Essent Group Ltd. Common Shares

first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Phil Stefano, Investor Relations. Please go ahead.

Thank you, Regina. 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 Caron, President of Essendon Guarantee. Our press release, which contains Essendon's financial results for the first quarter of 2025, was issued earlier today and is available on our website at EssendonGroup.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 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 18th of 2025, and any other reports and registration statements filed with the SEC, which are also available on our website. Now let me turn the call over to Mark.

Thanks, Phil, and good morning, everyone. Earlier today, we released our first quarter 2025 financial results, which continue to benefit from the impact of higher interest rates on the persistency of our insured portfolio and investment yields. We believe that our buy, manage, and distribute operating model uniquely positions us to operate in a variety of economic environments to generate attractive returns for our shareholders. Our outlook over the long term remains constructive, as we believe that favorable demographic trends, along with current affordability issues, are resulting in pent-up demand for housing. Even though we anticipate some headwinds to consumer spending and economic growth over the near term, given the high credit quality of our insured portfolio and the strength of our operating model, Essendon is positioned to navigate this environment. And now for our results. For the first quarter of 2025, we reported net income of $175 million compared to $182 million a year ago. On a diluted per share basis, we earned $1.69 for the first quarter compared to $1.70 a year ago. On an annualized basis, our return on average equity was 12% in the quarter. On the mortgage insurance front, lenders continue to be challenged by lower originations due to the impacts of higher rates, affordability, and overall lack of supply. This in turn also impacts the amount of new insurance written that our industry generates. While our industry is competitive in this environment, systematic credit guardrails established by the GSEs continue to mitigate credit box expansion. As such, we remain satisfied with the credit quality and unit economics of our new business. As of March 31st, our U.S. mortgage insurance in force was $245 billion, a 3% increase versus a year ago. The credit quality of our insurance and force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 93%. Our 12-month persistency on March 31st was 86%, flat from last quarter, while half of our in-force portfolio has a note rate of 5% or lower. We continue to expect that the current level of mortgage rates will support elevated persistency in the near term. Our consolidated cash and investments as of March 31st were $6.4 billion, and our new money yield in the first quarter remained over 5%. The annualized investment yield for the first quarter is 3.8%, while new money rates have largely held stable over the past several quarters and remain a tailwind for investment income. We continue to operate from a position of strength with $5.7 billion in gap equity, access to $1.5 billion in excess of loss reinsurance, and a PMIR sufficiency ratio of 172%. With a trailing 12-month operating cash flow of $866 million, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective. Our capital strategy seeks to balance a conservative balance sheet, preserving optionality for strategic growth opportunities and optimizing shareholder returns over the long term. With that in mind, I am pleased to announce that our board has approved a common dividend of 31 cents for the second quarter of 2025. At the same time, we recognize that our excess capital position and stock valuation present us with an opportunity to be proactive in returning capital to shareholders. As previously discussed, we are valuation sensitive when it comes to buying back shares believing this strategy will support our long-term goal of compounding book value per share growth. Year-to-date through April 30th, we repurchased nearly 4 million shares for over $200 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 first quarter, we earned $1.69 per diluted share compared to $1.58 last quarter and $1.70 in the first quarter a year ago. In connection with accounting guidance effective as of year-end 2024, public companies with a single reportable segment are required to disclose results by segment. We have one reportable segment, mortgage insurance, which aggregates our U.S. mortgage insurance business and our GSA and other mortgage reinsurance business at our subsidiary, Essent Re. My comments today are going to focus primarily on the mortgage insurance segment results. There is additional information on corporate and other results in the financial supplement in Exhibit O. Our U.S. mortgage insurance portfolio ended the first quarter with insurance in force of $244.7 billion, an increase of $1 billion from December 31st, and an increase of $6.2 billion, or 2.6%, compared to $238.5 billion at March 31st, 2024. Persistency at March 31st, 2025 was 85.7%, unchanged from the fourth quarter. Mortgage insurance net premium earned for the first quarter of 2025 was $234 million and included $15.5 million of premiums earned by S&RE on our third-party business. The average base premium rate for the U.S. mortgage insurance portfolio for the first quarter was 41 basis points, consistent with last quarter. And the average net premium rate was 36 basis points for the first quarter of 2025, increasing one basis point from last quarter. Our mortgage insurance provision for losses and loss adjustment expenses was $30.7 million in the first quarter of 2025 compared to $37.3 million in the fourth quarter of 2024. As a reminder, our fourth quarter provision included $8 million for defaults that we identified as related to Hurricanes Helene and Milton. While we observed a decline in the number of hurricane-related defaults in the first quarter due to cure activity, we made no changes in the reserve for hurricane-related defaults as this amount continues to be our best estimate of the ultimate lawsuits being incurred for claims associated with those defaults. On March 31st, the default rate on the U.S. mortgage insurance portfolio was 2.19%, down eight basis points from 2.27% at December 31st, 2024. Mortgage insurance operating expenses in the first quarter were $43.6 million, and the expense ratio was 18.7%. Compared to $39.9 million, and 17.5% in the fourth quarter. For the full year 2024, operating expenses for the mortgage insurance segment totaled $160 million. We estimate that other underwriting and operating expenses for the mortgage insurance segment will be between $160 million and $165 million for the full year 2025. In April, we entered into two excess of loss transactions effective July 1st of each year. with panels of highly rated reinsurers to cover our 2025 and 2026 new insurance written. These transactions complement the two quota share transactions closed in the first quarter, and we continue to be encouraged by the strong demand from reinsurers for taking mortgage credit risk. In addition, in April, we decided to increase the seeding percentage of our affiliate quota share from 35% to 50% to further leverage our Bermuda platform. This increased session to Essent Re, will be effective in the second quarter and will be retroactive to NIW starting from January 1, 2025. At March 31, S&G's PMIR sufficiency ratio was strong at 172%, with $1.5 billion in excess available assets. Consolidated net investment income increased $1.7 million, or 3%, to $58.2 million in the first quarter of 2025 compared to last quarter, due primarily to a modest increase in overall portfolio yield. As Mark noted, our holding company liquidity remains strong and includes $500 million of undrawn revolver capacity under our committed credit facility. On March 31st, we had $500 million of senior unsecured notes outstanding with a debt-to-capital ratio of 8%. During the first quarter, Essendon Guarantee paid a dividend of $65 million to its U.S. holding company, Based on unassigned surplus at March 31st, Essendon Guarantee can pay additional ordinary dividends of $405 million in 2025. At quarter end, Essendon Guarantee's statutory capital was $3.6 billion with a risk-to-capital ratio of 9.6 to 1. Note that statutory capital includes $2.5 billion of contingency reserves at March 31st. During the first quarter, Essendon Reade paid a dividend of $100 million to Essendon Group. Also in the quarter, Essent Group paid cash dividends totaling $31.7 million to shareholders, and we repurchased 2.8 million shares for $157 million. In April 2025, we repurchased 1.1 million shares for $61 million. Now let me turn the call back over to Mark.

Thanks, Dave. In closing, we are pleased with our first quarter financial results as Essent continues to generate high-quality earnings while our balance sheet and liquidity remains strong. Our outlook for housing remains constructive over the long term, and we believe that Essendon is well-positioned to navigate the current environment, given the strength of our buy, manage, and distribute operating model. Our strong earnings and cash flow continue to provide us with an opportunity to balance investing in our business and returning capital to shareholders. We believe this approach is in the best long-term interest of Essendon and our stakeholders, while Essendon continues to play an integral role in supporting affordable and sustainable homeownership. Now let's get to your questions. Operator?

At this time, I'd like to remind everyone in order to ask a question, simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Rick Shane with JP Morgan. Please go ahead.

Hey, guys. Thanks for taking my questions this morning. Look, you know, March, April have been unprecedented months in terms of volatility, in terms of some of the behaviors we've seen. When you think about where we are in the affordability cycle for homeownership, particularly for first-time homebuyers, do you think we are potentially reaching an inflection point where things will start to come the way of the consumer a little bit more, or do you remain a little bit more cautious? And then delving a little bit more deeply into that, are there certain geographies where you are particularly optimistic or particularly cautious, and how do you adjust for that within your rate cards?

Hey, Rick. Good morning, and thanks for the questions. I think the first one on affordability, I'm not sure where we are in the cycle. And remember, just in context, we've had this anomaly, right? We had the COVID anomaly with super low rates And everyone just buying stuff, houses, boats, cars, bicycles. It drove up HPA 40% in some markets, 60% in others. And then boom, in the middle of 2022, rates shot up and in a way just froze people. They call it the golden handcuffs, people with 3% mortgage rates. And they stayed elevated. Rates went up. And so this has really resulted in affordability because incomes didn't really grow. And now you have higher home prices and higher rates. It really has created this second anomaly that we're still in. Fortunately for Essent, we're well positioned for this environment. We saw tailwinds in investment yields, and we've seen unprecedented persistency. In addition to still driving business, and uniquely, Rick, the quality of borrower we're getting in this environment is actually quite good because of the affordability issues. Only the best kind of qualify. I do think, and I said this before, when you think about our insurance in force, it's relatively flattish, which drives a lot of what I'll call free cash flow to the bottom line. So again, we're well-positioned. But this next cycle will really play out or end when incomes catch up. And I think when incomes catch up, I don't really see rates going anywhere. I could see pockets of HPA declining, which I think is relatively healthy. But the consumer really is going to have to catch up. And then you're going to have life events, right? You're going to have people getting married, more home ownership, formation, you know, having more children, death, divorce, all those sort of things that will unlock some supply. But here's a great metric for where I think the market is a little bit stuck. The average age of the first-time homeowner is 38. That tells me there's a lot of pent-up demand for housing. So growth in our portfolio will renew. And longer-term, Rick, for Essent and for the other mortgage insurers, we're going to grow the way housing grows in this country, and it's always grown. It doesn't always grow in a straight line. That's why when we say longer term, we're constructive, that we've been able to kind of wait this period out and continue to generate strong returns. The only problem I have is I'm not sure when that's going to happen. I don't think it's going to happen this year, but I think we're getting closer to it. I think on your location standpoint, I would say with our pricing model, and remember, we have two parts to it. There's the credit engine part of it at S&Edge, and then we just have the ability to electronically deliver pricing. That allows us to kind of make numerous pricing changes. We've actually raised pricing in certain markets during the first part of the year, really trying to test pricing elasticity where we may have a larger share in certain markets Generally, we're more concentrated in areas where there's a lot more population growth. If you look at our segment, we tend to like places where people are moving to and jobs are moving to. And so we're more, I would say we're a little bit more invested there. That being said, you're always trying to get more price in certain areas and then other places you're backing off. So we look at it that way. And again, like I said in the earlier part, pockets of HPA decline, I do think longer term are healthy for the market.

Got it. Now, you know, it's been such an interesting cycle. And one of the things that we always talk about on our team is that not every cycle can be unprecedented. I'm hoping that eventually we're going to be right on that. It's been sort of from unprecedented to unprecedented to unprecedented. It's almost exhausting. Thank you for your answers.

You're welcome. Hang in there.

Our next question will come from the line of Terry Ma with Barclays. Please go ahead.

Hey, thank you. Good morning. Mark, I'm just curious, just given all the uncertainty around macro and the headlines around tariffs, I'm just curious to think to get how you're thinking about managing risk overall. And like, have you done anything on the pricing underwriting side? And at what point will you do so to kind of adjust for that?

It's a good question, Terry. I would say we have. Like I said earlier, we've raised pricing in the first quarter in certain markets, but that was more micro-oriented, so to speak, around pricing elasticity. I think on a macro standpoint, we're in a little bit of a wait and see with the impact of tariffs. So to give you some kind of background in terms of our pricing, we generally price through the cycle, which could mean good environments and bad environments. We don't particularly look and say, well, we think the next three months could be challenging. Therefore, we're going to change our pricing. just like we don't look and say, well, the market's going to be great for the next six months, so let's lower our pricing. So you have to kind of think it through the cycle. I think there's going to need to be a catalyst, an event, right? Tariffs could be an event. COVID was an event. And when COVID was an event, we could see that the economy was going to go slow considerably and that our pricing through this cycle was going to have to change. And we, along with all the mortgage insurers, were able to change our pricing very quickly. Again, another advantage for the engine. Right now, we're not seeing it. And we have to wait to see how it plays out, right? I mean, there's obviously a lot of puts and takes, but right now there's no real changes on the pricing front.

Got it. That's helpful. And then just more broadly speaking, how are you thinking about credit loss expectations? I think you pointed toward a 2% to 3% default rate as still being within expectations last quarter. Is that still the case?

Yeah, very much so, right? I mean, I think we're in the lower end of that right now, and we may not hit 3% depending on where... you know, where defaults come into the back half of the year. They tend to increase a little bit more in the back half of the year. And, Terry, it's a little bit of just math, right? I mean, roughly 800,000 loans and close to 18,000 defaults. You can kind of do the math and see what the percentage is. I would look to two things to note there. One, you know, big picture, you know, we really are. We own that first loss piece. We hedge out. uh, the Mez and we kind of reattach at the cat. So we don't get to, you know, kind of, you know, upset or fluxed around this kind of between two and three. And second, uh, you know, we provide their provision, uh, when they're, you know, they miss, they miss two payments, but depending on the vintage, uh, and the building kind of HPA, they may not necessarily result in a claim. I mean, we, we provide for that because that that's our expectations within our model. But as you've seen in the past, you know, people, you know, the severity where they end up selling the house and we don't pay a claim. So I wouldn't necessarily jump to a default rate, you know, necessarily leading to cash out the door for us. That's really what it comes down to is do we write a check and pay a claim? And to date we haven't really done much of that.

Yep. Got it. Makes sense. Thank you.

Yep.

Our next question comes from the line of Bose George with KBW. Please go ahead.

Hey, guys. Good morning. In terms of buybacks, maybe I missed this, but how much of the buybacks occurred in the first quarter versus April?

Hey, Bo, this is Dave Weinstock. $157 million of the buybacks were in the first quarter, and then we purchased about 1 million shares for... Actually, we purchased 1.1 million shares for $61 million. So it was 2.8 million shares for $157 million in the first quarter and 1.1 million shares for $61 million in April.

Okay, great. Thanks a lot. And then just with the comment you made about the new 50% ceding to S&RE, in terms of the tax rate, so I assume the tax rate on the incremental piece goes down over the next few years, and then And can you just remind us, in 2030, does everything just bounce back to the domestic rate or is there some sort of phase in at that point as well?

Yeah, no, Bose, you're right that the incremental will be, you know, we currently are, as we had talked about in prior calls, we have this limited international presence exemption where we are not paying taxes in Bermuda anymore. until 2030. But then once that exemption expires in beginning in 2030, we would expect to pay the 15% tax on earnings in Bermuda.

And the other thing that goes just on the change in the affiliate is it's a little bit of, it makes it more efficient to move cash from a guarantee to the holdco given, given, given that with the holdco sits in Bermuda. So that was another part of the thinking wasn't necessarily to, to drive a lower tax rate. It could be a little bit lower, but really the efficiency of cash and capital management was a driver there.

Yeah, and just to add on what Mark said, because we're talking about really just the incremental piece on the current year's NIW, it's not going to really have any dramatic impact on this year's effective tax rate.

Yeah, yeah, makes sense. Okay, great. Thanks a lot.

And as a reminder, to ask a question, press star followed by the number one on your telephone keypad. Our next question will come from the line of Mihir Bhatia with Bank of America. Please go ahead.

Hi. Good morning. Thank you for taking my question. I wanted to start actually going back to the comment on pricing and just unit economics in general. I think, Mark, you mentioned you're so happy with new unit economics on NIW. But maybe just like, you know, taking a step back, big picture, how have unit economics on new business changed in the last two or three years? Obviously, interest rates are up. Sounds like you've done some micro movements around pricing, but overall, the gross premium rate has been in this 40, 41 bits range for 10 quarters. Just trying to think about how unit economics have changed, if at all, in the last two, three years between interest rates and your credit expectations or your view on forward credit.

Thanks. Yeah, it's a good question. I would say pricing in general, the unit economics have been pretty steady. I would say they probably increased in the back half of 22 when there was a movement. I think we've raised pricing in our engines across different MSAs 12 plus times in 22. You don't necessarily see it on the yield on the book as it moves slower. But I would say in the engine itself, we probably raised pricing 30-ish percent, if not more. So the overall pricing on NIW increased pretty significantly. And again, there was a little bit more risk, right, because you had higher LTVs and higher DTIs on some of that 22 business, given some of the affordability issues. But I would say in general... the unit economics have been strongly kind of target that 12 to 14-ish range. And I would say that's probably on the high end of the range from here. And I think it's important for investors to think through that. There's a difference between, because if you write good unit economics, that eventually will show up in your P&L. And conversely, if you write poor unit economics, that'll show up. But For investors at Essin, it's important to differentiate between the unit economics that we're writing and kind of the core ROE that's on the balance sheet. The ROE and the balance sheet, you know, for the gap ROE, you know, there's drivers to that. It's, you know, equity and excess capital and certain things. You almost want to say you want to create what's the difference between the unit economics and the ROE on the balance sheet. Of course, the ROE that you print in the gap is the real ROE, but... you know, there's some optionality for us in retaining that capital. And it's a very powerful optionality. And you have to, again, take a context from a longer-term investor, not quarter to quarter. We operate in a cat business. Our catastrophe happens to be a severe economic recession. We do a lot of things. We manage that expected loss very well to the extent we can. We hedge out a lot of the mezz, but we could reattach. And that's why we run all these different stresses. And we as just as a management team, and you saw we bought back, I would say we bought back more shares in the last four months than we have in the history of Essent. And part of that was we just were valuation sensitive. We saw an opportunity. We think the market kind of overreacts to certain things, and that's fine. having capital allows us to, you know, to kind of lean in a little bit when we saw some value. And, again, you know, writing unit economics at 12% to 14%, you know, when your stock's trading, you know, at bookish or even below book, you know, it was a pretty easy decision. But, again, longer term, it's important we like the optionality of capital because I think it gives us both opportunities defensive here, right, if something bad happens. And I was on a call recently. with all of our investors in in february twenty when people were questioning our growth uh... and then a month later everyone's wondering if we're gonna run out of capital so and i've seen the movie before i've managed the mortgage insurer during a great financial crisis i've been around for the subprime crisis in late nineties i have a lot of scars and i've seen a lot of this so i have a longer term perspective with it and i just believe capital having that in times of stress will allow us it'll be a big advantage for us and we'll be able to take advantage of an opportunity versus being defensive. And if that doesn't ever happen, okay, that's not the worst thing. And then conversely, there's strategic opportunities on the growth side. And again, you haven't heard me say this in a while, but with six mortgage insurers and two large mortgage companies consolidating in a slow market, you guys can kind of think through that consolidation isn't the worst answer for investors, right? If you're thinking of uses of excess capital, putting two large mortgage insurers together is not the worst answer for investors. So we kind of think through a lot of that optionality. And, again, I know you asked a pricing question, but that's so when you see what's the gaps, like, geez, Mark, you guys have 14-ish percent union economics and you're printing 12. You know, what's the difference? It's that optionality of holding the capital.

Right, right. That makes sense. You're talking about capital allocation. I did want to touch on the title business. You've owned it for a little bit now. Any changes on your view of the opportunity there? Give us an update on just what's going on with that business and how you're thinking about it here as interest rates stay higher for longer. Thank you.

Yeah, it's interesting, right? I think when you take a step back at Essent, You know, the issue we have is we're in this pause for growth. And MI, we're very well positioned for it, titles a transaction business. It's one of the reasons we're able to purchase it at such a good price, right? We did it when rates were already up, and you could see on the horizon that it was going to be pretty slow. So I don't want to say it's relatively expected. Again, when we think about the business longer term, we do believe it's going to perform a lot like S&RE, which is supplemental business. earnings. The difference between S&RE and title is there's really no capital against title. So it's relatively ROE accretive. That being said, we had a lot to do in terms of bringing the unit into S&RE. I believe now we're in a good position. We have a good management team. We have a strong leader, which we didn't have before. And I think we're relatively and we want to be positioned so when rates come down, and that means activating more lenders, a lot of things that we did on the MI side, and quite frankly, we have work to do. We continue to have work to do to sign up lenders and to continue to sign up agents. But I would say with the title, again, building businesses takes time. And I think I look at this more almost like an investor, and I feel like we're doing the right things in title this time. And in terms of just the management team here, and this is for investors, I have not spent much time on title probably in the past six to nine months. It's really been that team is in place. And I think that's why I have some comfort in how they're going to perform.

Understood. Thank you for taking my question.

Our next question comes from the line of Jeffrey Dunn with Dowling and Partners. Please go ahead.

Thanks. Good morning. Given what you mentioned about the efficiency of the higher seed of Bermuda, can you provide any guidance in terms of how we think about dividend flows from the underwriting companies up to the holdco? You know, is it something where, I mean, you've been regular with the guaranteed dividends. Is that something where that probably drops below 50 on a quarterly cadence and we see more recurring higher dividends out of S3? Anything you can provide us to give us a little framework around that?

Hey, Jeff, it's Dave Weinstock. Yeah, I don't know that I would think about the tradeoffs between necessarily S&G and S&RE. I think, you know, we look at both entities and we try to think about the capital positions for both and the needs of the holding companies. So I think we'll continue to see dividends from both entities increase. this year, you know, subject to obviously what happens in the environment, right? So, you know, right now with where credit is and things like that, you know, you can see, you know, the continued kind of pattern that we've, you know, we, you know, you can almost see a little bit of what we did in the first quarter, you know, playing out. subject to, you know, the year playing out based on our expectations and credit kind of staying, you know, relatively stable.

Yeah, and I think, Jeff, the way to look at it is we're going to continue to maximize the dividends out of both entities, right? I think you can see whatever ordinary dividends we can get out of Guarantee, we're getting out of Guarantee. We're kind of pushing as much to Holdco as we can. The difference is when it goes to U.S. Holdings, we have to run it through, you know, different entities from a tax rate to get it to the group. So think of it the more... you you

It's a little bit more frictionless