Essent Group Ltd. (ESNT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Essent Group Limited Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Frank Fanta, Investor Relations.

Thank you, Daniel. 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 2026, and was issued earlier today and is available on our website at essentgroup.com. Our press release includes non-GAAP financial measures that may be discussed during today's call. A complete description of these measures and the reconciliation to GAAP may be found in Exhibit Q of our press release and in our third quarter 2026 earnings presentation posted on our website. Prior 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, Frank, and good morning, everyone. Earlier today, we released our third quarter 2026 financial results, which reflect solid credit performance and the continued impact of interest rates on persistency and investment income. The cash flow from our core MI business remains strong and gives us the flexibility to invest in the franchise while also returning capital to shareholders. . For the third quarter of 2026, we reported net income of $163 million or $1.82 per diluted share, representing an annualized return on average equity of approximately 12%. And our book value per share was $62.58 as of September 30 and inclusive of common dividends has increased approximately 9% from a year ago. Turning to our MI business. Our insurance in force ended September 30 at $250 billion, up 1% from a year ago. 12-month persistency was 83%, which reflects the current rate environment with over half of our in-force portfolio having a mortgage rate of 6% lower. We expect this dynamic to continue supporting elevated persistency while portfolio growth stays muted as affordability continues to impact origination volume. Over the long term, we remain constructive on housing as favorable demographics and pent-up demand should provide foundational support to home prices and purchase origination volume. The credit quality of our insurance in force remains strong with a weighted average credit score of 747 and a weighted average original LTV of 93%. And Consistent with our expectations, the portfolio default rate increased to 2.75%, reflective of seasonality and the aging of our portfolio. We continue to believe that substantial home equity embedded in our in-force book should help mitigate ultimate claims. Additionally, 95% of insurance in force is subject to reinsurance protection, which provides capital relief and reduces tail risk. Turning to the Reinsurance segment. We expect written premiums of approximately $320 million from our P&C reinsurance activity in 2026, with roughly half in this year at a combined ratio in the high 90s. And we are currently focused on building Essent Re's P&C platform and remain disciplined with our underwriting. While mortgage risk and the related MGA business will drive the majority of the segment's earnings in the near term, we expect the P&C business to provide complementary earnings in the long term as well as capital synergy given diversification credit. Our consolidated cash and investments totaled $6.5 billion as of September 30, an annualized aggregate investment yield for the third quarter was 4.4%. And that yield includes income from other invested assets, a portfolio of strategic investments that now totals approximately $450 million or 7% of our total portfolio. While returns will vary from period to period, this portfolio gives us another way to deploy capital outside of our core business to generate income and grow book value. We continue to operate from a position of strength with $5.6 million of GAAP equity, access to $1 billion of excess of loss reinsurance and $1 billion of cash and investments at the holding companies. With trailing 12-month operating cash flow of $857 million, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. We remain committed to a balanced capital strategy that seeks to optimize shareholder returns over the long term while preserving flexibility for our strategic growth. Year-to-date through October 31, we have purchased nearly 8 million shares for approximately $475 million. In addition, I'm pleased to announce that our Board has approved a common dividend of $0.35 per share for the fourth quarter of 2026 and has also authorized a new share repurchase plan of $500 million. 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 $1.82 per diluted share compared to $2.08 last quarter and $1.67 in the third quarter a year ago. My comments today are going to focus primarily on the results of our mortgage insurance and reinsurance segments. There's additional information on corporate and other results and Exhibit D and E of the financial supplement. . Our mortgage insurance portfolio ended the quarter with insurance in force of $250.1 billion, an increase of $342 million from June 30, and an increase of $1.3 billion compared to $248.8 million at September 30, 2025. Persistency at September 30, 2026, was 83.3% and compared to 84% at June 30, 2026. Mortgage Insurance net premium earned for the third quarter of was $211 million. The average base premium rate for the mortgage insurance portfolio for the third quarter was 40 basis points, consistent with last quarter and the average net premium rate was 34 basis points, down 1 basis point from last quarter. Our mortgage insurance provision for loss and loss adjustment expenses was $51.7 million in the third quarter of 2026, and compared to $29.4 million in the second quarter of 2026 and $44.2 million in the third quarter a year ago. At September 30, the default rate on the mortgage insurance portfolio was 2.75%. And up from 2.53% at June 30, 2026. mortgage insurance operating expenses in the third quarter of 2026 were $31.9 million and the expense ratio was 15.1% and compared to $31.9 million and 14.8% last quarter and $31.2 million and 14.4% in the third quarter last year. At September 30, Essent Guaranty's PMIERs efficiency ratio was strong at 177% with $1.6 million in excess available assets. Turning to our reinsurance segment. net premiums written year-to-date through September 30, 2026 were $330 million. compared with $49 million over the same period of 2025. Net premiums earned year-to-date 2026 were $137 million compared with $46 million over the same period of 2025. The increase in premiums reflects the growth in nonmortgage business from our expansion in the P&C reinsurance activity. The reinsurance combined ratio was 84.7% in the third quarter of 2026 compared to 77.9% last quarter, a 19.2% a year ago. The change in the combined ratio was as expected, reflecting a difference in underwriting performance between the mortgage and non-mortgage lines and the changing business mix of the segment's premiums. The pretax underwriting income for the Reinsurance segment predominantly reflects the underwriting results of our GSE and other mortgage risk share business, while the contribution from our P&C activity was not material. Consolidated net investment income was $63 million in the third quarter of 2026, up $1.3 million from the prior quarter. Income from other invested assets was $10.7 million in the third quarter of 2026. And compared to $19.4 million last quarter and $1.8 million in the third quarter a year ago. The results this quarter again reflect the net favorable fair value adjustments on these investments. Total 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 8.3%. Year-to-date, Essent Guaranty paid $115 million dividend to a holding company. At quarter end, sent guarantee statutory capital was $3.7 billion with a risk-to-capital ratio of 8.2:1. Note that statutory capital increased $2.7 billion of contingency reserves at September 30. As of October 1, Essent Guaranty could pay additional ordinary dividends of $324 million in 2026. On October 2, Essent Guaranty paid a dividend to its holding company of $85 million. During the third quarter, Essent Group paid cash dividends totaling $31.1 million to shareholders, and we repurchased 1.1 million shares for $74 million. In October, we repurchased 802,000 shares for $50.8 million. Now let me turn the call back over to Mark.

Thanks, Dave. In closing, Essent remains a well-capitalized high-quality franchise with strong and consistent cash flow generation. we are well positioned to keep growing book value per share, returning capital to shareholders and investing in opportunities that strengthen our franchise for the long term while continuing to support affordable and sustainable homeownership. Now let's get to your questions. Operator?

Our first question comes from Terry Ma with Barclays.

Maybe just to start off with persistency. Can you help us understand what you've been seeing in the mix of MI cancellations between scheduled versus borrower initiated. And then just looking ahead, how should we think about translation activity and the impact on persistency?

Yes. Terry, it seems to be a popular topic this quarter amongst all the MIs, not sure why. I would look at -- I think you're focused on the right metric, Terry, because I do think there's not that many things that move the business. Persistency is 1 of them. So when you think just bigger picture, I know in terms of cancellation, a lot of it is going to be that 2021 book that just simply amortizes off over. It started already, but it's probably going to be peak in like '28, '29. And then when you start thinking about growth -- normal growth kind of consistent with this slow market, I would think a persistency kind of in the 80% range. So it's fairly it's fairly muted, clearly lower than we've been. But remember, we've also experienced persistency of 60%, I believe it was in 2020 and parts of '21. So Bigger picture, I really do think you have to focus it there. In terms of like MI cancellation, by -- we actually had to look it up, right? I mean it's not something we track day on and day out. But I mean, to give it's probably 37,000 in the quarter. those was refinanced and the other 22 was cancellation, about 4 or 5, maybe. It's a little tough with the codes was borrower initiated. And the rest was just amortization. So I mean big picture again, Terry, the process works. It's a good -- line is a really good product. and it's been around for a long time since -- really since almost 70 years. It's fairly effectively priced. So on an average $400,000 loan, it's like $1,200 a year -- and down payment, we're saving folks probably anywhere from $40,000 to $45,000. So -- and also remember, this is an industry that during the great financial crisis didn't take any tarp probably 1 of the few financial services that didn't. So a lot of credit to some of our peers who manage through that process and an industry that paid billion in claims over the years. So again, good product I know there's a lot of kind of clearly emphasis on MI cancellation -- and clearly, you want to make the process. We're always what's best about for the borrower. So if there's ways in the future working with the GSEs and working with FHFA to kind of ease the friction, we're supportive, and we'll work with them to do that.

Got it. That's helpful. And then maybe just a quick housekeeping question. Just on the current period provision for the quarter, the $81 million on NI. Anything to kind of call out or impact there? It's quite a bit higher than what we were expecting.

Terry, it's Dave Weinstock. Really, I think when you look at our provision, I think 1 of the things that's really driving is that the average loan size is increasing. So when you look at our supplement, and specifically, if you look at Exhibit M, which kind of looks at reserves per bucket, we're reserving pretty much the same way we always have. Our reserve methodology hasn't changed. The loans that we're insuring have grown. I would say, in the past 18 months, they've probably grown from an average of the now to about 300,000 to now 400,000. So that's going to be what's increasing the loan size and the risk in force and it's going to increase the dollar of our provision. But overall, I think that's what you're seeing.

Yes. And I mean, Terry, again, I think it's a good question. And I agree with Dave, the severity, just the bigger loans are going to hike the provision up -- at the end of the day, it's really going to be about unemployment. So I mean a lot of these still have to roll the claim as they do. Clearly, the pre '22 book has a lot of build in equity -- it will be -- it's going to be, I would say, the post '22 book is really the more normal. So you're going to see we're seeing higher severities -- that's really the business. I wouldn't really look at 2021 as the business that was really an anomaly that's starting to work its way out. And if you again, thinking longer term or from a modeling perspective, Terry, we've always said kind of we expect 2% to 3% claim rate. That's what we priced for. And then in terms of combined ratio, kind of in that 35% to 45% ratio. So this is -- I don't want to say it's always within our expectations, but it doesn't really surprise us -- and I still think just look at our cash flow over the past 12 months, still in excess of $800 mil -- so not a lot of cash is leaving the company yet. I mean, again, we'll start paying more claims over time. But I do think what you're seeing is a normal MI business. And based on that, it's still -- I mean, it's still pretty good.

Our next question comes from Doug Harter with BTIG.

Hoping you could just talk about your view on competition. You guys continue to kind of be slightly below pro rata market share -- and just kind of how do you think -- what that tells us about your view of the risk-adjusted returns in the market? .

Doug, welcome back. Nice to have you back on the call. I would say the competitive market is still pretty similar. We haven't seen much of a change. I think for us, we always do -- we probably fall back a lot on the unit economics and we tend to look at our earned premium base premium is a little bit higher than the industry. We focus a little bit on that. And we like to do just it's a small market, Doug. So we don't really look -- we'd love to be 1 of 6, so a little bit higher on the share. But we're not particularly concern given the smaller nature of the market. And we're kind of using this opportunity to test a lot of things. We'll test pricing. Remember, Essent Edge, which is really our credit engine and does help us so -- and we can get into that a little bit more just in terms of Vantage. But it really helps us kind of we're really looking at kind of our estimated claim rate. So we'll test geographies. We'll test lenders, we'll test entails. So it's working as well as we'd like. I mean sometimes we know we may sacrifice a little bit of volume for that. But I think longer term, it's -- and given the small nature of the market, we're not particularly concerned. In terms of the competitive environment, I would look at it as every MI seems to have their own buy box, right? Some like lower LTVs, some like higher credit, some like certain geographies, certain lenders. But I do think it kind of balances out in the end. So I wouldn't read too much into our kind of take on the market because we're a little bit lower.

Our next question comes from Mihir Bhatia with Bank of America.

Maybe I'll just start with something you just mentioned there, Mark, about Vantage and Essent Edge. Can you talk a little bit more about that? .

Sure. I mean I think Vantage is coming into the market, and it's not very big right now. I mean here, it's probably less than 5% of our originations. I don't think it's going to impact the MI industry that much. I think it's going to impact the MBS buyers and certain buyers of loans more because they're so focused on FICO. But I think when we look at it, FICO, FICO 10T, VSF, the GSEs are looking at like post and their scores I think our advantage with Edge is we're looking at the raw credit data. So we're coming up with our own score. So we're agnostic to kind of -- we use it will impact those scores, but it's not really driving our ultimate claim rate. And anything we're on the card with, clearly, that's going to go advantage or FICO depending on the lender. We also run that through Edge on the back end. So we feel like we have a real good common denominator that we -- and we may start disclosing that over time. We'll see how it goes. But it will at least give investors what our view is on credit in the ups and downs. I think from a bigger picture, I think with Vantage, you could see a little bit of pricing compression if they start to pick like the best of all and I would be surprised if the industry doesn't respond and raise pricing a little bit. I mean you're talking like a basis point or 2. It's not big dollars, but I'd be surprised if the industry doesn't react. I think on the other hand, I do think you may see a larger market. I would believe, especially if there's some inflation, you could see FHA borrowers migrate to conventional, which I think, again, if that's better for the borrower, that's good. So I think net-net, it's probably a positive for the industry over the next year or 2.

Got it. The other question I had was just in terms of insurance in force growth at current market size, right? I mean if you think about 80% persistency, you have 50% -- I guess, approximately $50 billion running off each year. NIW is running about that same level. Should we expect insurance in force to be flat or even down next year?

Well, it's hard -- It's tough for me to say right now. I do say that it has been relatively flat. I mean we're entering '27, kind of the fifth plus year of just a flat market. So -- and I think given where rates were, we were able to grow insurance in force a little bit over the past few years. I wouldn't be surprised if it flattens out a bit. That being said me here. I do think we're levered more for the upside. I do. I think when you think about where housing has been relatively stagnant, and we can talk all day long about demographics, but I do believe there's a pent-up demand for housing. And kind of the longer stays this kind of slowness hangs around the larger the staff back will be. So look bigger picture, look at [$1.6 trillion] of industry in force for the whole industry. I wouldn't be surprised to see that grow to , not next year or not, but let's say, over a certain period of time, again, take our share. So I do think growth will resume. And I don't think and I don't think a lot of investors see that. And that's fun right? It's hard in this environment. But I do think we have that kind of growth because housing will come back. It always does. It always resumes it will grow in line with GDP. Just you have to think through it's not growing. And part of it was 2021 was such an anomaly. We literally pulled 5, 6 years' worth of growth into 1 year or 2 years. home price is up 50% in 2 years. It's just not normal. So now that you're seeing more of the normalization. So we're flattening out. We're fortunate as a company that because of the persistency in the noncredit environment, we're still driving a lot of cash flow to the bottom line, but some of the other participants, the transaction-oriented businesses us so. But I do think we've really -- we kind of get -- we kind of look at it internally as we're paid to wait in the way we're kind of managing capital over time. Because remember, insurance in force, if it doesn't grow, the capital needed to support it doesn't grow. So that becomes free cash flow, which, again, we've used predominantly the last 18-plus months to repurchase shares, which we think right now is a pretty good use of proceeds for the company.

Our next question comes from Rowland Mayer with RBC Capital Markets.

Mark, I think you said in response to a question that you price for a 2% to 3% claims rate, but then you still book new notices and a much higher figure than that. What would it take to close the gap? .

Well, remember, when we book new notices, that's not what our ultimate these things roll. So it's -- that's our initial claim rate, 2% to 3% rolling at the end. So it's kind of apples and oranges. So think of it again as the ultimate claim rate. So just picture unit economics, right? So premium rate, net premium rate kind of loss rate, which is your claim rate, that's kind of your kind of return on asset, then you have your expenses and your investment income. It's relatively straightforward. But I do think the claim rate for historically for us has been like less than 1%. That is just and we're pleased with it. But I think normally, you're going to have to look in that 2% to 3% range. Hence, when you kind of run through the math, that gets you to that 35% to 45% combined ratio. And I do think that's a good guide. 35% to 45% combined ratio kind of 80-ish persistency longer term is actually a good guide as you start to model this stuff out?

That's helpful. And then I guess from a competitive dynamic, we've seen a lot of multiyear quota-share deals announced in the industry at fairly cheap cost of capital. Do you expect that to drive any change in pricing decisions is that a result of the improved reinsurance dynamics? .

Great question. I don't know. We don't do it. I mean we look at it -- we price on an unlevered basis. We do not take the reinsurance cost and rotate that back into the front end. And part of it is just how the market works, right? I mean there's only 6 participants. So if you use that to lower price, it's easily matched. And I'd be surprised if the other participants use it that way, too, because it's really just reducing premium in the industry. So I think what we would do, the way we look at it is we'll price for kind of an unlevered return and anything that is cheaper, so to speak, on the reinsurance side, really benefits for shareholders. And we took that in this lower price and the shareholders don't really gain from that. And I think for reinsurance, we generally have gone 2 years. We've seen some of the -- yes, we've done a few participants go 3 years, which again speaks to, 1, the demand for reinsurance and MI. There's really not a lot of GSE reinsurance. So we're kind of the only game in town. -- we like it, and I think we'll -- we think it's a great tool, but I would remind you that we do like capital too, right? I mean I think reinsurance protects you in the event of a kind of lower, call it, higher unemployment, more losses, reinsurance clearly protects you. Capital lets you take advantage of those type of situations. And I'll give you the example at stated now 2020 we talked earlier, we were the lowest in market share. But in 2020, we -- we've only been #1 in market share twice in our history, and both times were in 2020. The second and third quarter, when we had -- we went out and had raised capital in May. We had a lot of capital. We wrote -- I think we had a 20% handle 1 and part of it was because some of the -- there was as much capital around the industry and there's a little bit of a shock event, we took advantage of it. So again, I think you have to look at it both ways. Reinsurance is a great tool. It's really part of our -- when we think about by manage and distribute as a key piece of it. But when you think about capital longer term, you also have to worry about the tail right? So when we think about how do we think about excess capital, clearly insurance or a growing we have a lot of excess capital. could we use it for opportunities outside of the core relatively small. We'd love to plow it back into the core business. And then we look and say, how much do we need in an event. So remember, we hold first loss, we really hedge out against the mezz, we reattach at the top. So for our business, Rowland, I know you cover the P&C market, a cat event for us is a severe macroeconomic recession, what's the probability of that happening in the next 2 to 5 years, probably pretty low, it's not 0. So I think we like -- we've been through it. I've managed through the GOC, I've been through the subprime crisis or the late '90s. We've seen the movie before. So we like -- we think having dry powder to take advantage of an event. And also when you think about just the kind of the price of the -- it's a call option, right? I mean so the price of holding on that additional capital, we actually think is relatively cheap. -- versus returning all of it to shareholders. I think for us, from a capital return, we're going to be in excess of 100% this year. We bought back 10% of the company last year and wouldn't be surprised that we're close to that this year. Again, I think we're fortunate in terms of how much capital we're generating. I think we're using most of it to buy back capital because we think that's the best use of funds now, but we're still we're still retaining a little bit for -- we like to have dry powder either for an opportunity that presents itself on the offensive nature or just being defensive.

And then if I could just sneak in 1 more. We're coming up on 1/1 renewals here. Is there any interest in expanding the P&C appetite? And can you may discuss your premium expectations there?