Executive Summary / Key Takeaways

• Essent Group Ltd. operates a resilient "Buy, Manage, and Distribute" model, generating high-quality earnings and robust cash flow through its core mortgage insurance business, strategically supported by reinsurance and a growing title segment.
• The company's proprietary EssentEDGE credit engine provides a significant technological differentiator, enabling superior risk selection, dynamic pricing, and a higher earned premium yield compared to the industry average.
• Despite a challenging housing market characterized by elevated interest rates and affordability issues, Essent maintains strong financial performance, benefiting from increased investment income and elevated persistency in its insured portfolio.
• Essent is actively returning substantial capital to shareholders through a recently increased quarterly dividend and a new $500 million share repurchase authorization, reflecting management's confidence in the company's embedded value and strong balance sheet.
• The long-term outlook for housing remains constructive due to demographic trends and pent-up demand, while stringent credit guardrails and Essent's conservative capital management framework mitigate macroeconomic risks.

The Essent Story: A Foundation of Resilience and Strategic Evolution

Essent Group Ltd., a Bermuda-based holding company, stands as a critical player in the U.S. housing finance industry, primarily offering private mortgage insurance and reinsurance for residential properties. Its core "buy, manage, and distribute" operating model is designed to navigate diverse economic environments, consistently delivering high-quality earnings. The company's strategy is rooted in a deep understanding of credit risk, leveraging technology, and maintaining a robust capital structure.

The company's journey began with its incorporation in 2008, establishing Essent Guaranty, Inc. in Pennsylvania as its primary U.S. mortgage insurance subsidiary. A pivotal development occurred in 2014 with the emergence of Essent Reinsurance Ltd. (Essent Re), a Bermuda-domiciled subsidiary, which began contributing significantly to Essent's book value through third-party reinsurance business. This Bermuda platform has proven instrumental, offering capital and tax efficiencies while extending Essent's credit expertise beyond primary mortgage insurance. The strategic evolution continued with the 2023 acquisition of Boston National Holdings LLC and the subsequent renaming of Agents National Title Insurance Company to Essent Title Insurance, Inc. in 2025, marking a deliberate expansion into title and settlement services.

Essent's reinsurance strategy has evolved to enhance capital diversification and manage mezzanine credit risk. The quota share reinsurance coverage from Essent Re to Essent Guaranty has steadily increased, reaching 50% for new insurance written (NIW) effective January 1, 2025, up from 35% in prior years. This move aims to further leverage the Bermuda platform for efficient cash and capital management. Additionally, in the first quarter of 2025, Essent executed forward quota share transactions and, in April 2025, entered into excess of loss transactions with highly rated third-party reinsurers, covering eligible policies for 2025 and 2026. This programmatic approach to reinsurance underscores a commitment to prudently managing risk exposures. The financial strength of this model was recently affirmed in August 2025, when Moody's upgraded Essent Guaranty's insurance financial strength rating to A2 and Essent Group's senior unsecured debt rating to Baa2.

Technological Edge: EssentEDGE and Operational Excellence

A cornerstone of Essent's competitive advantage is its proprietary credit engine, EssentEDGE. This advanced technology allows the company to selectively grow its high-credit-quality insurance in force while generating strong returns. EssentEDGE is notably "credit score agnostic," instead analyzing "400 kind of variables" from two credit bureaus to assess risk. This granular approach enables dynamic pricing adjustments and performs particularly well when credit data is "more disparate."

The tangible benefits of EssentEDGE are evident in the company's financial performance. Essent's earned premium yield is consistently higher than the rest of the industry, often by one or two basis points. This seemingly small difference, when applied to a portfolio of approximately $245 billion in insurance in force, "adds up," demonstrating the engine's effectiveness in capturing greater value for individual loans. Looking ahead, Essent is considering investing in a third credit bureau to further enhance its data insights, especially given "noise around the industry with the tri-merge." The company is also exploring the integration of AI tools within its IT group and other areas to "speed things up to market," indicating a commitment to continuous technological improvement. This technological leadership forms a critical part of Essent's competitive moat, supporting superior risk selection, optimized pricing, and consistent unit economics, which management targets in the 12-14% range.

Competitive Positioning in a Regulated Fairway

Essent operates within a competitive landscape that includes major private mortgage insurers such as MGIC Investment Corporation (MTG), Radian Group (RDN), Genworth Financial (GNW), and Arch Capital Group (ACGL). Essent differentiates itself through its integrated service offerings, customer-centric approach, and the regulatory advantages afforded by its Bermuda-based structure, which can lead to cost efficiencies.

While Essent's profitability and cash flow are robust, it may not match the sheer scale or global reach of larger, more diversified rivals like Arch Capital. However, Essent's focused expertise in the U.S. residential mortgage market allows for greater operational efficiency and quicker responses to market shifts. The EssentEDGE credit engine provides a distinct competitive advantage, particularly in its ability to discern between varying levels of credit risk, which becomes even more critical if the "fairway starts to widen" in terms terms of eligible borrowers. The industry benefits from significant "credit guardrails" established by Dodd-Frank's qualified mortgage rules and the sophisticated underwriting systems (DU and LP) of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These guardrails limit credit competition, fostering a stable environment for Essent and its peers. Indirect competitors include government-backed programs like the FHA and VA, as well as emerging fintech companies. Essent's specialized strategy, however, provides operational resilience against these alternatives. Potential GSE reform could introduce more liquidity and expand the market, but it also carries the risk of increased credit competition, a dynamic Essent is prepared to address with its advanced underwriting capabilities.

Financial Performance: Resilience in a Challenging Environment

Essent's financial performance in the third quarter of 2025 underscores the resilience of its business model. The company reported net income of $164.2 million, translating to $1.67 per diluted share, compared to $176.2 million and $1.65 per diluted share in the prior year's third quarter. For the nine months ended September 30, 2025, the annualized return on equity stood at a healthy 13%.

The company's insurance in force (IIF) for its U.S. mortgage insurance portfolio reached $249 billion as of September 30, 2025, representing a 2% increase year-over-year. Persistency, a key driver of premium revenue, remained elevated at 86% as of September 30, 2025, a direct benefit of the current high mortgage interest rate environment. Net premiums earned in the mortgage insurance segment were largely stable at $231.6 million for the third quarter of 2025, compared to $231.2 million in the same period of 2024.

Net investment income continues to be a significant tailwind, increasing to $59.8 million in the third quarter of 2025 from $57.3 million a year prior. This growth is primarily attributable to an increase in the weighted average balance of the investment portfolio and a higher pre-tax investment income yield of 3.9% in Q3 2025, with new money yields consistently near 5%. Income from other invested assets also saw a notable increase for the nine months ended September 30, 2025, driven by favorable fair value adjustments.

The provision for losses and loss adjustment expenses in the mortgage insurance segment increased to $44.2 million in Q3 2025 from $29.8 million in Q3 2024. This rise is primarily due to an increase in the number of defaults and a higher average reserve per default, influenced by the aging of the portfolio and a reduction in hurricane-related defaults without a corresponding change in reserves. The portfolio default rate modestly increased to 2.29% as of September 30, 2025, reflecting normal seasonality. Management notes that the average loan size has increased to nearly $300,000, which naturally leads to larger provisions when loans default. Despite this, the substantial home equity embedded in the in-force book is expected to mitigate ultimate claims. Operating expenses for the mortgage insurance segment decreased to $34.2 million in Q3 2025, down from $36.3 million in Q3 2024, mainly due to lower compensation expenses. The combined ratio for the MI segment was 33.9% in Q3 2025, compared to 29.6% in Q3 2024.

The "Corporate Other" category, which includes the title operations, reported net premiums earned of $14.7 million in Q3 2025, a decrease from $17.7 million in Q3 2024, primarily due to fewer title insurance policies issued. This segment recorded a pre-tax loss of $5.0 million in Q3 2025, an improvement from a $8.5 million loss in Q3 2024. Management views the title business as a long-term "call option" and an "incubator" for supplemental earnings, noting it is "relatively ROE accretive" due to minimal capital allocation.

Robust Capital and Strategic Allocation

Essent maintains a position of exceptional financial strength and liquidity. As of September 30, 2025, the company held $91.4 million in cash, $640.1 million in short-term investments, and $5.4 billion in fixed maturity investments, totaling $6.6 billion in consolidated cash and investments. The holding companies alone held $1 billion in cash and investments, complemented by $500 million in undrawn capacity under its Revolving Credit Facility. Management is confident in the company's ability to meet its operating cash needs and committed capital expenditures for the next 12 months.

The company's capital management framework is comprehensive, incorporating PMIERs (Private Mortgage Insurer Eligibility Requirements), an enterprise-wide view including Essent Re, and rigorous stress tests such as the Great Financial Crisis scenario and Moody's S4. Essent Guaranty's PMIERs sufficiency ratio stood at a strong 177% as of September 30, 2025, with $1.6 billion in excess available assets. Its statutory capital was $3.7 billion, yielding a robust risk-to-capital ratio of 8.9:1. Essent Re, with total equity of $1.7 billion, also contributes significantly to the group's capital flexibility.

Essent is committed to returning capital to shareholders. The Board of Directors recently approved an 11% increase in the quarterly common dividend to $0.31 per share for the fourth quarter of 2025, alongside a new $500 million share repurchase authorization extending through year-end 2027. This aggressive capital return strategy is driven by the significant buildup of excess capital from strong operating performance and a lack of compelling alternative investment opportunities. Year-to-date through October 31, 2025, Essent has repurchased nearly 9 million shares for over $500 million. Management views these buybacks as the "best investment we can make in the company," emphasizing a "valuation-sensitive" approach to "compounding book value per share growth."

The estimated annual effective tax rate for 2025 is approximately 16.2%, an increase primarily due to withholding taxes on intercompany dividends. This "tax friction" is considered a necessary cost for efficiently distributing capital to shareholders, deemed a "no-brainer" given the value created by lowering the share count. Essent's Bermuda-domiciled entities benefit from a limited international presence exemption from Bermuda income tax until 2030, contributing to the overall favorable tax rate.

Outlook and Key Risks

Essent's long-term outlook for the housing market remains constructive, underpinned by favorable demographic trends and a significant "pent-up demand for housing." Management anticipates that the current elevated mortgage rates will continue to support high persistency in the near term. For the full year 2025, mortgage insurance segment operating expenses are estimated to be between $160 million and $165 million. While the investment yield is expected to remain in a similar range for 2025, a yield above 4% is not anticipated this year.

However, the company acknowledges several pertinent risks. Changes to government-sponsored enterprises (GSEs), increased competition, and broader economic conditions, particularly a "severe macroeconomic recession," represent Essent's primary "catastrophe" risk. While the credit quality of the insured portfolio remains strong (weighted average FICO of 746, original LTV of 93%), it is "reasonably possible" that loss estimates could change due to shifts in the economic environment, including the impact of elevated mortgage interest rates on home sales, housing inventory, and prices. Specific events like Hurricanes Helene and Milton in late 2024, which led to 2,119 hurricane-related defaults, are being monitored, though a lower claim rate is expected based on historical experience. Wildfires in Southern California in early 2025 are not expected to have a material impact on reserves. Affordability challenges persist, evidenced by the average age of a first-time homeowner reaching 38, and rising homeowners insurance costs in certain regions could impact borrowers' disposable income, though Essent's exposure in high-cost areas is limited.

Conclusion

Essent Group Ltd. presents a compelling investment thesis built on a foundation of credit expertise, technological differentiation, and a disciplined capital management strategy. The company's "Buy, Manage, and Distribute" model, powered by its EssentEDGE credit engine and strategic reinsurance programs, consistently delivers high-quality earnings and robust cash flow. This operational strength, coupled with a conservative balance sheet and a commitment to shareholder returns through dividends and opportunistic share repurchases, positions Essent as a resilient performer in the specialty insurance sector.

Despite near-term headwinds in the housing market and a modest increase in loss provisions due to portfolio aging, Essent's ability to generate strong investment income and maintain elevated persistency underscores its adaptability. The company's proactive approach to capital allocation, including leveraging its Bermuda platform for efficiency, highlights a management team focused on long-term value creation. With a constructive outlook for housing demand and robust credit guardrails in place, Essent is well-prepared to capitalize on future opportunities and withstand potential market challenges, making it an attractive proposition for discerning investors seeking consistent returns and a strong competitive standing.