Essent Group Ltd (ESNT) 2025 Q4 法說會逐字稿

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited Fourth Quarter Earnings Call. (Operator Instructions) I would now like to turn the call over to Phil Stefano, Investor Relations. Phil, please go ahead.

Thank you, Tiffany. 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 fourth quarter and full year 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, which was filed with the SEC on February 19, 2025. And then the 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 financial results for the fourth quarter and full year of 2025. Our strong performance this year was driven by positive credit trends and the benefit of higher interest rates on both persistency and investment income.

These results demonstrate the strength of our buy, manage and distribute operating model and generating high-quality earnings which has enabled us to take a more strategic approach to capital management. For the fourth quarter of 2025, we reported net income of $155 million or $1.60 per diluted share. For the full year, we earned $690 million or $6.90 per diluted share while generating a return on average equity of 12%.

As of December 31, our book value per share was $60.31, and an increase of 13% from a year ago. As of December 31, our mortgage insurance in force was $248 billion, a 2% increase versus a year ago. Our 12-month persistency on December 31 was 86%, with roughly 60% of our in-force portfolio having a note rate of 6% or lower. Over the last several quarters, persistency has been relatively flat, reflecting higher mortgage rates and a smaller origination market. As a result, we believe that over the near term, earned premium and insurance in force growth will be modest.

The credit quality of our insurance in force remains strong, with a weighted average FICO of 747 and a weighted average of original LTV of 93%. Our portfolio default rate increased modestly quarter-over-quarter, reflecting normal seasonality and the continued aging of our insurance in force. Looking forward, we believe that the substantial home equity embedded in our in-force book should mitigate ultimate claims.

Outward reinsurance continues to play an integral role in operating our business. At the end of 2025, 98% of our mortgage insurance portfolio was subject to some form of reinsurance. During the fourth quarter of 2025, we entered into a quota share 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, seeing a meaningful portion of our mezzanine credit risk and diversifying our capital resources. On the Bermuda front, Essent Re continues to be a very effective platform in deploying capital and generating additional earnings for Essent. For 2025, Essent Re earned nearly $80 million in third-party net income while ending the year with $2.3 billion in risk.

In addition, during the fourth quarter, Essent Re entered into quota share reinsurance agreements backed by funds at Lloyd's to reinsure certain property and casualty risks. These agreements are effective in the first quarter of 2026, and we expect $100 million to $150 million of written premium with approximately 2/3 to be earned in 2026. The at a combined ratio consistent with the diversified P&C reinsurance company. Looking forward, we believe that P&C will be an ongoing opportunity to generate supplemental earnings for Essent Re.

On the title front, we remain focused on activations, leveraging our lender network and building out our transaction management system. However, as a primarily centralized refinance platform, our title operations are unlikely to have a substantial impact on earnings unless there's a material decrease in mortgage rates. Our consolidated cash and investments as of December 31 totaled $6.6 billion with an aggregate yield to the year of 3.9%. New money yields on our core portfolio in the fourth quarter were nearly 5%, holding largely stable over the past several quarters. We continue to operate from a position of strength with $5.8 billion in GAAP equity access to $1.3 billion in excess of loss reinsurance and $1.3 billion in cash and investments at the holding companies.

With the full year 2025 operating cash flow of $856 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, which enabled us to return nearly $700 million to shareholders in 2025 between dividends and repurchases. During the year, we repurchased nearly 10% of the shares outstanding at the end of 2024.

Furthermore, I'm pleased that our Board has approved a 13% increase in our quarterly dividend of $0.35 per share starting in the first 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 fourth quarter, we are $1.60 per diluted share compared to $1.67 last quarter and $1.58 in the fourth quarter a year ago. Considering Essent Re's expansion into the Lloyd's market, as Mark noted, we began to assess the performance of all third-party reinsurance as an operating segment in the fourth quarter.

To reflect this change, GSE and other mortgage risk share is no longer aggregated with US mortgage insurance, and all third-party reinsurance is now disclosed as a separate reportable segment called reinsurance. All prior period segment information has been recast to conform to the new segment presentation. My comments today are going to focus primarily on our results of our Mortgage Insurance segment. There's additional information on reinsurance and Corporate and Other results in Exhibits D and E of the financial supplement.

Our mortgage insurance portfolio ended the fourth quarter with insurance in force of $248.4 billion, a decrease of $452 million from September 30 and an increase of $4.7 billion or 1.9% compared to $243.6 billion at December 31, 2024. Persistency at December 31, 2025, was 85.7% compared to 86% at September 30, 2025. Mortgage Insurance net premium earned for the fourth quarter of 2025 was $213 million, the average base premium rate for the mortgage insurance portfolio for the fourth quarter was 41 basis points, consistent with last quarter and the average net premium rate was 34 basis points, down 1 basis point from last quarter.

We expect that the average base premium rate for the full year 2026 will be approximately 40 basis points. Our mortgage insurance provision for losses and loss adjustment expenses was $55.2 million in the fourth quarter of 2025 compared to $44.2 million in the third quarter of 2025 and $37.2 million in the fourth quarter a year ago.

At December 31, the default rate on the mortgage insurance portfolio was 2.5%, up 21 basis points from 2.29% at September 30, 2025. For the full year 2025, we recorded a net provision on the mortgage insurance portfolio of approximately $145 million, with higher defaults reflecting the seasoning of the portfolio.

Mortgage Insurance operating expenses in the fourth quarter were $34.3 million, and the expense ratio was 16.1% compared to $31.2 million and 14.4% last quarter. For the full year 2025, operating expenses for the Mortgage Insurance segment totaled $140 million, and we expect that operating expenses for the mortgage insurance segment will be approximately $145 million for the full year 2026. At December 31, Essent Guaranty's PMIERs efficiency ratio was strong at 169%, with $1.4 billion in excess available assets.

Consolidated net investment income and our average balance of cash and investments available for sale in the fourth quarter were largely unchanged from last quarter due to our share repurchase activity. The consolidated effective tax rate for the full year 2025 was 16%, including the impact of $2.1 million of favorable discrete tax items.

For 2026, we estimate that the annual effective tax rate will be approximately 17%, excluding the impact of any discrete items. As Mark noted, our total holding company liquidity remains strong and includes $500 million of undrawn revolver capacity under our committed credit facility. At December 31, we had $500 million of senior unsecured notes outstanding and our debt-to-capital ratio was 8%.

In the fourth quarter, Essent Guaranty paid a dividend of $280 million to its US holding company. As of January 1, Essent Guaranty can pay ordinary dividends of $246 million in 2026. At quarter end, Essent Guaranty's statutory capital was $3.6 billion with a risk-to-capital ratio of 9.1:1 with a statutory capital includes $2.6 billion of contingency reserves at December 31. During the fourth quarter, Essent Re paid a dividend of $100 million to Essent Group. Also, in the quarter, Essent Group paid cash dividends totaling $29.5 million to shareholders and we repurchased 2 million shares for $125 million.

In January 2026, we repurchased 713,000 shares for $44 million. Now let me turn the call back over to Mark.

Thanks, Dave. In closing, our 2025 results demonstrate Essent's resilient financial performance in a challenging housing market. We delivered a strong return on equity and book value per share growth while retiring nearly 10% of our share count through value-accretive repurchases.

The normalization of credit continues, but our high-quality portfolio remains positioned for a range of economic scenarios as we explore new opportunities. We believe this disciplined strategy serves the best interest of our stakeholders and positions Essent to create long-term shareholder value.

Now let's get to your questions. Operator?

(Operator Instructions) Mihir Bhatia, Bank of America.

Maybe just -- let's just start with the decision into the Lloyd's market. I guess why now? Maybe talk a little bit about the strategy that you're doing there, what type of assets you're looking to underwrite? Maybe just help us understand what exactly is happening there for both strategically and operationally? Thank you.

Sure. Thanks for the question. I would say it's been in process for a while. We have been studying ways to expand Essent Re. So think of it in here more as Essent Re expansion versus we're jumping in to a new line of business.

When you take a look at Essent Re, it's a valuable asset. I mean, over the years, it's done the affiliate quota share, they've written a lot of really high-quality GSE risk share business. They have a nice MGA where we assist 10 other larger insurance companies to write GSE credit share risk.

But because of -- when you combine all three of them, we're sitting there with a $1.7 billion balance sheet, single-A rated from A.M. Best, A(-) S&P. It's one of the larger reinsurance companies in Bermuda. And because of the changes over the past several years, one, just investment yields went up. There's a lot of asset leverage within P&C. On the MI side, we're generally 1:1. In P&C, it could be 2:1, in some cases, 3. So there's nice asset leverage. Clearly, that's a lot more valuable when yields go up.

Second, S&P, a couple of years ago now changed their capital rules. So there's a lot more capital, I would say, efficiencies when writing P&C on top of MI kind of get that diversification benefit, right? And third, it's clearly not correlated to the consumer. Those, I would say, attributes probably 18 months ago is when we started to look at it. So we've been looking at various ways. And we thought Lloyd's a very efficient way for us to kind of step into the market. $50 million of FAL, it's Lloyd's itself is kind of a self-contained market, very, very capital efficient.

The $50 million that we're putting in is actually sitting on S&R's balance sheet. So there's no additional capital required. I think that's important for folks to realize and it's really well diversified. So I would say 87% of the business roughly is insurance versus reinsurance. Our top 40-plus syndicates that we're backing, reinsuring and it's across generally well diversified across most lines, less we kind of made a conscious decision to be a little less weighted towards property cat, just because of the volatility there.

And it's -- that's one where we still have more I would say, more work to do. We've hired a small team and they're very experienced in the P&C business, very technical. So they have actuarial backgrounds, which we like. We're very technical, right? We talk a lot about unit economics and balance sheet and all those sort of things. So they kind of fit our style and we'll continue to build that team out. It's not going to be very material.

And so I don't want to play this up that we've entered into a new business. It's not transformational. It's very measured because that's how we like to do things. And as we learn over time, remember, One of the advantages we have at Essent because we're kind of a founder-operated company. We all own a lot of shares.

We have a long-term view. And I was in London a few times last year, and I met most of the syndicates that were backing within the top 10. And I looked at them and said, do we want to invest with them because it's essentially what we're doing. I know we'll recognize it as premiums. But think of it also is kind of almost like a big watching line.

So we'll certainly update you guys. But the leverage and we may, with that platform, we also have the opportunity to write whole account quota share with larger reinsurance companies, kind of like how we do it on the MI side and the relationships that we have, there may be a way for us to partner with some over time. Again, not really in the 2026 forecast.

We'll see how it goes, but a pretty measured approach. But similar to title, which is still kind of in that incubation phase and starting to do -- we're starting to see some real good signs. They are just nice call options for our investors. So it's not -- it's not like we're going to buy back less shares. It's a way for us to learn the business, we'll continue to attract talent to the organization, both in the Bermuda and the US.

And if there's a time -- and we realize where we are in the cycle. And we know it's entering into kind of -- it's getting a little softer in certain segments of the market, that's fine. You're never going to -- we're not trying to time the market. We look at this as an opportunity. Again, longer term, 5, 10 years is successful.

It'll generate supplemental earnings for the company and help us. It's like another tool I have to grow book value per share.

Got it. That's helpful. Maybe just switching to the MI business for a second. The right I know you don't manage the market share. So I'm not -- it really -- this really is in a market share question.

But you look at it in your -- I think, of MIs that have reported so far, you're the only one that's got NIW lower quarter-over-quarter. So is that just a reflection of you not liking the returns in the market? Is there a conscious decision to pull back in certain parts of the market or risk grades or something like, I guess, help us understand what's happening there?

Yes. I wouldn't read too much into it. You've heard me say before, it kind of ebbs and flows. For the year, we were 15, and we always say we're kind of in 15, 16. We really try to optimize the unit economics.

We haven't -- I want to say we backed off a couple of things earlier in the year. You had the tariffs coming we probably cut some of the tails. And that's probably a little bit of that. That's okay. I mean if you look at -- we went back in here, and if we were -- 2 points higher in share for the last three years.

It all comes out in the wash. I mean there's really no -- the price/volume trade-off, especially the better credits is just not there. it's just not there. We'd rather take that dollar and give it back to shareholders. And I'm telling you, I'm warning investors because, this is just a price game.

And if we're like bottom in share and the number one or two guys, $5 billion ahead of us in this market, here, it's price. And we're not -- we don't -- again, that's -- everyone has their own strategy. We think $1 rather than put it into a loan at a super low premium I'll give it back to shareholders. So we're fine. And then we'll -- we've in times of this location like 2020, we wrote most market share. So longer term, it's -- market share is really a result of some of the things you do.

We're very -- I would say when you kind of take a look at us against some of the advantages we have. Look at our gross premium meal. It's the highest in the industry. It's like 3 points higher than the average. It's pretty high and run that over $250 billion book.

It's pretty meaningful. So these are real economics to the company. Look at our gross -- and this is this all be available, I guess, when all the case come out, but look at our gross operating expenses relative to our peers. Add back the ceding commission, right? Because everyone looks and talks about net expenses. It's really not gross expenses, which is cash going out the door. There's a form of leverage there.

We outperformed the industry. And so when you think about -- and it's a relatively sizable advantage versus a few. That expense efficiency allows us to build a team in Bermuda. It allows us to build out a system and title. Those are things, again, since we manage the business so well, these are ways for us to kind of create competitive advantages, clearly, on the technology side with SME, we have been monetizing AI now for seven years.

We haven't done the new AI, but machine learning and what we're doing in the edges flat out artificial intelligence, but we're monetizing. We're not just talking about it. You can see that in our premium yield.

That's another good example of how we're thinking about the business. So again, back to market share, it's -- I'd rather have better unit economics at a smaller share than the other way around.

Bose George, KBW.

Actually, just a follow-up on that last question. Your gross premium yield has been 41 basis points for a few quarters. You guided to 40% next year. Is that just kind of a rounding issue or anything tied to market returns?

It's been -- it's been 41 for a while, Bose. And if you just think about it, it actually it probably was lower than that, and I was actually looking at it the other day. It was lower than that in kind of the '21, '22 period. And remember, if you think about the first quarter of '22 when I commented how low pricing was, there was kind of a reversal that and pricing kind of came up in the industry. And it kind of rolls through, remember you're talking about insurance in force.

So it's tough to get a -- it's tough for there's not a lot of transparency for analysts and investors on what the premium yield is upfront. You can kind of sense though, if you guys should look at kind of where gross premium yields were for all the companies -- two quarters ago, four quarters ago, that will give you a good hint a leading indicator as what people are pricing in on the front end.

So I think for us, it actually went up when pricing went up. And clearly, pricing it's been relatively stable. But as that pricing starts to compress, and it has compressed a little bit in 2025. But the compression isn't really competitively oriented.

There's a little bit of that, but it's really driven by credit. When we look at the credit that's coming in, like $757 million we rounded it up, but our LTV in the fourth quarter was like shy of 92%. So that's -- so all of a sudden, if you think about the old-fashioned rate card, you're in that 1 quadrant, where it's super good credit quality but lower premium. So that's driving a little bit of it. So I wouldn't get too -- we're not too fussed about it.

I mean once the homeowners that are on the sidelines come back down and we get kind of that 740, 745, 93 LTV, you'll see that pricing come back up, and that will work its way into the yield. So it's a way for us to kind of just give you guidance to run the models.

Okay. Great. That's helpful. And then you noted that insurance-in-force growth is likely to be modest. I mean, this year was 1.9%, looks like year-over-year, which is kind of already in the modest cap. So is it like going to be -- do you think it's going to be sort of below that level or kind of in that range?

I think within that range, again, I do think longer term -- I hate to say longer term, but it is longer term. That housing will continue to grow. There will be renewed growth, Bose. I mean the demographics $4 million to $5 million in that age grew kind of 28% to 32%. We're coming into that homeownership camp every year. But the lack of -- given where rates are the lack of affordability, a little lack of supply, they're just on the sidelines. And when they come off the sidelines, I don't know.

But when they do, it's going to be -- I think it's going to be a bigger spike than people think. I just -- I don't my crystal ball doesn't work in those type of increments. I think we're well positioned. So again, from an Essent perspective, credit is relatively benign still. And as long as credit stays benign and we can continue to kind of produce the type of cash flow we're producing and really just use the return it to shareholders, we're kind of paid the weight.

So we're fine with that. So again, modest growth Again, that's a little bit of us trying to guide investors and analysts to what they expect because the numbers are the numbers, and we don't want to -- we'd rather kind of underpromise and overdeliver than the reverse.

(Operator Instructions) Doug Harter, UBS.

Mark, can you talk about what you're seeing in your activity and whether you're seeing any difference across the vintages, especially the vintages that maybe have a little bit less embedded home price appreciation?

Yes. Good question. It's -- not really. I mean, we have 20,000 defaults. If you break it out by vintage, if you break it out by state, if you break it out by lender, if you break it out by servicer.

There's nothing really stands out. I mean Florida is a little higher because we have some hurricanes. And I would say that the Florida book is probably our higher premium book, but there's a little bit more risk there. We're fine with that. We love the unit economics in Florida and Texas. But now it's really -- you're always looking for something, but we haven't really seen anything.

And even the pre-'22 book, and I always like that, we always call it kind of the two books, right? It's the -- halfway through '22 and before is one book and then the kind of the newer book, which was at elevated HPA and higher interest rates. We're not seeing much of a difference there. That's probably a more normal business. That's probably a more normal high LTV MI type portfolio, and we're not seeing anything there, too.

I mean, you're going to see noise, and we still see it with forbearance, which ultimately is a good answer for borrowers. But it does create some noise in terms of the faults and the ins and outs but again, roughly 800,000 loans.

There's only 200 -- 20,200 defaults, I think it was 18,000 plus 12 months ago. So it's really been maybe too light of a word, but it's not -- we're not really we're not too fussed about where defaults are. It comes down to unemployment, Doug. I mean at some point, if it rains like every blade of grass is going to get wet. We keep our eyes on unemployment.

That's where we're always looking for pebbles. It will happen. Something will hit us at some point. We just -- we're not seeing it and obviously, not seeing in fact, the credit coming in has never been better. We're not seeing that. I know you follow a lot of them to -- we don't see it in a lot of the consumer finance. We're not seeing in the cards is pretty elevated.

But other than that, we're not -- we're super , I would say, very, very happy with the portfolio and the performance of the book. And even then if default rates do spike at some point, look at where our claim rate is. So the embedded home equity helps a lot. I think our claim rate probably right around 1% ever to date. So I mean, there's some good protections.

And I think it's a little -- again, it's just a little underappreciated from the investor community, which is fine. I mean, again, if you look at just we're at book value. We have -- it's all cash. We don't have a lot of debt, and there's not really a lot of credit given for the future value of the cash flows. And don't forget the future cash flows are pretty well hedged.

I mean we own that first loss piece, but the mess piece is pretty well hedged out. I don't -- so we have a high degree of confidence in the future value or the present value of those future cash flows, hence that's why we're buying back shares. That's why we pay a dividend. If we didn't have that confidence, we certainly we wouldn't be funneling cash outside the company.

Rick Shane, JPMorgan.

It's interesting. Obviously, I've done this a while and we follow a bunch of different companies. And I'm thinking about comments from two other founder-run businesses that I recall over time. One is in the middle market lending space, and the comment was basically there's no spread for a bad loan. Conversely, if you're making a massively diversified card-type portfolio you're ultimately sort of seeking an efficient frontier.

You accept the fact that you're going to have losses. They're not idiosyncratic.

It strikes me that you guys sort of try to balance both. But ultimately, your business is an actuarial business. Mark, you've sort of provided this cautious outlook. And I'm curious if you think it is because you can't capture price in the context of what you are concerned about in terms of credit? Is that the right way to think about this?

Yes. I mean I think that's -- I don't think you're off. We're never going to be the market leader -- and part of it is we don't have to be our incentives, look at the incentives of -- they're all in the proxy statement. Just read the incentives, people do what their incentive to do. incentive to grow book value per share is 100% of my long-term incentive is growth in book value per share. We're not incentive on market share. We're not incented on NIW. We're not incentive on insurance in for.

So they're not -- we don't come in everyday so we have to grow NIW look at the incentives around the industry. Some do. That's -- so they're going to make different trade-offs. I'm not saying the we're right and they're wrong. It's just different people do what their incentive to do we like over the long term, we'd like to optimize our unit economics.

So what yield are we charging what's their loss? What's our capital because over time, if you write good unit economics, that will still see your P&L. And conversely, if you don't, that will also flow through the P&L. And again, bottom line is we want to grow book value per share. That's our incentive. That's why we're doing it.

And as a founder-run company and owning a lot of shares, I don't -- in a very, I would say, very supportive and constructive Board of Directors, who, a lot of them have been with me from the beginning, we all sing from the same hymn sheet. So it's not like they say you have to grow. They're with us in terms of how well slowly grow. And I think it's a long-term boring story is what we're at Essent. But since we've been public, Rick, we've grown Book value per share 18%.

Our total stockholder return is close to 12%, which is equal to the S&P 500. It's more than the S&P 400 mid-cap by like 3 points longer term. Am I going to win in the next two weeks or a month or a quarter I don't know. I don't care I want to win long term and the company wants to win long term.

And I think that's -- when we come in every day, and we do come in every day. And we meet and we talk, it's really like where do we want the business to be 5 years from now, 10 years from now, and we like to work backwards as to. And when we look at that in the context of do we invest in title? Do we invest in Essent Re? Do we try to be number one in market share.

We balance a lot of that stuff. So again, it's our way. It's not necessarily the right way. But as a large owner of the company, I feel very comfortable with the direction in how we're managing the company.

Got it. That helps. And just to sort of build on a little bit more pricing hasn't really changed that much, but you're a little bit more cautious. Is there something that you are thinking about specifically in terms of housing credit that shifted. And again, you know our views on the world. So I'm curious sort of how you -- what your credit outlook is here?

I wouldn't -- I wouldn't -- like I said, the market share ebbs and flows. Like I said at the beginning, I wouldn't read too much into it. It's not like we made a credit call and we want a 14% market share. It's nothing like that. It's around it's really around kind of on the margin and optimizing unit economics.

We still do a lot of testing on pricing elasticity. Our view is, I think what -- you'll know when we're cautious on credit, right, trust me, you'll know. I wouldn't -- it's not a credit call. It's more around what's the best dollar is it used to kind of repurchase shares or look at other opportunities? Or is it to grow NIW.

And I think our view is given the strength of our balance sheet, given the kind of, I would say, the liquidity advantage we have with Essent Re we can lean in when things get when the market looks -- when people are a little bit more scared to the market, and we can feel like we can get more pricing right now. given where pricing is.

And like it really hasn't moved. We're just comfortable kind of being at the bottom of the pack. It doesn't really impact we -- like I said earlier, if we were larger, it would just require more capital at those that dollar of capital is probably just better at this point in our life cycle and where the market is not forever, we think returning it to shareholders is really the best investment decision. And the fact that we retired 10% on of the shares. That's a large number.

And if that continues, and I would expect it to continue this year, all as being equal, all right? We bought back $45 million or $44 million in January. And if we kind of stay where we're at in terms of the market, it wouldn't surprise me to see that level continue, and that just means a lot of our larger shareholders get to own more of the company and they get them on more of a fantastic business. So I think it's a good thing. So don't read into it in credit.

It's not really -- I'm not making a credit call. And I know your views.

That concludes our question-and-answer session. I will now turn the call back over to management for closing remarks.

I'd like to thank everyone for calling in and joining the call and the questions, and have a great weekend.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.