Prepared remarks
Thank you for standing by, and welcome to the Essent Group Limited Second Quarter Earnings Call. Operator gave instructions. I'd now like to turn the call over to Phil Stefano, Investor Relations. You may begin.
Thank you, Rob. 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 2026 was issued earlier today, is available on our website at essentgroup.com. Our press release includes non-GAAP financial measures that may be discussed during today's call. A complete description of these measures and the reconciliation to GAAP may be found in Exhibit Q of our press release and in our second quarter 2026 earnings presentation posted on our website. 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 a 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 18, 2026, 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 2026 financial results, which again reflect the benign credit environment, along with the effects of current interest rates on persistency and investment income. Cash generation from our core MI business remains strong, giving us the flexibility to allocate capital between investing in growth across the franchise and returning capital to the shareholders. Our Buy, Manage & Distribute operating model remains a distinct advantage, positioning Essent to produce high-quality earnings across a wide range of economic environments. For the second quarter of 2026, we reported net income of $190 million or $2.08 per diluted share, which translates to an annualized return on average equity of 13.4%. As of June 30, our book value per share was $63.1 and inclusive of our common dividend, it grew nearly 13% over the past year and has compounded approximately 18% annually since our IPO. As a reminder, we believe that success in our business is best measured by growth in book value per share. In our MI business, as of June 30, our Insurance in Force was $250 billion, a 1% increase versus a year ago. 12-month persistency was 84%, reflecting the current rate environment and that nearly half of our In Force portfolio has a mortgage rate of 5.5% or lower. We believe that this rate dynamic will support elevated persistency levels, while our portfolio growth will remain in a pause as affordability continues to constrain origination volume. Longer term, we continue to believe that favorable demographics and pent-up demand will be a positive for housing in our MI business when affordability improves. The credit quality of our Insurance in Force remains strong with a weighted average credit score of 747 and a weighted average of original LTV of 93%. Our portfolio default rate was effectively flat quarter-over-quarter, and we continue to believe that the embedded home equity of our in force book should mitigate ultimate claims. In addition, 97% of our Insurance in Force is subject to reinsurance protection, which provides capital relief and reduces tail risk. On title, we continue investing in technology across our platform while onboarding new partners by leveraging the broad relationships within our MI franchise. High interest rates remain a modest headwind near term, and we do not expect title to have any meaningful impact on earnings. Longer term, our expectations remain the same. Title provides a capital-light opportunity that generates supplemental earnings for our franchise and deepens our lender relationships. Turning to the Reinsurance segment. We continue to expect written premium of approximately $320 million for our P&C reinsurance activity in 2026, with roughly half earned this year at a combined ratio in the high 90s. The P&C book is weighted towards casualty and specialty requiring minimal incremental capital from Essent Re. However, over the near term, mortgage risk and a related MGA business will continue to drive the segment's earnings. Our consolidated cash and investments as of June 30 totaled $6.6 billion with an annualized aggregate investment yield for the second quarter of 4.9%. Our investment yield this quarter includes income from other invested assets, a portfolio of strategic investments in insurance, specialty finance and housing that we built over several years. It's now approximately $450 million or 7% of our total portfolio. Although returns will vary period to period, this portfolio gives us another way to deploy capital outside of our core businesses to generate income and increase book value. We continue to operate from a position of strength with $5.7 billion in GAAP equity, access to $1 billion in excess of loss reinsurance and $1.1 billion in cash and investments at the holding companies. With a trailing 12-month operating cash flow of $834 million, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. Capital strategy remains a balanced approach that optimizes shareholder returns over the long term while preserving optionality for strategic growth. Year-to-date through July 31, we repurchased nearly 6 million shares for approximately $350 million, and I'm pleased to announce that our Board has approved a common dividend of $0.35 for the third quarter of 2026. 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. Second quarter, we earned $2.08 per diluted share compared to $1.82 last quarter and $1.93 in the second quarter a year ago. My comments today are going to focus primarily on the results of our mortgage insurance and reinsurance segments. There's additional information on our Corporate & Other results in Exhibit D and E of the financial supplement. Our mortgage insurance portfolio ended the second quarter with Insurance in Force of $249.7 billion, an increase of $1.8 billion from March 31 and an increase of $2.9 billion or 1.2% compared to $246.8 billion at June 30, 2025. Persistency at June 30, 2026, was 84% compared to 84.7% on March 31, 2026. Mortgage Insurance premium earned for the second quarter of 2026 was $216 million. The average base premium earned for the Mortgage Insurance portfolio for the second quarter was 40 basis points, down 1 basis point from last quarter, and the average net premium rate was 35 basis points, consistent with last quarter. Our Mortgage Insurance provision for losses and loss adjustment expenses was $29.4 million in the second quarter of 2026 compared to $37.6 million in the first quarter of 2026 and $15.3 million in the second quarter a year ago. At June 30, the default rate on the Mortgage Insurance portfolio was 2.53%, essentially unchanged from March 31, 2026. Mortgage Insurance operating expenses in the second quarter were $31.9 million, and the expense ratio was 14.8% compared to $37.6 million and 17.4% last quarter and $33.6 million and 15.3% in the second quarter last year. At June 30, Essent Guaranty's PMIERs sufficiency ratio was strong at 172% with $1.5 billion in excess available assets. Turning to our Reinsurance segment. Net premiums written in the first half of 2026 were $249 million compared to $31 million in the first half of 2025. Net premiums earned in the first half of 2026 were $73 million compared to $30 million in the first half of 2025. The increase in premiums reflects the growth in non-mortgage business from our expansion into P&C reinsurance activity. The reinsurance combined ratio was 77.9% in the second quarter of 2026 compared to 69.6% last quarter and 19.4% a year ago. The change in the combined ratio was as expected, reflecting the difference in underwriting performance between the mortgage and non-mortgage lines and the changing business mix of the segment's premiums. The pretax underwriting income for the reinsurance segment predominantly reflects the underwriting results of our GSE and other mortgage risk share business, while the contribution from our P&C activity was not material. Consolidated net investment income increased $2.4 million or 4% to $61.6 million in the second quarter of 2026 compared to last quarter due to an increase in the overall yield of the portfolio. Income from other invested assets was $19.4 million in the second quarter of 2026 compared to $10.2 million last quarter and $4.5 million in the second quarter a year ago. The higher results this quarter are primarily due to increased favorable fair value adjustments. Our 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%. Year-to-date, Essent Guaranty paid dividends of $115 million to its U.S. holding company. At quarter end, Essent Guaranty's statutory capital was $3.7 billion with a risk-to-capital ratio of 8.5:1. Note that statutory capital includes $2.7 billion of contingency reserves at June 30. As of July 1, Essent Guaranty can pay additional ordinary dividends of $302 million in 2026. During the second quarter, Essent Re paid a dividend of $100 million to Essent Group. Also in the quarter, Essent Group paid cash dividends totaling $31.6 million to shareholders, and we repurchased 3.2 million shares for $191 million. Now let me turn the call back over to Mark.
Thanks, Dave. In closing, Essent is a well-capitalized, high-quality franchise with strong and consistent cash flow generation. We remain confident in our ability to grow book value per share, return capital and invest in opportunities to build a stronger franchise for the long term. Now let's get to your questions. Operator?
Questions and answers
Operator gave instructions. Your first question comes from the line of Bose George from KBW.
Actually, first, on the premium yield, can you remind us, do you expect that to be fairly stable? And anything to call out on the slight decline this quarter? And then could you just talk about competitive trends?
Sure, Bose. Yes, I think we guided to around 40 basis points for the year, so we're generally in line with that. Longer term, it's really a reflection of new business written, persistency, and all the things that go into the portfolio. The competitive environment is relatively stable and has been for a while. It's a small market, so there isn't much to be gained from heavy competition. Also, there's essentially no credit competition because the GSEs, due to their rules and guardrails, control approvals; if the GSEs don't approve a loan, we generally don't insure it. That's a positive some investors sometimes overlook. Price competition is also fairly stable. Different players focus on particular lenders, geographies, debt-to-income ratios, or credit score segments — everyone picks their spots. At the end of the day, the economics are fairly similar across the industry. For Essent, we're at the lower end in terms of market share gains, but in lifetime premium share we're around the middle of the pack or slightly above. As you know, our earned premium yield has been a bit higher than the industry, partly because of our selection technique. We don't claim to do anything better; we simply have a different appetite and prioritize premium dollars over raw market share. On loans with credit scores 85 and below, we're the lowest in market share; that's market-share-rich but premium-light, which suits some competitors. When you add it all up, industry economics are fairly similar, and I think that's a positive for investors.
Okay, great. That's helpful. And then actually just on that topic of what's happening with the credit scores. I think one concern in the market is that with VantageScore picking up momentum that lenders could use that to game the system. I mean do you think there's any credit risk to be worried about as VantageScore becomes a bigger part of the market?
Yes, it's a fair question. I would say, again, taking a step back a little bit and looking at VantageScore, it is a little bit more lenient than FICO to be sure. There's roughly a 20-point gap between FICO and VantageScore as the GSEs have set up; it may be a bit wider. I wouldn't be surprised to see the GSEs tighten that over time. So if there's any kind of arbitrage, Bose, I expect that to disappear over time. I really do. I don't think the GSEs are going to leave money on the table. They're just too smart for that. In terms of our market, it's actually a little bit of a benefit. So if the scores are a little bit higher, that could bring an FHA borrower into the conventional business. We have to be careful how we price it. But I think net-net, it's probably positive for the conventional market. And in terms of kind of adverse selection, I think that's going to even itself out. I think for us, clearly, given how our engine works, we're not really reliant on the credit score. We use over 400 variables. The credit score is a component of that for sure, but we're relatively score agnostic because we come up with our own scores. So we feel comfortable there. I think for the GSEs, you're going to have to be a little bit more careful. And again, I think that's really going to come down to the GSEs, and how they structure the LLPAs going forward. And again, like I said, I think that will be squared up pretty in relatively short order, should it become bigger. And it's not very big right now. There's not many lenders using it. Actually, some of our top lenders don't even have it as a kind of a priority item because I don't see the real pickup. So it remains to be seen. It's a good question, certainly something in the industry. And if it does help certain borrowers get loans that they are getting today. I think that's a positive. I just don't think that's the case. I think it may shift again from FHA to conventional. I don't see a lot of borrowers coming off the sidelines because they have a higher score to be honest.
Your next question comes from the line of Mihir Bhatia from Bank of America.
I wanted to first follow up on Bose's question about premium yield. I understand it depends on many factors. Could you talk a little about the new-money yield versus what's in the book? We're trying to think about, over the next year or two as the book turns over, what that premium yield could look like — is 40 basis points the floor you recommend? I know you've guided that for this year, but what do you expect further out?
Yes. I wish it was as simple as I could just tell you what our new premium is, our new insurance written, and you could calculate it. It's just not that simple. It's because it's so embedded in the years of books. We're at 40-ish. I would expect that if you're modeling it out over the next couple of years, it may go down a little bit, but it's not a big move because of the weight and size of the book. Going back to new insurance written, again, that's what it's dependent on. We feel pretty good about that. As I mentioned earlier, we've been looking and we are more premium seekers rather than just focusing on the best credit quality. That gets to my point that everyone in the industry is picking their spots. In the second quarter, and this is overall premium, we increased premium 10% on new insurance written just in the quarter, and that's part of it. We took a little more risk, but I think that is a good sign of how the industry picks their spots, and we're able to look for stuff and find value or at least what we perceive as value. Again, I think that's our strategy. It's a little different than others. Everyone is kind of picking their spots, but the economics across the industry are relatively consistent.
Your next question comes from the line of Rick Shane from JPMorgan.
Look, it's a pretty straightforward quarter, and I'm following the analysts who ask really good questions. So I'm going to go a little bit off the beaten path. It's a question we've been asking on some calls and certainly back channel with a lot of the companies we follow. If you could talk a little bit about how you guys are looking at AI and token usage within the organization. I think we're finding a really disparate range of outcomes. Some companies are still saying, 'Hey, be aggressive. We want you to figure everything out, don't worry about token usage,' and we're starting to now hear some conversations about throttling usage and things like optimizing model selection. Where are you guys, and how do you think this plays out over time?
Yes, it's certainly a topic among companies and a top issue here with the Board. I would say our token usage is pretty robust. When you look at the cost of tokens relative to our operating expense level, though, Rick, it's pretty small. We are not a tech company. I've seen stories of token usage running rampant, but we don't really have that. Out of our roughly 500 people, about 100 are active users. When we think about AI, we break it into buckets. At the top of the house, it's a very strong analytical tool. We use Copilot, Claude, Gemini, and Kiro. Depending on where you are in the organization, I’m an active user of Claude; it’s a great analyst and a way to cut through and analyze a lot of data. It’s not a replacement for judgment; it’s like having another pair of hands. It’s complementary when we review opportunities or go through 10-Ks and 10-Qs. But it’s garbage in, garbage out: if you don’t prompt well, you won’t get good answers. At the top of the house, we have to be active users, and it’s hard to push the tools down if leaders aren’t familiar with them. Within the risk group, that’s our core work, and we see opportunities to improve analytics around EDGE on both frequency and severity, and to improve cycle times for making changes. We’re making progress, but it’s not instant. You can’t wave a magic wand and have everyone adopt AI; there’s a process and you must get the right data in, which is underway in the risk group. In IT, the ability to code faster with Kiro has been a big lift, so you’ll see changes there. It all comes back to cycle time—how quickly you can change or improve systems. We have a modular systems platform in the cloud for close to 10 years. We were early adopters because of cyber risk: ten years ago, companies with localized data centers faced significant cyber risk. For us the probability of a hit was low but the severity could be devastating, so we moved to the cloud where incidents are more frequent but less severe. Being on AWS makes us feel well protected. As a modular system, we can make iterative improvements over the next few years and gain efficiencies. We view AI more in terms of the ability to price better, pay claims faster, and improve customer response times on premiums and issue resolution. That’s the heart of our business. We don’t talk about it much, nor do our competitors, how operationally intensive and complex these businesses are. It’s a credit to the industry and a key competitive advantage. From an AI perspective, it will help us. On the title side it’s an even greener pasture: for processing like search and exam, we think we can do things better, cheaper, and faster with AI. As I mentioned, we’re investing in technology. When we bought the title company, they had outsourced IT to a third party. Similar to what we did on the MI side, we bought the code of an underlying system and have implemented it; it’s going live soon and is being tested. It will be much easier to embed AI agents and tools into that platform. So, to answer your question, token cost is immaterial relative to the potential. I think this will play out over the next few years, and I would be surprised if most companies are not actively involved. We talk to our top lenders and can see which public ones are using it and the efficiencies in mortgage originations. Overall, it’s positive and will likely lower the cost for borrowers.
Yes. Look, personally, I think this is probably the most; it is the most transformational thing I've seen other than when I used to sit around and wait for faxes for earnings releases.
You're dating yourself there, Rick. I mean I can say, too, as I explained to the team, I used to use spreadsheets, which means we would actually spread the paper out. And we look at it that way. We didn't invent Excel, but we certainly leverage it. And I think a lot of these is how do you leverage these tools to price loans that are become more efficient from an operating expense basis. And to me, that's the exciting part. And I think as an entrepreneurial company at the top of the house and within the senior management team, I think we've embraced it pretty good.
Your next question comes from the line of Rowland Mayor from RBC Capital Markets.
I wanted to quickly start on the P&C business and just understand if there's any meaningful cat exposure there. And then could you help us understand a bit on the underlying risk in the casualty? Is it U.S. or international? Are there any notable lines of business that we need to know about?
No. I would say there's really two books of business, Rowland, which is Lloyd's. And that's pretty well diversified. I would say that's 85% insurance, 15% reinsurance, mostly specialty and casualty. There is a little bit of property, I would say, probably 15-ish percent is property, not all cat, so probably more mainstream type property risk. And with Lloyd's, remember, we wrote a check for $50 million. So, in a way, it's a strategic investment that we're recognizing as premium and losses. But we're backing 45-plus syndicates. So it's pretty well diversified. I think the top 10 syndicates make up 40-ish percent of the book; there's definitely some exposure there from specialty, marine and energy. But remember, we also have the benefit of the hedging that the insurance companies do, so we're getting this net. We had a pretty, I would say, conservative loss pick upfront for the Lloyd's book. I think for the quota share, that's spread out under over 400 different cedents. It's 70-ish percent casualty, 30% specialty, and the casualty is across the board. So whether it's general liability, D&O, workers' comp, all cross, we think it's pretty well diversified. And there, too, the loss pick of combined ratio was 100%. So this year, Rowland, we'll earn a few bucks on the P&C business, and we expect that to grow over time. But taking a step back, the way we look at the reinsurance segment and the P&C part of it is it's an investment. It's another chance for us to allocate capital. We're bringing in, obviously, a lot of cash flow, roughly $830 million over the last 12 months. Our first choice always is to deploy it into the core business. It's such a good business. But it's relatively limited in terms of whether it's one of six competitors, the unit economics, all those sorts of things. And then we look for what we call little call options. What other places can we invest capital which over time could become something bigger. Title is an example of that. And I think P&C is another example. The third example is our other invested assets, which are really strategic investments. We've built that up over the last three or four years. It's probably roughly like 7% of the portfolio, maybe a little bit higher percentage of equity, but it's strategic. So we work pretty closely with private equity funds as the majority of what we do, and we invest alongside them in direct investments. When we went public, Rowland, back in the day, we talked about stacking vintages. So we had our 12th vintage or 13th vintage, and we would just stack them. Over time, we've built that $250 billion book. It's generating a lot of cash. So a very similar philosophy applies across the board in these other investments. For the strategic investments, we're stacking investments. So we're stacking a $25 million investment here, $30 million here, $10 million there. This year, we have committed in the first half of the year $100 million on strategic investments. We'll fund that over a period of four years. Maybe it takes a while, and it takes a while for them to harvest and have cash flows and return capital to us. So it's always lumpy, but at the end of the day, our number one goal is to grow book value per share. So it helps us do that. I think on the P&C side, that's a different business. It's much different than the MI business. In the MI business, we are chartered to make a market every day in high LTV loans, and we do it for first-time home buyers. In the reinsurance business, we're not under any such obligations. So I think we can be a lot more selective; it's much more like an investment business, where you lean in at certain times and back off at others. There, the concept, especially on the casualty side, is how do we stack float. If we can write a couple of hundred million dollars of gross written and increase that over time in a careful way, certainly you want to have underwriting income, but stacking the float will pay off. It's not going to pay off this year or next year, but it will pay off down the line. On timing of the market for P&C, given where the market is with probably too much capital, we're probably the new capital guy where there's too much capital, but it's not a bad time to build out the infrastructure in this type of market so you're ready for the next market. So we continue to do our work there. In the transaction that we did on the quota share, we have access now to loss triangles from 2005 across both specialty and casualty by line, excess of loss and quota share. That's a treasure trove that we can look to as we make other decisions and start to build that historical context, which we don't have in that business. We have it in spades in the mortgage business, but it's always about data. And I think with Lloyd's it's the same thing: as we, over time, continue to make the trips there and get the data, it will make us smarter longer term if we want to get bigger in the business. We may not get bigger. That's why it's kind of a call option. I think on the title side, it's the same thing. It's a relatively soft market in title, especially on the residential side. It's not a bad time to be building out infrastructure. There, the stacking is we stack lenders. So we continue to leverage and sign lenders up in slow times. When the market does come back, which it will, the housing market will come back, maybe not in the next six or 12 months, but housing will grow again in this country. For title, once most mortgage rates are at 6%, the refinance part of that market will become much more robust. We're clearly levered to that. On the underwriting side, we're stacking title agents, so we continue to focus on Florida and Texas and prepare ourselves when the market comes back. From an investor standpoint, it's a good situation to be in because we're investing in the core business and getting good returns. We're making, I think, smart investments across title, P&C and these strategic investments. We had an excess of 100% payout ratio in the first half of the year. So when you combine them all, it's nice optionality for our longer-term investors.
That was far more in-depth of an answer than I could have hoped for. Switching to the core business. I was just wondering if you think we need to see affordability dynamics meaningfully shift for the NIW opportunity to improve? Or have there been some signs that housing demand is adjusting to the rate environment?
I think the answer to your question is yes. We do need to see affordability improve. Again, Rowland, taking a step back, this is just a function of time. When we look at that 2021 period with ultra-low rates and home price appreciation, when the music stopped in the middle of 2022 HPA had gone up about 50%. During 2021 there was a rush to buy everything — bicycles, pools, cars, boats and houses. Younger folks leaving the city accelerated that. People who wanted a larger house because of low rates accelerated that. My favorite was people saying they were going to work remotely forever and needed a special room just for their Zoom office. We pulled close to five years of demand forward in those big years, and this is the after effect. After the second half of 2022 and through 2023, 2024, 2025 and 2026 we're still feeling it, Rowland. I don't see it changing soon. When you think about affordability, you have to break it into three things: job income growth, interest rates and HPA. HPA is still growing, which helps us even in our later book, but it doesn't really improve affordability. For affordability to improve sooner, rates will have to change. The math is relatively simple. From an Essent standpoint and from an MI and industry standpoint, we're very well positioned. We said before that when rates went up and originations slowed, our persistency would be higher, and that natural hedge in the business, similar to a mortgage servicing book, has played out in spades. The downturn or slowness has lasted longer than we thought, Rowland. But remember, the longer it takes, the more demand queues up. These young homebuyers haven't gone anywhere; they just have an affordability issue. The longer this lull lasts, the stronger the comeback will be, and I think it will be toward the tail end of the decade.
And then if I could just sneak in one more. Is the right way to think about the subsidiary dividend capacity, is that it grows largely alongside the scheduled contingency reserve releases shown in the slide deck?
Yes. That's a good catch. I mean, obviously, the income coming from the group, given a lot of the business we wrote as we grew — remember, you have to hold 50% of the premium for 10 years. So if you look at 2017, 2018, 2019, and obviously 2020 and 2021, there's a bubble of, I would say, increased contingency reserves that will come in over the next few years. So it's a lot of nice dry powder for us in terms of dividend capacity coming out of Essent Guaranty. Yes, good catch.
And there are no further questions. I will now turn the call back over to management for closing remarks.
Thanks, everyone, for your participation, and have a great weekend.
This concludes today's conference call. Thank you for your participation. You may now disconnect.