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

Thank you for standing by, and welcome to the Essent Group Limited Second Quarter Earnings Call. [Operator Instructions] I'd now like to turn the call over to Phil Stefano, Investor Relations. You may begin.

Thank you, Rob. 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 Karen, President of Essent Guaranty. Our press release, which contains Essent's financial results for the second quarter of 2026 was issued earlier today, 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 second quarter 2026 earnings presentation posted on our website. 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 second quarter 2026 financial results, which again reflect the benign credit environment, along with the effects of current interest rates on persistency and investment income. Cash generation from our core MI business remains strong, giving us the flexibility to allocate capital between investing in growth across the franchise and returning capital to the shareholders. Our buy, manage and distribute operating model remains a distinct advantage, positioning Essent to reduce high-quality earnings across a wide range of economic environments. For the second quarter of 2026, we reported net income of $190 million or $2.08 per diluted share, which translates to an annualized return on average equity of 13.4%. As of June 30, our book value per share was $63.1 and inclusive of our common dividend, it grew nearly 13% over the past year and has compounded approximately 18% annually since our IPO. As a reminder, we believe that success in our business is best measured by growth in book value per share. In our MI business, as of June 30, our insurance in force was $250 billion, a 1% increase versus a year ago. 12-month persistency was 84%, reflecting the current rate environment and that nearly half of our in-force portfolio has a mortgage rate of 5.5% or lower. We believe that this rate dynamic will support elevated persistency levels, while our portfolio growth will remain in a pause as affordability continues to constrain origination volume. Longer term, we continue to believe that favorable demographics and pent-up demand will be a positive for housing in our MI business when affordability improves. The credit quality of our insurance in force remains strong with a weighted average credit score of 747 and a weighted average of 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. In addition, 97% of our insurance in force is subject to reinsurance protection, which provides capital relief and reduces tail risk. On title, we continue investing in technology across our platform while onboarding new partners by leveraging the broad relationships within our MI franchise. High interest rates remain a modest headwind near term, and we do not expect title to have any meaningful impact on earnings. Longer term, our expectations remain the same. Title provides a capital-light opportunity that generates supplemental earnings for our franchise and deepen our lender relationships. Turning to the Reinsurance segment. We continue to expect written premium of approximately $320 million for our P&C reinsurance activity in 2026, with roughly half earned this year at a combined ratio in the high 90s. The P&C book is weighted towards casualty and specialty requiring minimal incremental capital from S&R. However, over the near term, mortgage risk and a related MGA business will continue to drive the segment's earnings. Our consolidated cash and investments as of June 30 totaled $6.6 billion with an annualized aggregate investment yield for the second quarter of 4.9%. Our investment yield this quarter includes income from other invested assets, a portfolio of strategic investments in insurance, specialty finance and housing that we built over several years. It's now approximately $450 million or 7% of our total portfolio. Although returns will vary period to period, this portfolio gives us another way to deploy capital outside of our core businesses to generate income and increase book value. We continue to operate from a position of strength with $5.7 billion in GAAP equity, access to $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 $834 million, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. Capital strategy remains a balanced approach that optimizes shareholder returns over the long term while preserving optionality for strategic growth. Year-to-date through July 31, we repurchased nearly 6 million shares for approximately $350 million and I'm pleased to announce that our Board has approved a common dividend of $0.35 for the third 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. Second quarter, we earned $2.08 per diluted share compared to $1.82 last quarter and $1.93 in the second 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 our corporate and other results and exclude the D and E of the financial supplement. Our mortgage insurance portfolio ended the second quarter with insurance in force of $249.7 billion, an increase of $1.8 billion from March 31, an increase of $2.9 billion or 1.2% compared to $246.8 billion at June 30, 2025. Persistency at June 30, 2026, was 84% compared to 84.7% in March 31, 2026. Mortgage insurance premium for the second quarter of 2026 was $216 million. The average base premium for the mortgage insurance portfolio for the second quarter was 40 basis points, down 1 basis point from last quarter, and the average net premium rate was 35 basis points, consistent with last quarter. Our mortgage insurance losses and loss adjustment expenses was $29.4 million in the second quarter of 2026 compared to $37.6 million in the first quarter of 2026 and $15.3 million in the second quarter a year ago. At June 30, the default rate on the mortgage insurance portfolio was 2.53%, essentially unchanged from March 31, 2026. Mortgage insurance operating expenses in the second quarter were $31.9 million, and the expense ratio was 14.8% compared to $37.6 million and 17.4% last quarter, and $33.6 million and 15.3% in the second quarter last year. At June 30, Essent Guaranty's PMIERs efficiency ratio was strong at 172% with $1.5 billion in excess available assets. Turning to our reinsurance segment. Net premiums written in the first half of 2026 were $249 million compared to $31 million in the first half of 2025. Net premiums earned in the first half of 2026 were $73 million compared to $30 million in the first half of 2025. The increase in premiums reflects the growth in non-mortgage business from our expansion into P&C reinsurance activity. The reinsurance combined ratio was 77.9% in the second quarter of 2026 compared to 69.6% last quarter and 19.4% a year ago. The change in the combined ratio was as expected, reflecting the 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 increased $2.4 million or 4% to $61.6 million in the second quarter of 2026 compared to last quarter due to an increase in the overall yield of the portfolio. Income from other invested assets was $19.4 million in the second quarter of 2026 compared to $10.2 million last quarter and $4.5 million in the second quarter a year ago. The higher results this quarter are primarily due to increased favorable fair value adjustments. Our holding company liquidity remains strong and includes $500 million of undrawn revolver capacity, under our committed credit facility. At June 30, we had $500 million of senior unsecured notes outstanding and our debt-to-capital ratio was 8%. Year-to-date, Essent Guaranty paid dividends of $115 million to its U.S. holding company. At quarter end, Essent Guaranty's statutory capital was $3.7 billion with a risk-to-capital ratio of 8.5:1. Note that statutory capital includes $2.7 billion of contingency reserves at June 30. As of July 1, Essent Guaranty can pay additional ordinary dividends of $302 million in 2026. During the second quarter, Essent Re paid a dividend of $100 million to Essent group. Also in the quarter, Essent Group paid cash dividends totaling $31.6 million to shareholders, and we repurchased 3.2 million shares for $191 million. Now let me turn the call back over to Mark.

Thanks, Dave. In closing, Essent is a well-capitalized, high-quality franchise with strong and consistent cash flow generation. We remain confident in our ability to grow book value per share return capital and invest in opportunities to build a stronger franchise for the long term. Now let's get to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Bose George from KBW.

Actually, first, on the premium yield, can you remind us, do you expect that to be fairly stable? And anything to call out on the slight decline this quarter? And then could you just talk about competitive trends?

Sure, Bose. Yes, I think we guided to 40-ish -- 40 basis points for the year. So I think we're kind of in line with that. Longer term, it's really just a reflection of new business written, persistency and all the things that go into the portfolio. In terms of the competitive environment, I think it's pretty much the same, relatively stable, and it's been stable for a while. It's a small market those. So there's not a lot to be gotten from a lot of competition. And remember, in this industry, there's no credit competition. I mean the GSEs because of the rules and the guardrails they set up, we don't have any real credit competition. So the GSEs don't approve it generally we don't insure it. So that's a positive that I think sometimes can be lost on investors. In terms of the price competition, again, I think it's fairly stable. And if you take a step back, and look at really where the different players are participating. Everyone kind of has their spots, whether it's particular lenders, sometimes it's geographies, clearly around DTIs, FICOs, or credit scores now that we call them. Everyone's picking their spots. But at the end of the day, the economics are fairly similar. So for someone like Essent, we're at the lower end of the market share gain. But if you look at kind of lifetime premium share, we're probably closer to middle of the pack, if not a little bit above that. So that's really, for us, as you know, you see our earned premium yield goes or a bit higher than the industry. And part of that is just -- it's our selection technique. And I don't think we have anything better. I just think we have a different appetite and we're more interested in the premium dollars so much more than just market share. If you look at our market share on 85 and below, we're the lowest in the industry. And again, that's market share rich, but premium light [Audio gap] some folks like that, that's fine. But I think [Audio gap] so when you add it all up, the economics across the industry are fairly similar. And I think that's a positive for investors.

Okay, great. That's helpful. And then actually just on that topic of what's happening with the credit scores. I think one concern in the market is that with Vantage score picking up momentum that lenders could use that to gain the system. I mean do you think there's any credit risk to be worried about as [Audio gap] this core becomes a bigger part of the market?

Yes, it's a fair question. I would say, again, taking a step back a little bit. and looking at Vantage score, it is a little bit more lenient than FICO score to be sure, right? There's a 20 basis point -- 20-point gap between FICO and Vances the GSEs have set up. It's probably a little bit wider. I wouldn't be surprised to see the GSEs tighten that over time. So if there's any kind of arbitrage, Bose, I expect I expect that to disappear over time. I really do. I don't think the GSEs are going to leave money on the table. They're just too smart for that. In terms of our market, it's actually a little bit of a benefit. So if the scores are a little bit higher, that could bring an FHA borrower into the conventional business. We have to be careful how we price it. But I think net-net, it's probably positive for the conventional market. And in terms of kind of adverse selection, I think that's going to even itself out. I think for us, clearly, given how our engine works, we're not really reliant on the credit score we were using over whatever 400-plus variables. It depends as a component of that, for sure, but we're relatively score agnostic because we come up with our own scores. So we feel comfortable there. I think with the cards, you're going to have to be a little bit more careful. And again, I think that's really going to come down to the GSEs, and how they structure the LLPAs going forward. And again, like I said, I think that will be squared up pretty in relatively short order. Should it become bigger. And it's not very big right now. There's not many lenders using it actually, some of our top lenders don't even have it as a kind of a priority item because I don't see the real pickup. So it remains to be seen. It's a good question, certainly something in the industry. And if it does help certain borrowers get loans that they are getting today. I think that's a positive I just don't think that's the case. I think it may shift again from FHA to conventional. I don't see a lot of borrowers coming off the sidelines because they have a higher score to be honest.

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

I wanted to first just follow up on this question about premium yield. I hear you about it being dependent on a lot of factors. But maybe just talk to us a little bit about like just the new money yield what's in the book? Like I think what we're trying to think about is like over the next year or two as the book turns over a little bit, what that premium yield can look like is 40 bps like the floor you recommend? I know you've guided that for this year. But just like as we go look out a little bit explore further.

Yes. I wish it was as simple as I could just tell you what our new premium is on new insurance written and you could calculate it. It's just not that simple. It's just because it's so embedded in the years of books. We're at 40-ish, I would expect that if you're modeling it out here over the next couple of years, it may go down a little bit, but it's not a big move and just because of the weight and the size of the book I would say back into the new insurance written, again, that's what it's dependent on. We feel pretty good about that. And again, as I mentioned earlier, we have been looking -- we're more a premium seekers so much versus just the best credit quality. And again, that gets to my point that everyone in the industry is picking their spots. But I think for us, in the second quarter, and this is overall premium, we increased premium 10% on new insurance written just in the quarter, and that's part of [Audio gap] we took a little bit more risk, but I think that is a -- that's just a good sign of how the industry picks their spots, and we're able to look for stuff and find value or at least when we perceive value. But again, I think that's our strategy. It's a little different than others. But again, like I said, everyone is kind of picking their spots, but the economics across the industry are relatively consistent.

And just actually on that point, I mean, you did grow NIW a little faster than the industry this quarter. No, I know you don't manage for -- like we've talked about, I think, extensively on these calls about not managing for market share. and focusing on returns. But I am curious just in terms of was there anything unusual? Were there certain pockets or segments where you found a little bit more opportunity this quarter? Or is it just as you were talking about like everyone has their pockets and the market just kind of came to where your pockets are more in the quarter?

There's a few specifics, but, I mean, I think it's really around kind of the makeup of the borrower, whether it's credit score, debt-to-income, LTV, there are certain competitors that stay away from I would say they stay away from that type of risk or much -- they're probably lower DTI, lower LTV, so they like the 85% much higher credit score. So when we go into those a little bit more of that, the other side of that market, say, higher DTI or higher LTV, there's just less competition here. So instead of being 106 or 103 or 104, so we like our chances there. So there's a little bit more pricing power, I would say, in those buckets than they are, everybody wants to 780, right? And so that's going to be super competitive but in these other markets. And sometimes it states in geography, certain people like in parts of the country. So there's other areas where, again, there's just a little bit more, I would say, a little bit more value is the way we kind of look at it. So nothing -- again, nothing cutting edge per se, but it's just a matter of just kind of piercing through the market and seeing and trying to get those and capitalize on those opportunities.