Essent Group - Earnings Call - Q2 2025

Executive Summary

• Strong quarter with EPS of $1.93, a clear beat versus S&P Global consensus $1.71*; total revenue of $319.1M slightly topped $318.2M consensus*. Loss ratio fell to 6.6% and MI expense ratio improved to 15.5%, driving high-quality earnings and ROE uplift.
• Credit trends remained favorable: default rate declined to 2.12% (from 2.19% in Q1), while cure activity continued; net premiums were stable and investment income modestly higher QoQ.
• Capital strength and returns: PMIERs sufficiency at 176% with $1.579B excess; Board declared a $0.31 dividend; YTD through July 31, ESNT repurchased 6.8M shares for $387M, with $260M remaining under the $500M authorization.
• Strategic/catalyst: Moody’s upgraded Essent Guaranty to A2 and Group senior debt to Baa2; management underscored valuation-sensitive buybacks and highlighted embedded value and persistency tailwinds as potential stock drivers.

What Went Well and What Went Wrong

What Went Well

• Operating leverage: MI expense ratio improved to 15.5% (from 18.7% in Q1), contributing to EPS outperformance and lower combined ratio; CFO emphasized lower operating expenses QoQ.
• Credit performance: Default rate decreased to 2.12% from 2.19% in Q1; loss ratio dropped to 6.6% from 13.1% in Q1, reflecting favorable cures and stable performance.
• Strategic positioning and tone: “Our second quarter performance demonstrates the strength of our business model… We believe that our buy, manage and distribute operating model uniquely positions Essent…” — CEO Mark Casale.

What Went Wrong

• Defaults still elevated YoY: Default rate 2.12% vs 1.71% a year ago; cure rate in Q2 was 26% vs 66% in Q1; average claim severity 67%, reflecting seasonality and hurricane cohort dynamics.
• Title headwinds: Management reiterated title is unlikely to be a near-term earnings contributor given rates and transaction volumes.
• Premium mix softness YoY: Net premiums earned down modestly vs Q2’24 ($248.8M vs $251.9M), with risk-share and title premiums also lower YoY.

Transcript

Speaker 4

Hello, and thank you for standing by. My name is Prilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Ltd. second-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star one again. Thank you. I would now like to hand the conference over to Phil Stefano, Investor Relations. Please go ahead.

Speaker 2

Thank you, Prilla. 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 second quarter of 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 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 19, 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 second-quarter 2025 financial results, which continue to benefit from favorable credit performance and the impact of higher interest rates on persistency and investment income. Our second-quarter performance demonstrates the strength of our business model in the current macroeconomic environment. We believe that our buy, manage, and distribute operating model uniquely positions Essent within a range of economic scenarios to generate high-quality earnings.

Our outlook on housing remains constructive over the longer term, as we believe that demographics will continue to drive demand and provide home price support. Over the last several years, demand has exceeded supply, resulting in meaningful home price appreciation and affordability challenges. A byproduct of these affordability issues is that higher creditworthy borrowers are being qualified for mortgages, as evidenced by the weighted average credit score of our new business. Also, the increase in home values has resulted in further embedded equity within our insured portfolio, which provides a level of protection in reducing the probability of loans transitioning from default to claim. Now for our results. For the second quarter of 2025, we reported a net income of $195 million compared to $204 million a year ago. On a diluted per share basis, we are at $1.93 for the second quarter compared to $1.91 a year ago.

On an annualized basis, our return on average equity was 14% in the quarter. As of June 30th, our U.S. mortgage insurance in force was $247 billion, a 3% increase versus a year ago. The credit quality of our insurance in force remains strong, with a weighted average FICO score of 746 and a weighted average original LTV of 93%. Our 12-month persistency on June 30th was 86%, flat from last quarter, while nearly 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. On the Washington front, our industry continues to play a vital role in supporting a well-functioning and sustainable housing finance system. We believe that access and affordability will continue to be the primary focus in D.C.

Essent is supportive and believes that our industry is very effective in enabling homeownership for low-down payment borrowers while also reducing taxpayer risk. During the quarter, Essent Re continued writing high-quality GSE risk share business and earning advisory fees through its MGA business with a panel of reinsurer clients. As of June 30th, Essent Re had risk in force of $2.3 billion for GSE and other risk share. Essent Re achieves both capital and tax efficiencies through its affiliate quota share with Essent Guaranty and allows us to leverage Essent's credit expertise beyond primary MI. It also provides a valuable platform for potential long-term growth and diversification of the Essent franchise. Essent Title remains focused on expanding our client base, footprint, and production capabilities in key markets.

We continue to maintain a long-term horizon for this business, and given persistent headwinds of high rates, we do not expect Title to have any material impact on our earnings over the near term. Our consolidated cash and investments as of June 30th total $6.4 billion, with an annualized investment yield in the second quarter of 3.9%. Our new money yield in the second quarter was nearly 5%, holding largely stable over the past several quarters. We continue to operate from a position of strength, with $5.7 billion in GAAP equity, access to $1.4 billion in excess of loss reinsurance, and a PMIERs sufficiency ratio of 176%. With a trailing 12-month operating cash flow of $867 million, our franchise remains well-positioned from an earnings, cash flow, and balance sheet perspective.

Earlier this week, we were pleased that Moody’s upgraded Essent Guaranty’s insurance financial strength rating to A2 and Essent Group Ltd.’s senior unsecured debt rating to Baa2. We believe these actions reflect our consistent, strong results, high-quality insured portfolio, financial flexibility, and the benefits of our comprehensive reinsurance program. Our capital strategy is to maintain a conservative balance sheet, withstand a severe stress, and preserve optionality for strategic growth opportunities. We continue to believe that success in our business is best measured by growth in book value per share as we look to optimize returns over the long term. In addition, our strong capital position and slowdown in portfolio growth allow us to be active in returning capital to shareholders. With that in mind, I am pleased to announce that our board has approved a common dividend of $0.31 for the third quarter of 2025.

Further, year to date, through July 31, we repurchased nearly 7 million shares for approximately $390 million. Now, let me turn the call over to Dave.

Speaker 0

Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the second quarter, we earned $1.93 per diluted share compared to $1.69 last quarter, $1.91 in the second quarter a year ago. My comments today are going to focus primarily on the results of our mortgage insurance segment, which aggregates our U.S. mortgage insurance business and the GSE and other mortgage reinsurance business at our subsidiary, Essent Re. There's additional information on corporate and other results in Exhibit O of the financial supplement. Our U.S. mortgage insurance portfolio ended the second quarter with insurance in force of $246.8 billion, an increase of $2.1 billion from March 31, and an increase of $6.1 billion, or 2.5%, compared to $240.7 billion at June 30, 2024. Persistency at June 30, 2025, was 85.8%, essentially unchanged from the first quarter of 2025.

Mortgage insurance net premium earned for the second quarter of 2025 was $234 million and included $13.6 million of premiums earned by Essent Re on our third-party business. The average base premium rate for the U.S. mortgage insurance portfolio for the second quarter was 41 basis points, and the net average premium rate was 36 basis points, both consistent with last quarter. Our mortgage insurance provision for losses and loss adjustment expenses was $15.4 million in the second quarter of 2025, compared to $30.7 million in the first quarter of 2025, and a benefit of $1.2 million in the second quarter a year ago. At June 30, the default rate on the U.S. mortgage insurance portfolio was 2.12%, down 7 basis points from 2.19% on March 31, 2025.

While we continue to observe a decline in the number of defaults associated with Hurricanes Helene and Milton during the second quarter due to cure activity, we made no changes to the reserve for hurricane-related defaults, as this amount continues to be our best estimate of ultimate losses being incurred for claims associated with those defaults. Mortgage insurance operating expenses in the second quarter were $36.3 million, and the expense ratio was 15.5%, compared to $43.6 million and 18.7% in the first quarter. As a reminder, in April, we entered into two excess of loss transactions covering our 2025 and 2026 new insurance written, effective July 1 of each year, with panels of highly rated reinsurers. In addition, in April, the ceding percentage of our affiliate quota share with Essent Re increased from 35% to 50%, retroactive to NIW starting from January 1, 2025.

At June 30, Essent Guaranty's PMIER sufficiency ratio was strong at 176%, with $1.6 billion in excess of available assets. Consolidated net investment income increased $1.1 million, or 2%, to $59.3 million in the second quarter of 2025, compared to last quarter, due primarily to a modest increase in the overall yield of the portfolio. As Mark noted, our total holding company liquidity remains strong and includes $500 million of undrawn revolver capacity under our committed credit facility. At June 30, we had $500 million of senior unsecured notes outstanding, and our debt-to-capital ratio was 8%. During the second quarter, Essent Guaranty paid a dividend of $65 million to its U.S. holding company. As of July 1, Essent Guaranty can pay additional ordinary dividends of $366 million in 2025. At quarter end, Essent Guaranty's statutory capital was $3.7 billion, with a risk-to-capital ratio of 9.2 to 1.

Note that statutory capital includes $2.6 billion of contingency reserves at June 30. During the second quarter, Essent Re paid a dividend of $120 million to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $30.9 million to shareholders, and we repurchased 3 million shares for $171 million. In July 2025, we repurchased 1 million shares for $59 million. Now, let me turn the call back over to Mark.

Speaker 2

Thanks, Dave. In closing, we are pleased with our second-quarter financial results as Essent continues to generate high-quality earnings, while our balance sheet and liquidity remain strong. Our outlook for housing remains constructive over the long term, and we believe Essent 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 Essent and our stakeholders, while Essent continues to play an integral role in supporting affordable and sustainable homeownership. Now, let's get to your questions. Operator.

Speaker 4

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press the star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press the star one again. Your first question comes from the line of Terry Ma with Barclays. Please go ahead.

Thank you. Good morning. I wanted to ask about home prices and your expectations going forward. To the extent home prices kind of trend negative, how do you think about pricing on a go-forward basis? How would you feel about the more recent vintages that the industry has underwritten, which has seen just less home price appreciation overall?

Speaker 1

Good morning, Terry. I think on home price appreciation, where do we see home prices going? It really depends, you know, down at the MSA level. I mean, we have a pretty detailed forward-looking model across all of the MSAs. It puts a lot of, you know, I would say the driving factors are clearly month supply, recent home price appreciation, and job growth, right? They're the kind of three factors if you just kind of boil it down to a local community, you know. I think there, yeah, we see home prices going up in certain areas still because of the lack of supply. Other areas, we think there's going to be some weakening. We've thought that for a while. It depends on the extent of it, you know, 5%, 10% maybe in certain markets. I think when we take a step back, that's actually pretty good. It's healthy.

Some of the markets have really increased rapidly. I think almost a 50% increase over a few-year period. You know, income growth still at 3%, 4%. Then you had a doubling of rates. That's why you've seen such kind of slowdown in housing, right? We're kind of coming out of that. You've heard me say it before, the COVID bubble, so to speak, with low rates and high demand. We're kind of on the second leg of that. I think coming out of that, you know, if you think of just affordability when it becomes kind of normalized again, you're going to need a mix of job growth, HPA kind of flattening out or decreasing in certain areas, and clearly a little bit of relief on rates, right? You can almost draw the math up as to depending on where your belief is on rates.

I think, again, I think for in certain markets for home prices to come down, I think that's healthy for borrowers. You heard me say it in the script. There's a big issue. There's a big push in D.C. around affordability. There's a big push with our lenders, as it should be. It's very difficult to get a mortgage, and especially when you think of the first-time home buyer is 38 years old, when historically, you know, it's in the low 30s. That tells you right there that folks are having trouble getting home. Anything to kind of help affordability, if that means HPA is going down a little bit, that's fine. I look at the embedded equity in our portfolio. I'm not particularly worried. Yeah, you said the recent vintages. I would say sure that we've always said they're probably more exposed, but they're pretty normal, right?

If you think about, historically, Terry, kind of on average, let's say before COVID, and you looked at our portfolio, it was probably 81%, 82% mark to market. It's below that today. Assuming it gets back to that level, that's the normal business. We're not particularly concerned around that. In terms of new business, we've always priced differently. We kind of have little add-ons for what we'll call a market of focus. That, again, has to be, it's not just HPA rose a lot, puts a market of focus for us. If there's still underlying strong income growth and kind of lack of supply, that kind of, we'll probably like that market. If you just think about all of our markets in general, if you go down to the MSA level, and you'll hear about Cape Coral's in the Wall Street Journal, and you should stay away from it.

The default rates in that area for us are pretty similar to the rest of our portfolio. I want to say it's a touch higher. Go to Austin, our default rates are actually lower than the overall portfolio. You have to be careful at trying to look at the industry from a 30,000-foot level. I think when you look individually at Essent, I think continually the returns are there. Obviously, when you think about what we're doing on the capital side, I think we probably have a pretty good sense of where our view around credit.

Got it. Super helpful. I guess maybe on just credit for the quarter, new defaults were up 9% year over year. The pace of increase has kind of decelerated markedly the last few quarters. It seems like it's pretty consistent across the MIs that I cover. I guess any color on the makeup of new defaults that you've seen the last quarter or two, and what's the outlook there? Thank you.

Yeah, I mean, again, new defaults, nothing surprising. I mean, very consistent with other quarters. From an investor standpoint, you just have to understand that's really this, we're starting to get back to probably the normal seasoning pattern around defaults where you see it kind of decrease in the first half of the year and tends to pick up a little bit in the second half of the year. There's kind of the normal seasoning that folks should be aware of. It happened last year, and it seemed to catch everyone by surprise that our default seasoned. Now they're kind of, you know, they decrease in the first half of the year. I think you'll see that normal seasoning. Big picture, you know, Terry, again, it's, you know, 2-ish, 1 point, was it 2.12% default, you know, out of roughly 811,000 or 12,000 loans that we have.

It ebbs and flows a little bit, but I think big picture, given the embedded equity in the portfolio, you know, having some of those, even if they become defaults, transitioning to claim depending on the vintage is, you know, it's probably in the lower probability side. I think from a credit standpoint, big picture, you know, we feel pretty good, you know, from that first loss perspective.

Got it. Thank you.

Speaker 4

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

Hey, Ed. Good morning. On the buybacks, would you characterize the pace of your buybacks this year as opportunistic, or is there any change in how you're thinking about excess capital, which has obviously built quite a bit over the last couple of years?

Speaker 1

It's a little bit of both, Bose. I think we've always, you know, I think we kind of have, we are valuation sensitive around the buyback. We kind of have a grid, you know, that we execute across. It changes quarter to quarter depending on, you know, where we think credit is. Are there any opportunities to invest the cash? Pretty high bar given the returns in the core business. To your point, you know, we said before we have a retain and invest mentality. We haven't really invested anything in a couple of years, so we've retained a lot. It's a little bit of, we have a lot of buildup of excess capital. We like, you know, where, you know, the valuation is. We think it's really good returns for the shareholders. It's a good use of proceeds.

Given, you know, what we did in July, I wouldn't expect that to change for the remainder of the year. I wouldn't be surprised if it doesn't change, you know, given what we're looking at. We'll have something else. It's probably going to be in an investor deck we'll put out next week around kind of the embedded value of the portfolio. One of our peers did it a couple of years ago and stopped doing it. It's a really interesting kind of slide that I think it's important for analysts and investors to take a look at. If you think about it, it'll give you some context for how we think about, you know, the company, Bose. I mean, we're roughly $5.7 billion of capital that we have today. That's roughly where the stock trades in terms of a market cap.

If you look, it doesn't really give any credit then for the, what, roughly $245 billion insurance in force we have that earns 40 basis points in yield. You can kind of predict, or you know, you can assume a certain combined ratio over four to five years discounted back. Take a look at the investment portfolio, $6 billion, $6.5 billion, you know, yielding close to 4%. A lot of embedded value in the investment portfolio, Bose, that frankly wasn't there three, four years ago. When you look at that number, you can be, and you can pick whatever discount rate that you like. It's probably $15 to $20 in terms of the stock, in terms of the valuation, additional book value. Embedded book value.

That doesn't give us, that doesn't, that ignores any credit for being a platform or a franchise that's one of six in the country that offers low-down payment borrowers to the top lenders backed with the GSEs. Just big picture, I don't, it's a slide. I think it's something just for investors to be aware of. I think it's something we're going to start thinking through and discussing with investors. It's pretty true for all of our competitors too. It's not just an Essent-only thing. I think it deserves a little bit more of a spotlight. I think when you put in the context of that, and again, given where, you know, the valuation is, we feel comfortable buying shares, a healthy amount of shares back at these prices.

That's great, very helpful. Thanks. Just one follow-up on the buybacks. What was the dollar amount that was spent just during the second quarter?

Hey, Bose. It's David Weinstock. We purchased 3 million shares at $171 million in the second quarter.

Okay, great. Thank you.

Sure.

Speaker 4

Your next question comes from the line of Doug Harter with UBS. Please go ahead.

Thanks, and good morning. Mark, just following up on that embedded value and the buyback, how are you thinking about sizing it? What are the limitations of cash flow up to the holding company? How do you think about holding back for opportunities that may or may not present themselves versus buying back today?

Speaker 1

No, it's a good question. I think there's clearly a limit, right? I mean, we get cash back to the group two ways. Obviously through U.S. and Holdings, which is the core. We will dividend it up from Guaranty up to Holdings, and then have to get it to Group. Then we invest in Re. We've tended to use a little bit more Essent Re recently. It's a little bit more tax-efficient, Doug. There is a limit. When you think about kind of payout type ratios, I think 100% is probably kind of a max just from how the cash moves through the system. Not saying we would do that, but if you're looking at an upper end just over the net, where it was kind of in the first half of the year, that's a decent level.

In terms of how we calculate excess capital, we've gotten many questions over the years. PMIER is certainly one, but we also look at it from an enterprise framework, right? Because we include Essent Re in there. We kind of look at it like consolidated capital requirements and needs. We run it through different stress. I would say the Moody’s S4 stress is one, and the constant severity model that they use. Moody’s obviously looked at both of those during the upgrade. I think that's important, right? I think you have now another independent party looking at our balance sheet and our risk and detailed review of the stresses and feels comfortable now that we're at the kind of single A level. I think that's good news for investors and clearly for bond holders. We'll also look at it. We'll still run it through the great financial crisis.

We'll still run that. You're always looking, because remember, we're that upper tier, Doug, right? We own the first loss. We're very comfortable. That's why we don't get too stressed about default rates and first loss. That's kind of what we signed up for. It's much more, it's clearly earnings versus capital. Then, we hedge out that whole MEZ piece. Our exposure is when it comes back to the top. I think when we think about what comes back to the top, is the probability that low? Sure, it is. It was low. Low doesn't mean zero. I think when we look at that environment, we're looking to make sure we clearly have enough, more than enough capital from a PMIER standpoint. Remember how pro-cyclical PMIER is, Doug. There is a liquidity component of that to the MIs that I'm not sure all investors appreciate.

We run it through that, not just capital, clearly P&L, but PMIRs too. We want to make sure we have enough capital, not to just withstand that, but basically to maybe use it as an opportunity, an opportunistic. We had that chance in 2020. If you go back, we raised capital. We had plenty of capital. We wrote a lot more business than some of our competitors back then because we had the capital. We're still enjoying the cash flows of that today. I think it's making sure we're just well-positioned between, we say it, like a range of economic scenarios. We really don't get caught on our back foot. Again, clearly, you know, with the buybacks in the first half of the year, we feel comfortable around that scenario and still have the capital to return to shareholders. Bose alluded to it.

Some of it is just the buildup that's been over the last couple of years, Doug. We have it and we're comfortable and we're fortunate. I say this and everyone wants their stock price up, but if you're looking to buy shares back, you kind of like the valuation that it's at. We're not too, we're not too stressed about that either. Hopefully that gives you a little color.

Very helpful, Mark. Thank you.

Speaker 4

Your next question comes from the line of Rick Shane with JP Morgan. Please go ahead.

Good morning, everybody, and thanks for taking the question. Hey, I'd like to dig in a little bit on the persistency. When we look at the persistency by vintage, there is some dispersion. The 2023 vintage persistency was a little bit lower. That makes sense. Presumably, that is the cuspiest of the slightly seasoned vintages. You probably have borrowers there who are trying to take advantage of the refi window. The other two vintages that have persistency a little bit lower sequentially are 2020 and 2021. I'd like to delve in a little bit more on that. Is that just natural aging associated with those vintages? Should we expect, regardless of rate, that the persistency should trend down there, or is it exogenous factors like borrowers taking seconds and the brokers, you know, getting appraisals and allowing borrowers to rescind the private mortgage insurance?

Speaker 1

Yeah, I mean, a lot to unpack there, Rick. I would say, which is a typical one of your insightful questions. I think when we think about persistency, a little bit of it depends on, you didn't bring this up, but our persistency tends to be a little bit higher because we don't really place a lot in the lower kind of half of the high LTV, like the 80 to 85s. If you look at our market, if you kind of break our market share between 80 to 85, we may be the lowest in the industry. Having a bit of a higher LTV, which clearly comes with more risk, also helps a bit on the persistency side. I think on the earlier books, 2021, I just think they're seasoning, right? All of a sudden now you're five years into it.

Especially folks who bought the house then, if their families are bigger, they're, again, rates on all sides, they're looking, they could be looking to move up. That doesn't, that's pretty natural, and that's happened over time as the portfolio seasons. I don't think it's seconds, and I know there's a lot of noise around seconds. I do think seconds in home equities will become, continue to increase as they should if someone is kind of locked into the 3% mortgage and they need another bedroom and to get the home equity loan in addition makes perfect sense. We haven't done it most recently, but I think the last time we did it, 3% of our portfolio had seconds on it. I wouldn't, again, back to reading, big picture articles and assigning it into the MI portfolio.

A little tougher to stick a second on an 85 or 90 LTV, even if it has built the, built-in market. A lot of that's going to be on the traditional, below 80 business for the GSE. I think it's also interesting, Rick, just to point out, again, the strength of the business model. We got questions galore from 2014 to 2020, like especially 2018. Might have been even in 2018 when rates went up. Like, geez, Mark, how's your portfolio going to perform when rates increase? What's going to happen to Essent when rates increase? We would say, hey, you know what, there's a hedge. NIW is going to go down, but persistency should stay elevated. Clearly in 2022, it was a little bit of that on steroids, right?

Because we had that, we got the lock-in with a 3% rate, and we got the added tailwind with investment income, which quite frankly we never saw coming. I mean, we ran a business where our yields were below 2% for, you know, 10 plus years. Every year we thought the yields would go up, and they never did. Then we woke up one day, and now they're at, you know, new money yields at 5%. I do think it's a reminder of the strength of the portfolio and kind of the business model. It's a unique business model in that we play in a space that we understand very well, but we're able to take that in insurance form and premium form. There's a building kind of cash flow advantage to getting paid first.

The next question we'll get, as we should get, is what happens when rates go down? You know, what does that do? I think it's the same thing, Rick. It's going to be, persistency is going to be lower in certain segments, especially the newer segments, right, where the rates are in the sixes. The renewed NIW is probably going to grow the portfolio. I just don't know when that's going to be. I think you would ask me that a couple of years ago, and we're still not sure the timing of it. A lot of it gets back to that earlier question or comment around affordability. It has to reach kind of that medium level. I believe, you know, I could be wrong. I've been wrong many times before, but I do believe there's a pent-up demand for housing.

I think it's, and I think, and it's ironic, but the longer this slowdown lasts, probably the more upside there'll be in housing, in the return to housing and demand, which I think will bode well for the top line for Essent and the whole industry, to be honest.

Yeah, it's fair. There's an interesting comment there, which is you've been wrong many times. I appreciate the humility of that and acknowledge the number of times I've been wrong too. I would argue that you built this portfolio not for being right, but actually for being wrong. That's part of what you constructed here. I'm curious, this question is driven by something we saw earlier in the week. We have another company we follow that makes very, very short duration loans. They are, because of that and the short-term uncertainty, pulling back from originations. If they miss a window of six months, given the 12 to 18-month duration of their assets, they can recover that very quickly. It made me think of you guys and how long the duration of your portfolio is.

Are you willing to, when you see those, have those concerns, take the risk of pulling back and knowing that for five years you will have a cohort that is underrepresented at the risk of being wrong?

I think it depends. I wouldn't say we wouldn't shy away from lower share, and we've done it in the past. I think we probably, you know, there's been records where we've been, you know, I think we've been top market share like twice in a quarter in our history, but we've been at the bottom more than twice. We're not afraid to kind of make calls there. A lot of it's around pricing. It's also an interesting thing in our industry. There's a lot of, as you know, and that's really the only competitive factor to the industry, Rick. We don't really have a lot of credit competition in the industry. That goes back again to the guardrail setup. We've always called them the credit guardrails set up with, you know, the qualified mortgage rule.

Fannie and Freddie with DU and LP, they do such a good job of segmenting risk. They do a great job around QC. We're kind of the beneficiaries of that, as is the industry. There's not a lot of credit competition. I think, you know, we haven't gotten a question, but if you think about GSE reform, like what happens if the GSEs go public? One, I think that that helps us a lot, more so than people think, because I think it'll bring a lot more liquidity into the space from an investor standpoint. It helped us on the CRT side, kind of more visibility, probably more share, right? Because they're going to start, they'll do the buy, manage, and distribute operating model, again, probably in much greater force. They'll probably expand the market a little bit. There's good and bad to that. It's good because higher top line.

The bad is it could introduce some credit competition to the space, and we haven't had that. I think that's when you're going to make more calls on higher or lower share, right? Right now, you know, yielding, you know, price, if, you know, we'll back off a little bit on price, but at the end of the day, if the returns are there, we're still there. There's a lot of volatility around the loss assumptions. I think then you're going to see a lot more disparity in share. We have an advantage there. I don't think it's an advantage we've been able to leverage much. When you think about our credit scoring engine, Essent Edge, and this comes in with a lot of, there's been a lot of banter about with the scores, the Vantage scores, and the new FICO score, and all those sort of things.

We look at the rural credit bureau. We're almost agnostic to the score. We can, and we use two bureaus. We don't even need necessarily the third to be able to triangulate and get the right price. If there's a lot of disparity in the market, I would use the analogy, Rick, of like a fairway. If that fairway starts to widen, all of our lenders will increase their volume, as they should. I would do the exact same thing. I think when we look at our ability to discern between kind of a good 700 and a bad 700, if there's a lot of different scores flying around, I think it's even a bigger advantage for us. That advantage may have us decide not to do some of the business versus to do the business.

Not saying that market's going to happen, but as we think about it, we always think about multiple scenarios and how we would react and position the business before it happens.

Okay, I appreciate it very much. Thank you, guys.

You're welcome.

Speaker 4

If you would like to ask a question, simply press the star one on your telephone keypad. Your next question comes from the line of Mihir Bhatia with Bank of America. Please go ahead.

Hi, good morning, and thank you for taking my questions. First, I just wanted to actually follow up on the Essent Edge point you just made, Mark. Specifically, I guess, you know, Essent Edge, you know, next generation has been out for a couple of years. Can you just talk a little bit about what you've seen so far? I appreciate you saying that, you know, you haven't, I guess from the outside, we haven't really been able to, you know, we can't really tell, given how low default rates are, how these engines are different. Maybe just talk a little bit about what you're seeing internally, and are you continuing to invest with Essent Edge adding, you know, or is it more just a matter of now we're getting all this data and it's just waiting for the fairway to widen as you mentioned?

Speaker 1

I would say we haven't made a ton of investment on it over the last 12 months. Once we got, you know, we did a lot to get that second credit bureau in. Clearly, with some of the noise around the industry with the tri-merge and things like that, we may make the investment to get the third bureau. I've gone the whole call without saying AI, which seems to be the banter for most companies, not our industry, but others. The technology there has increased so much, just even over the last six months. We're seeing more opportunities to use it within our IT group in other areas to speed things up the market. I think that's, you know, you saw some of the lenders announce some things, which we've been watching.

There are some things there that we potentially could use to improve it over time, which I don't know if I necessarily would have said that a year ago. I thought we felt pretty comfortable with it a year ago. You're right. I think you're going to need some disparity in credit for it to really shine. The one way for people to look at it today, for investors to look at it today, Mihir, is look at our earned premium yield, right? Our earned premium yield's higher than the rest of the industry. What does that tell you? Our defaults are relatively the same. We're able to get a little bit extra yield. What's a basis point or two? Two basis points on $245 billion adds up.

I think if you're from the outside looking in, that's probably the best evidence of the success of how the credit engine works. Again, remember, it's just a credit engine. We'll use that then to create price using an old fashioned yield analysis. There, the price is a little bit, you're testing pricing elasticity in certain markets where you can get a little bit more price. Think of it more as a way to get value for an individual loan.

No, that is helpful. It is certainly something we see in the data. You mentioned AI. My second question actually does relate to AI, but almost like from a little bit of a threat to your business. Maybe not a threat, actually. I was trying to understand the implications. Specifically, I'm talking about today, borrowers getting an appraisal and canceling MI. My understanding is that is not super common. As more and more data moves to the crowd, fintechs in a way are trying to build these personal finance recommendations. Do you worry about that becoming something that becomes more common where borrowers ask to go get an appraisal and cancel MI from existing policies? How would that, something like that, impact your business and returns?

Yeah, I mean, it's been kind of, you know, it's been discussion over the last five years, ever since kind of rates went down. It's not very common in the business. Part of it is that there's clearly friction to it, for sure, Mihir. A lot of the major servicers do notify the borrowers, so the borrowers are aware of it, or they're notified of it. It's just small dollars. I think it's, you know, again, you're going to, there's work to be done to refinance something that's, you know, 30 to 40 basis points. I'm not saying it can't be done. We don't lose a lot of sleep over it. I do think, though, in terms of AI, it'll impact it. I'd be surprised if it didn't. It's also going to make refinancings, even, you know, in our lenders, I would say today are brutally efficient in refinancing loans.

I think it's going to be even more frictionless. If you speak to some of our top lenders and their investments in technology, I think what's the common theme of all this, though, is the borrower benefits. If the borrower, you know, right now the borrower, you know, the MI automatically cancels below 80%, I think that's a great rule. I think that benefits the borrower. If there's a slowdown in rates and borrowers are, you know, locked into their mortgage and their home price appreciates significantly, and they're able to, you know, get the appraisal easier and cancel MI, good for them, good for the borrower. That means it's a good borrower. Yeah, I know we don't get too fussed about it. There could be some economic impact to it, but I don't think it's very big.

I wouldn't, we're not going to lose a lot of sleep over it.

If I could squeeze in one question on just ARPA. Any thoughts on outlook for the year? I think there was a little bit of a downtick this quarter. Any callouts there?

Hey, Meher. It's David Weinstock. I think we feel really good about our guidance. If you look at where we are for the six months, I think we're kind of right on track for our $160 million to $165 million, probably a little bit towards the lower end. On a quarter-to-quarter basis, things can fluctuate based on production volumes, staffing levels, things like that. Overall, we're happy with where we are.

Got it. Thank you for taking my question.

You're welcome.

Speaker 4

I am showing no further questions at this time. I would like to turn it back to the management for any closing remarks.

Speaker 1

I'd like to thank everyone for their time today and enjoy the rest of your summer.

Speaker 4

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