Essent Group (ESNT) reported third-quarter earnings of $1.82 per share, 3.2% below the $1.88 consensus. Revenue of $374.18 million beat expectations by 12.7%. On the surface, the year-over-year comparisons look healthy: earnings grew 9.0% and revenue rose 20.0%. The quality of both figures deserves scrutiny. Net income was $163.4 million, slightly below the $164.2 million earned a year ago. Per-share growth came entirely from a diluted share count that fell from 98.5 million to 89.8 million. Sequentially, EPS dropped from $2.08 in the second quarter. The central tension is that Essent is shrinking its share base faster than its core mortgage insurance earnings are deteriorating, but those core earnings are now deteriorating.
The revenue beat came almost entirely from the newer reinsurance business, not from mortgage insurance. Reinsurance net premiums earned reached $64.0 million, up from $16.3 million a year ago, as non-mortgage property and casualty premiums ramped. That growth carries much higher losses. The segment's combined ratio rose to 84.7%, from 77.9% in the second quarter and 19.2% a year earlier. Reinsurance pre-tax income actually declined year over year, to $17.5 million from $20.1 million. Mortgage insurance premiums earned slipped to $211.0 million from $215.7 million. Other income was also flattered by a $5.7 million favorable embedded-derivative mark. Meanwhile, income from other invested assets fell to $10.7 million from $19.4 million in the prior quarter. In short, the top-line beat added volume without adding much profit.
Credit is where the quarter turned. The mortgage insurance default rate rose to 2.75%, from 2.53% in the second quarter and 2.29% a year ago. New defaults reached 12,034, the highest in the five quarters disclosed. The mortgage insurance loss provision jumped to $51.7 million from $29.4 million, and the segment loss ratio rose to 24.5% from 13.6%. Essent still released $29.6 million of prior-year reserves, but the current-period provision of $81.3 million was the largest in the disclosed history. Management linked the rise to larger average loan sizes, roughly $400,000 versus about $300,000, which lift severity. It also acknowledged that the post-2022 book is weaker. That candor matters. The 2022 through 2024 vintages show inception-to-date incurred loss ratios of 21% to 27%. Every vintage from 2021 and earlier sits below 7%.
Growth in the insured portfolio has also stalled. New insurance written fell to $12.1 billion from $14.1 billion in the second quarter. Insurance in force grew just $342 million, and management warned it could be flat or down in 2027. Persistency eased to 83.3% and the net premium rate slipped to 34 basis points. Management described housing demand as still paused and gave no recovery timing. It also guided the tax rate higher, to 17-18%. On the positive side, management pointed to a potentially larger conventional mortgage market from VantageScore adoption and borrowers migrating from FHA loans. It also flagged a risk that lenders could cherry-pick loans using VantageScore, compressing pricing.
Capital remains the strongest part of the story. The PMIERs sufficiency ratio, which measures capital against the government-sponsored enterprises' requirements, improved to 177% from 172%. Risk-to-capital tightened to 8.2:1, and Essent Guaranty's ordinary dividend capacity rose to $324 million. The board authorized a new $500 million buyback after year-to-date repurchases of 7.7 million shares for $474 million. Management said capital return is running above 100% of earnings. Book value per share, however, dipped to $62.58 from $63.01 as unrealized investment losses produced a small comprehensive loss of $5.6 million for the quarter. The release shows 6.3% year-over-year book value growth, or 8.6% including dividends; the call's roughly 9% figure appears to reflect the dividend-inclusive measure.
The market setup is more complicated than a modest miss implies. Investor sentiment moved from essentially neutral (-0.004) to moderately positive (0.244) ahead of the report. Shares rallied about 19% off their September 30 low and set a 52-week high of $71.84 the day before results. At $68.60, the stock was 4.6% above its post-August opening price and 8.8% above its 200-day moving average. It therefore entered earnings priced closer to optimism than to concern about credit.
The bottom line is that Essent delivered a lower-quality quarter beneath a respectable headline. The revenue beat came from lower-margin reinsurance premiums, the EPS growth came from buybacks, and mortgage credit metrics deteriorated meaningfully. The capital engine is intact and still supports aggressive shareholder returns. With insurance in force flattening and the newer vintages performing worse, however, bears have legitimate ammunition, particularly for a stock that came into the report near its highs.