that, hey, these things are changing, we need to start thinking that maybe the reserve releases slow down? .

Yes, I mean I would look at unemployment rate. I mean, at the end of the day, if -- as long as we -- at a 745 FICO average income, what we said earlier. I mean it's a strong borrower unless they lose their job. So you saw that in COVID, Mihir. So again, employment is actually -- is pretty strong. And I think it will continue to be strong. So we'll continue just from a consumer standpoint, I don't think much changes that. And also, again, remember, home prices are still -- there's a lot of embedded equity in the portfolio, so especially between kind of the pre-'22 book. So again, as we said earlier, just because they kind of get to -- or they go into default doesn't necessarily mean they're going to roll the claim again, back to the $13 million-or-so that we paid. So I would take a step back, and I know you're good at this. I would take a step back and just, again, look at the longer-term implications of what we're doing, right? The cash flow generation of the company again, last 12 months, $827 million. So that's -- if you look at just the yield basis of where we are from a book value standpoint, the returns are -- the cash flow returns are pretty high. We continue to have a lot of excess cash at the Holdco. And that's after buying back the amount of shares that we did. So we're in a really good position. So as we always said, capital begets opportunities, and we feel like we're in a good position. We're starting to allocate that capital a little bit within Essent Re, other invested assets. We continue to -- that's another place where we can improve returns and make it a little bit more accretive to the shareholder title, which we don't talk a lot about is really, as I mentioned in the script, is really starting to come into its own a bit, really almost as an adjacency to the MI business. So lots of -- I would say, lots of momentum there around the coordination between the MI machine, as I like to call it, and the sales force and the title folks and really -- and we've seen some nice customer wins. You got to stack all that just like we had to do back in the day when we built the MI business, and you clearly need -- you need rates to come down. But we're starting to start -- we're starting to see some green shoots throughout the organization. And that's in a pause. And so when you take a step back and just think about where the demographics are in this country in terms of first-time homebuyers, there's 4 million to 5 million new homebuyers coming into age every year, and that's going to continue. Look at the chart in our investor deck, it's just a lot of these guys can't afford it. So there's an affordability issue. It's not going to be solved by the government, to be quite honest. It's going to be solved when there's continued job growth and income growth, which there is some form of moderation of rates. And then there could be some changes in HPA, right? There are some pockets where there's some weakness. And I've said before, actually, I think that's healthy. So big picture, I think we're in good shape. So I would just caution investors to not look at just some of the short-term metrics. They're important. They're always important in terms of defaults and new notices, a bigger picture. Right now, this is a pretty well-oiled cash flow machine. So we'll see where we go, and see how we can allocate that in the future, but we're feeling pretty good about kind of where we're situated today.

Got it. No, that's helpful, for sure. And maybe 1 just follow-up on something, said about just the intra-quarter and Title, the benefit from Title kind of comes through. Obviously, we had, early in the quarter, lower rate. Maybe just talk about what you saw upon intra-quarter trends, both from a persistency but also from a Title perspective. Did you see the benefits of that type of -- from lower rates China coming through?

Okay. You broke up a little bit. But yes, we did. We did see -- we saw a little -- we saw a spike in the fourth quarter. We saw a spike in the first quarter, for sure, which we took advantage of. And we're better situated to take advantage of it. That's another message for investors as we continue to build scale, we're putting in a new system, very similar to how we did it back in the MI days we bought code and now we're implementing. And so again, it's coming in within the information kind of machine, technology machine of Essent and the company we bought outsourced their IT. So that doesn't -- you don't wave a magic wand and just put something on to your structure overnight. So we're investing in the system. We're patient I think of the capital -- the capital we have allows us to do that. And also, I mean, here just the efficiencies around our expenses allow us to invest. So we're starting to see it. The question is it's more important from the MI standpoint. So if refinances spike up, we'll see some of that benefit on the title side. I think MI is a bit more important, though, to understand the rationale. Persistency will decrease I think the new originations will overwhelm that or mitigate it. And actually, it will help us, that will be the signal for renewed growth in the portfolio because what you're going to see -- we're actually -- it's an interesting position to think about, Mihir, is go back and look at our pre-'22 book, right? I said half of the book is like 5.5% below. That's not going to necessarily refinance. It's going to be all the post-'22 book at the higher rate. So we could see this phenomenon where the back book sticks a little bit more and the newer book is the one that starts to refinance, but then it's kind of a renewed growth. So again, something to watch for. I'm not necessarily seeing rates come down this year, given what's going on with oil prices and inflation, but it is -- it's another little tailwind that could happen if there is a movement in rates.

And with no further questions, I will now turn the conference back over to management for closing remarks.

I'd like to thank everyone for joining us today, 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.