Essent: a 13% return on equity, priced just below book value

Essent's net income fell 2.9% in the second quarter, from $195.3 million to $189.7 million. Earnings per share rose 7.8%, from $1.93 to $2.08. Both statements are true, and the gap between them is a diluted share count that shrank 9.6% in a year.

Essent sells private mortgage insurance, and it has done three things at once: earned an annualized return on equity of 13.4% in the second quarter, grown book value per share 10.6% in twelve months (12.9% counting dividends), and bought back shares at a pace few insurers of its size match. At $60.49, the September 30, 2026 intraday quote, the stock trades at 0.96x the June 30 book value of $63.01.

My triangulated Base value is $75.40, which is 24.6% above the price. The Bear value of $53.30 is 11.9% below it and the Bull value of $95.90 is 58.5% above it. For a Confidence B score the framework requires a 25% margin of safety, which puts the maximum buy price at $56.55. The shares would have to fall about 11.3% to get there. Until then this is a hold: a good business priced well below my Base value, but not yet inside the margin of safety that pays for being wrong about the credit cycle.

Route: SF-03 Insurance, U.S. private mortgage insurance with a reinsurance segment. Economic classification: Quality Growth (8/12). Primary method: justified price to book value (residual income logic). Secondary method: normalized price to earnings. Values are present fair value estimates, not 12 month price targets.

What Essent does and why book value is the number to watch

Essent Guaranty insures a slice of the loss (27.4% of the loan balance on average) on U.S. home loans made with small down payments. The borrower pays a monthly premium, and Essent pays a claim only if the loan defaults and the home sells for too little. At June 30 it had $249.7 billion of insurance in force (up 1.2% from a year earlier) across 801,140 policies, with a weighted average credit score of 747 and an original loan to value ratio of 93%. Of that insurance in force, 97% is covered by reinsurance, which Essent's CEO says provides capital relief and reduces tail risk.

Persistency, the share of policies still in force after twelve months, was 84.0%, down from 85.8% a year earlier. Nearly half the portfolio carries a mortgage rate of 5.5% or lower, so borrowers have little reason to refinance and cancel coverage. New business is healthy (new insurance written was $14.1 billion, up 12.8%), but management expects portfolio growth to stay subdued while affordability limits mortgage originations.

The second engine is a reinsurance segment, mostly mortgage risk sharing with the government sponsored enterprises (Fannie Mae and Freddie Mac). Its net premiums written were $248.8 million in the first half of 2026, against $30.6 million in the first half of 2025. Management describes the property and casualty part of it as not yet material. A small title insurance business sits in the corporate segment.

The latest quarter

Revenue grew while profit fell, and two lines explain most of it. The provision for losses across the group was $49.0 million against $17.1 million a year earlier, nearly three times as much, because credit losses are returning from a very low base. Working the other way, income from other invested assets rose by $14.9 million. By my estimate (assuming an 18% tax rate) that added about $0.13 per share compared with the year-earlier level, which is worth remembering before anyone multiplies $2.08 by four.

PMIERs stands for Private Mortgage Insurer Eligibility Requirements, the capital standard set by Fannie Mae and Freddie Mac. A sufficiency ratio of 172% means Essent holds $1.72 of eligible assets for every $1.00 the standard requires.

Which numbers matter for Essent

For an insurer, free cash flow is the wrong headline metric. Book value per share, the return on equity that drives it, and capital strength are the right ones. Book value per share of $63.01 and an annualized return on equity of 13.4% are the anchors.

My normalized estimates for a full mortgage cycle are adjusted earnings per share of $6.60 in the Bear case, $7.50 in the Base case and $8.20 in the Bull case, with sustainable return on equity of about 10.5%, 12.5% and 14.5%. The Base EPS is 9.9% below the $8.32 you would get by annualizing the second quarter, and 4.9% above the trailing twelve month figure of $7.15. Net income was $690.0 million in 2025, $729.4 million in 2024 and $696.4 million in 2023, so the Base case asks for earnings per share above last year's $6.90 but not above what a benign credit year has already delivered.

One consistency note. Base EPS of $7.50 is 11.9% of current book value per share, a little below the 12.5% return on equity used in the book value method. The earnings method is therefore slightly more conservative than the book value method, and I have left it that way.

Shares and capital structure

Shares outstanding fell from 95.46 million at year-end 2025 to 89.88 million at June 30, 2026, a decline of 5.8% in six months. The 5.8 million shares repurchased through July 31 equal 6.1% of the year-end count. Total equity fell 1.6% over the same period, from $5.757 billion to $5.663 billion, while book value per share rose 4.5%, from $60.31 to $63.01. Book value per share is growing because the share count is shrinking faster than equity, which is exactly what a buyback below or near book value is supposed to do.

The average repurchase price of about $60.00 was 95% of the current book value per share. Leverage is low: $500 million of senior notes due in 2029 at a weighted average rate of 6.25%, a debt to capital ratio of 8.1% and $500 million of undrawn committed credit capacity. The holding companies carry $1.11 billion of cash and investments.

Primary valuation: justified price to book value

The justified price to book multiple is (ROE minus growth) divided by (cost of equity minus growth). It asks what multiple of book a stock deserves given the return it earns on that book.

With long-run growth of 3%, a Base multiple of 1.20x on a 12.5% return implies a cost of equity of about 10.9%. Growth and cost of equity are my estimates, not company data. On the same inputs a 10.5% return would justify 0.95x and a 14.5% return would justify 1.45x. The Bear multiple of 0.85x is therefore a deliberate extra discount for credit stress, and the Bull multiple of 1.50x is 0.05x more generous than the formula.

Sensitivity to book value and the multiple

Secondary valuation: normalized price to earnings

At $60.49 the stock trades at 8.5x trailing earnings of $7.15 and 8.1x Base EPS. The Base case therefore needs a P/E of 10x, above where the shares trade today. The secondary Base is $75.00, and it lands almost exactly on the primary method partly because both Base cases assume the market pays more than it does now.

Historical multiples as context

Since the end of 2024 price to book has stayed between 1.0x and 1.1x, and at 0.96x the stock now sits below every quarter-end reading in that period. Quarter-end readings from December 2024 to September 2025 ran from 1.01x to 1.09x, after 1.27x in September 2024. The Base multiple of 1.20x is above every reading since December 2024, so the Base case assumes a re-rating and not just an unchanged multiple applied to a higher book value. I give the history no formal weight in the triangulation, but I tested it (see the robustness table): at 1.10x book the Base value falls to $71.30.

Valuation triangulation

The two Base values differ by 0.8%, far below the 20% warning threshold. The weighted result is $75.40 and I use it unrounded. Applying the same 65/35 weights to the Bear and Bull cases gives $53.30 and $95.90.

What is the market already pricing in?

At $60.49 and a book value of $63.01, the stock trades at 0.96x book. Working backward through the justified multiple with the same 3% growth and 10.9% cost of equity, that price implies a sustainable return on equity of about 10.6%. That is 2.8 points below the 13.4% reported for the second quarter and 2.1 points below the 12.7% for the first half, and almost exactly my Bear assumption of 10.5%. The market is pricing the Bear return, not a collapse: it is allowing for higher credit losses, slower growth in insurance in force, or smaller capital returns.

Bear, base and bull scenarios

I assign no probabilities to the scenarios. The upside to Base (+24.6%) is about twice the downside to Bear (-11.9%), a reasonable skew but not the margin of safety the framework asks for before calling a stock a buy.

How the buy price is set

A Confidence B score carries a base margin of safety (MOS), the discount to estimated value that I require before calling a stock a buy, of 25%. Applied to the $75.40 Base, the maximum buy price is $56.55. A stricter 30% margin would put the reference price at $52.78. The maximum buy price sits 6.1% above the Bear value of $53.30, so at that price the downside to the pessimistic case would be small. The shares would need to fall about 6.5% from $60.49 to reach it.

Dividend

The quarterly dividend is $0.35, or $1.40 a year, up from $1.24 paid in 2025. The yield is 2.3% at $60.49 and the payout ratio is about 19% of Base EPS. At the current share count the dividend costs roughly $126 million a year, a fraction of the $348 million spent on buybacks in seven months. Total shareholder yield matters more than the dividend alone here.

Reasons to own ESNT

• Book value compounding. Book value per share plus dividends has grown 12.9% in twelve months and at about 18.5% a year since the 2013 IPO, according to the company.
• Strong capital. PMIERs sufficiency of 172% with $1.5 billion of excess assets, risk to capital of 8.5 to 1, and 97% of insurance in force reinsured.
• Stable credit today. A default rate of 2.53%, flat from the prior quarter, on a portfolio with an average credit score of 747.
• A shrinking share count. Diluted shares are down 9.6% year over year, and buybacks have been done near book value.
• A price below book value. 0.96x book for a business earning 12% to 13% on it is a modest discount, and it is below every quarter-end reading since December 2024.

What could go wrong?

• Thesis breaker: credit deterioration. Rising unemployment or falling home prices would raise defaults and claim severity. The group loss provision has already nearly tripled from a very low base, and the return on equity being paid for today comes from that base.
• Growth is paused. Insurance in force grew 1.2%, persistency slipped 1.8 points, and management expects affordability to keep limiting new business.
• Policy risk. On September 15, 2026, mortgage insurer shares fell after FHFA Director Bill Pulte announced that Fannie Mae and Freddie Mac would align policies so servicers can proactively contact borrowers who are eligible to drop mortgage insurance. Reports described it as a small change. Essent shares are down 12.1% from the September 14 close of $68.80. That includes the 3.97% drop in today's quote, for which I found no specific news.
• Reinsurance is new territory. Premiums written rose about eight times in a year, and the segment's loss ratio went from 0.3% to 42.9% in the second quarter as the book grew. Its pretax income fell slightly while premiums more than tripled.
• Earnings quality of the latest quarter. Income from other invested assets and a benign loss environment flatter the $2.08.

Management execution

Management kept book value per share compounding while returning capital, repurchased stock near book value, kept leverage at 8.1% of capital, expanded reinsurance protection to 97% of insurance in force, and grew a second segment. The open question is whether that segment earns an adequate return for its tail risk. Assessment: 16/20, good. The next test is whether a reinsurance segment whose loss ratio moved from 0.3% to 42.9% in a year earns its capital.

Stock Analyza scorecard

Mortgage-credit cyclicality keeps Essent out of the Compounder class. Business quality is 78/100: franchise and moat 15/20, economic return 15/20, balance sheet 13/15, underwriting quality 12/15, growth and runway 9/15, management and allocation 9/10, dilution and governance 5/5.

Confidence score

The filings are detailed and the two valuation methods agree. Predictability is marked down because mortgage credit is cyclical. Valuation robustness is the score I would challenge first, since the Base value depends on a multiple above every reading since December 2024.

What I would watch from here

Today's readings are green on every line: 13.4% return on equity, 12.9% growth, a 2.53% default rate, 172% PMIERs sufficiency, 8.5 to 1 risk to capital, 97% reinsurance protection and a falling share count. Review with the third-quarter report, currently expected around November 6, 2026.

The three most important thesis breakers

1. Sustained credit deterioration that pushes normalized return on equity below the cost of equity and erodes book value.
2. A change in PMIERs, GSE policy or housing finance that raises capital requirements or lowers premium economics.
3. Losses in the reinsurance segment that show its returns do not cover its tail risk.

Adversarial review

The first draft's arithmetic for the two valuation methods was correct: $63.01 x 1.20 = $75.61 and $7.50 x 10 = $75.00, within 1% of each other. The corrections came in the step after that, where the results were rounded in different directions, and in the price.

The largest change is in the Bear case. Rounding it up by $1.70 made the downside look like 9.1% at today's price when the weighted figure is 11.9%. None of these corrections changes the Hold verdict, and the Base value moves by only $0.60.

The strongest counter-thesis for the bulls: a mortgage insurer earning 13% on equity, trading at book, with 9.6% fewer shares than a year ago, is priced as if the return will not last, and it does not need to last at 13% to earn a fair result. The strongest counter-thesis for the bears: mortgage insurers earn their best returns exactly when credit is benign, the loss provision has already nearly tripled, and the stock has traded between 1.0x and 1.1x book since the end of 2024, so even today's 0.96x is only a small discount to its own recent history.

Audit flags: the EPS scenarios, the sustainable return on equity ranges, the 3% growth rate and the 10.9% cost of equity are my estimates, not company guidance. The Base value is sensitive to the multiple: at 1.10x book it drops to $71.30 and the upside to 17.9%, still above the 15% threshold for Undervalued. The reference price is an intraday quote, not a closing price, and it moved 3.97% during the day. The publication gate status is PASS WITH WARNING for that reason.

Final verdict: hold at $60.49, watchlist for new money below $56.55

Essent is a high-quality insurer with a strong balance sheet, a falling share count and a return on equity above 13%. Its stock is priced just below book value, a meaningful discount to my Base value, but still 7.0% above the maximum buy price and so short of a discount that covers a turn in the credit cycle. Management has been a buyer at about $60 a share. At $60.49 you would be paying almost exactly what the company itself paid this year.

Verdict: HOLD at $60.49. Triangulated Base value $75.40, upside 24.6%, Confidence B (21/25). Required margin of safety 25%, maximum buy price $56.55.

The case improves if the price falls into the buy zone with credit still stable, which needs a further drop of about 6.5%, or if the third-quarter report shows the reinsurance segment earning its capital while the default rate stays near 2.5%.

Sources

Primary sources include Essent Group's second-quarter 2026 earnings release and financial supplement (August 7, 2026), the second-quarter earnings call and presentation, and the 2025 Form 10-K. Market data comes from StockAnalysis (price history and statistics) and Yahoo Finance (historical price to book readings). The policy item comes from Yahoo Finance reporting on the September 15, 2026 announcement by the Federal Housing Finance Agency director.

The reference market price is $60.49, the September 30, 2026 intraday quote from the XTB trading app, down 3.97% on the day. Balance sheet and capital figures are as of June 30, 2026, taken from the earnings release and call. Normalized EPS, sustainable return on equity, growth, cost of equity and scenario values are analytical estimates, not company guidance.