Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Limited Second Quarter 2017 Earnings Conference Call. [Operator Instructions] After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Chris Curran, Senior Vice President of Investor Relations, you may begin your conference.

Thank you, Chris. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer. Our press release which contains Essent's financial results for the second quarter of 2017 was issued earlier today and is available on our website at essentgroup.com in the Investor section. Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliations to GAAP may be found in Exhibit L of our press release. 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, please review the cautionary language regarding forward-looking statements in today's press release. The risk factors included on our Form 10-K filed with the SEC on February 16, 2017, 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 Chris. Good morning, everyone and thank you for joining us today. I am pleased to report that Essent posted another solid quarter of financial results. Portfolio growth, strong credit performance, and ongoing expense leverage continue to drive of our high quality and growing earnings. As a franchise that invests in U.S. mortgage credit risk, we are well-positioned in growing our short portfolio and generating strong returns. Our outlook for Essent and our industry remains positive, as the MI business is correlated to housing and weighted towards purchase mortgages and first-time homebuyers. We believe that demographics such as the millennials entering their peak buying years are contributing to a strong housing environment. In fact the largest cohorts of the millennials are between the ages of 25 to 27 years old. While the average age of the first-time homebuyers' approximately 32. This demand combined with builders increasing supply to first-time homebuyers with price points in the low 200,000s is good for housing. Now let me touch on our results. For the second quarter, we earned $72 million, an increase of 38%, compared to $52 million for the second quarter a year ago. On a per diluted share basis, we earned $0.77 for the second quarter of 2017 and generated a 20% return on average equity. In addition, we grew adjusted booked value per share of 22% to $15.93 compared to $13.08 as of June 30, 2016. Our increase in net income continues to be driven by growth in our insurance and force, which increased 32% to $95 billion from $72 billion as of June 30, 2016. This growth drove a 26% increase in earned premiums to $127 million compared to $101 million for the second quarter a year ago. We remain pleased with our portfolio's credit performance and improved operating leverage.…

Thanks Mark. And good morning, everyone. I will now discuss the results for the quarter in more detail. For the second quarter, we reported net income of $72 million or $0.77 per diluted share. Net income for the quarter increased 38% as compared to $52 million for the second quarter of 2016. Earned premium for the second quarter was a $127 million, an increase of 8% over the first quarter of a $118 million and an increase of 26% from a $101 million for the second quarter of 2016. The average premium rate for the second quarter was 53 basis points, which was consistent with the first quarter of 2017 and down from 57 basis points for the second quarter of 2016. The decrease in the average premium compared to the second quarter of last year is primarily due to a lower level of single's cancellation income. We remain pleased with the credit performance of our insured portfolio ending the quarter with the default rate of 41 basis points compared to 45 basis points as of March 31, 2017, and 36 basis points as of the end of the second quarter of 2016. Our provision for the quarter was $1.8 million compared to $3.7 million for the first quarter and $3 million for the second quarter a year ago. The decline in our provision in this quarter compared to last quarter continues to be driven by a decrease in the number of new defaults, net of cures reported during the quarter. Other underwriting and operating expenses were $35.7 million for the second quarter, and our expense ratio was 28.2% compared to $36.3 million and 30.9% respectively for the first quarter of 2017. The income tax rate for the second quarter was 27.1%. We expect our effective tax rate for the…

Thanks Larry. In closing, Essent had another strong quarter of financial performance. Our goal at Essent remains simple and that is to build a high credit quality and profitable mortgage insurance portfolio. The Essent team does this every day by delivering best-in-class service to our lender partners and helping them grow their businesses. I am very proud of our team and all their efforts in building such a strong customer-focused franchise. Now let's turn the call over to your questions. Operator?

[Operator Instructions] Your first question comes from Jack Micenko of SIG. Your line is open.

Hey, good morning guys. Looks like the 95 LTV product has increased a bit year-to-year, quarter-to-quarter and the FICOs are holding, so is that the banks maybe reducing overlays or do you think that's maybe more education on behalf of the mortgage originators around the availability of that product? What do you think is driving some of that growth? We've seen it in others in the industry as well.

Yes. Hey, Jack, it's Mark. It's pretty simple. It's really the GSEs have reopened their program going back a couple of years now and really it's - so what you're seeing is two things in our portfolio. You're seeing the 95s migrate to 97s because the borrowers with 3% down versus 5% and you're also seeing some of the borrowers move over from that FHA. So you are seeing a slight increase. I think from our standpoint, we like the risk there. We have reduced coverage at the 97s, and the pricing is pretty good. So like our all-in returns at that product are really no different than any other LTV across the book.

Okay. And then Larry, it looks like you guys took on some duration in the quarter. Is that sort of you - the mid part of the curve is maybe flat or longer, and maybe just talk about your sensitivity to rising rates on securities books compared to maybe where it was a year ago?

Sure, Jack. We have no substantial change in our strategy around the investment portfolio. In terms of rising rates, we do believe we're pretty well-positioned to manage any increase in rates as it relates to the portfolio. The duration is still relatively moderate at about 4. In addition in terms of the portfolio it's well laddered. We have about 30% of the portfolio that matures in the next 24 months. So we'll be able to reinvest that at higher rates. And I think maybe most importantly, we continue to generate a lot of cash in the core business. First six months of the year operating cash flow was about $144 million, so we'll obviously have the ability to reinvest that to the extent that our rates increase in the future as well. So we think the portfolio in the business is pretty well-positioned as it relates to any rise in the interest rates.

Okay. And to sneak one more, the persistency bumped sequentially about 190 basis points. Are we pretty much through the sort of the resolution of the refis that we had seen later last year at this point?

It's tough to tell, Jack. I mean again, I think from a guidance standpoint, we would probably point you more to the kind of 78 maybe and bumped up a little bit above 80 for the quarter. But tough to tell really where rates are going and where persistency is going to kind stop. We tend to be a little bit more conservative in guiding you guys. So 78 to 80 is probably good range.

Okay. Thanks a lot.

Your next question comes from Rick Shane of JPMorgan. Your line is open.

Good morning guys. Thanks for taking my questions. In looking at the operating expenses it looks like you've sort of hit a new plateau over the last three quarters in the $36 million, $37 million per quarter range, and that was up and sort of plateaued in the $31 million, $32 million range. What is the trend going forward? Should we see this as a longer plateau or with the portfolio having continued to grow, should we expect another incremental step up sometime in the next six to 12 months?

Yes. Hey, Rick, it's Mark. I don't know if it's incremental. Remember we paid premium taxes so as the portfolio grows that's a certain kind of percentage where the expenses will grow. We also have kind of nominal wage inflation growth. So yes, I would see slow and steady. I don't think there is going to be any jump ups so to speak but we have plateaued. I think we're really starting to see - kind of grow into our portfolio so to speak. So we would expect to see further kind of expense ratio reduction down the road. But like I said, I think we'll be more slow and steady.

Got it. Great, that's very helpful. Thank you, Mark.

Your next question comes from Bose George of KBW. Your line is open.

Hey guys, good morning. First, just one on the growth. I mean you guys noted that growth has been higher than expected in the 32% insurance and force, looks like it's the fastest level in a couple of years. The - just in terms of the growth can you sort of think about how much of that is the outperformance was driven by better industry growth versus better growth than expected at Essent itself?

I think it's really kind of three things. The industry growth is strong and I think that really points to kind of what I said earlier in the script around housing. We follow the workings of housing; housing we think is strong and I think the demographics are setup to remain at really good levels. Second is, I think growth within Essent, both on the origination side and also on the persistency side. I think the increase kind of in persistency has helped. So you combine those three things, I think that has really contributed to kind of a little bit faster than expected growth within the portfolio.

Okay. That makes sense. And then actually just on seeding to Essent Re, do you think it's possible that the level of seeding could exceed 25% in 2018 or is that probably later than that?

It's tough to put a timeline on it. It's something definitely that we have considered in the past and something we're continuing to evaluate. So I would stay tuned on that one.

Okay, great. And then actually, I know you don't like to discuss, share but I'm going to try one anyway. The - just with all the companies reporting now, I mean it looks like you've taken a fair amount of share over the last few quarters. So from a share standpoint do you think there is any reason we should think that you should lose any share from here? Do you feel this is the pretty stable share position for you?

Yes. Actually no, I think we're - looking forward I'd still be in that 13 to 15 range, Bose. I mean quarter-to-quarter, it ebbs and flows a little bit. I mean certainly we've increased utilization with a few of the larger lenders but - and we've done that through our history but it kind of really ebbs and flows. Looking forward, I think really 13 to 15 is probably a better guide for you guys. It gives us a little bit more flexibility in terms of pricing and credit and it really gets back down to insurance and force growth. So as long as we continue to grow our insurance and force, and the market's at this pretty good size, I still believe 13 to 15 is probably a better long term range for us.

Okay. Thanks. That makes a lot of sense. Thanks Mark.

Your next question comes from Phil Stefano of Deutsche Bank. Your line is open.

Yes. Thanks and good morning. I wanted to talk about the reserve setting process and my expectation is there might be incentives for you early in the business development to maybe you have been more conservative in how you set reserves. Have there been any changes to the reserving process as the business is seasoned? Are there different confidence intervals that you're booked to now maybe versus you may have in 2013? Any thoughts you might have around that.

Yes. Hey, Phil its Larry, responding to your question. No. No substantial changes - really no changes in our methodology relative to the reserves. The approach that we currently employ, we've employed for a number of years. We'll update factors each quarter based on historical performance, which we have done consistently, sort of since the inception of company. So again our approach to reserve is very consistent from inception of the company.

Okay. And I wanted to ask quickly, something I haven't heard come up on the other calls and Arch has started to put out a realistic disaster scenario where I - the mortgage insurance equivalent of a PML. Is this a number that you discuss internally? Is it something that management is aware of but maybe hasn't been disclosed? And one of the things I'm struggling with is when I think about modeling the path of a storm I mean that's something I can probably do and have a pretty good idea of what the loss accumulation looks like there, but as far as using historical performance during down cycles to apply to the current portfolio, are there inherent difficulties in doing that when we think about what this number is?

Hey, Phil, it's Mark. You haven't followed us for that long so I'll give you a little bit of the context. We have built the company around setting economic capital models and it's basically based on kind of the great recession stress scenario, and that's really kind of how we form our capital view. It's done internally. It's not shared externally. And it's really the basis for how we originally funded the company and put capital for the company when we were private, that's how we asses capital today. We also obviously look at PMIERs and rating agencies as kind of binding constraints. That's really kind of the core of the company as how we asses that. And yes, it's really taking the current portfolio every quarter and then stressing that on the great recession scenario and then looking - kind of doing a simple sources and uses to make sure we have enough capital to pay our claims. So again it's really the basis of the company and it's again something we don't share, but I think the RDS scenario is obviously a very sound technique and I think it's - I'm sure others in the industry do the same thing.

Okay. Well, I appreciate the history lesson and helping me get this. Thanks a lot guys.

Your next question comes from Mark DeVries of Barclays. Your line is open.

Yes. Thanks. I had a follow-up question on the expenses. Larry, I think we saw more operating leverage this quarter than we have seen in a while. Is there anything worth calling out in the quarter?

No, Mark, nothing specific. If you remember in the first quarter, and historically, in the first quarter we'll experience a little bit higher level of payroll taxes associated with payment of bonuses, investing of restricted share so that's something that you'll historically see each quarter, so that isn't as recurring. But as Mark mentioned earlier there are some variable expenses and premium taxes will increase. But no, other than that, I think its continuing to grow the top line and grow premiums and expenses starting to - leveling out a little bit versus the first quarter.

Okay, got it. And then just a question around the credit trends. I mean it's no surprise that everything written since 2010 has been very high quality. But it's kind of remarkable how low your default rates remain. I guess, Mark are you surprised that default rates still remain so low even as your book seasons here and anything worth kind of noting about what's keeping them so low?

Yes. I mean we've talked about this in the past. I do caution everyone, the book is still relatively young and as we continue to grow, book remains young. That being said Mark, there a number of factors and I think they are kind of more secular in nature in terms of where credit is. One is, kind of the regulatory guard rails that we mentioned way back on the IPO around QM. They continue have a positive effect on the industry. Second is really kind of a manufacturing quality that we're seeing out of lenders, I would say is excellent. And you put on top of that some of the enhanced QC that's been done by the GSEs and by the MI's. Lastly and maybe the most important part is just the credit quality of the portfolio with the average FICO being close to 750, and as I've pointed out in the past, that's well above where it was kind of pre-crisis for the MIs. I think it was closer to 700 and 705. So when you get a 750-type borrower you're generally going to get lower DTIs, better reserves, more ability to withstand an event in their lives. So I think that's really contributed to it. Going forward, remember that we're subject to economic swings. So I mean the economic environment has been strong too. I would just say, given kind of the strength of the portfolio we feel the portfolio's better equipped that to handle some of those events maybe than it was - certainly than it was in the past.

Okay. And then, sorry if I missed this. But Larry, why were the provisions down both Q-over-Q and year-over-year so much? Was there any kind of like reserve adjustment that was made during the quarter?

Yes. The question came up earlier relative to our reserve methodology, very consistent from quarter-to-quarter, really it relates to the number of net new defaults we're experiencing. A decline in the number of defaults are being reported and also an increase in the number of cures.

Got it. Thank you.

Your next question comes from Mackenzie Aron of Zelman & Associates. Your line is open.

Thanks. Good morning. Mark, I guess just two questions on the volume outlook and what you guys are seeing. First, as we're thinking about the back half and just recognizing that the year-over-year comps get more difficult compared to last year, given how robust the purchase and refi trends were last year. Can you give us any sense of how we should be thinking about just modeling out for the remainder of the year? And then also, just curious if when you look at the business that's being delivered over the last quarter or two, are you seeing any shift in the mix of borrowers and maybe picking up anything incremental in terms of what would have maybe been an FHA customer, but because of either lenders' execution or is it GSE's 97 programs where you think the MIs are benefiting incrementally from some of that share shift?

Good morning, Mackenzie. I would say on the NIW question, I don't think we've changed our guidance too much. I do think that yes, I agree the back half of the year will be tougher, about $120 billion $122 billion for the first half of the year. So I kind of - we feel comfortable with kind of that 250 to 260 range for the whole year, which again, is obviously elevated relative to the historical levels and it gets back to again kind of housing fundamentals. In terms of kind of taking share away from FHA, I would really just point to the 97s. It's clear, given our increase in the 97s and some of the programs that the lenders have out there that we're seeing a little bit of an incremental shift. Not a lot though, but a little bit of shift from FHA just on the 97s. Tough to see it in other places.

Okay, thanks.

Your next question comes from Mihir Bhatia of Bank of America. Your line is open.

Good morning, and thank you for taking my questions. Most of my questions have been answered so just two hopefully pretty straightforward and quick ones. In terms of your NIW growth this year, it's been pretty good I think as it has been discussed on the call. I was just wondering are there any particular channels that you're seeing, better growth in or where maybe you think you've - maybe not taken share, but you are seeing more product from what you have compared to last year or the year before this year?

No, no particular channel. Again, I think it's just increased activation and utilization. Kind of what we said, we continue to add clients each quarter as we continue to grow the company. Remember we're still relatively a young company compared to some of our peers. And then I said as we get to know some of them better and get more comfortable with them we're seeing some increased utilization but tough to pinpoint any one kind a channel so to speak or product that we're seeing differences. So…

Great. And just on your credit. Clearly, it's been very good and I think you've talked about not to read too much into it at this stage, given the young portfolio. But can you talk about maybe some of the things that you would - that we should be looking for maybe in terms of just when credit will start normalizing? What are some of the early indicators that credit is starting to normalize a little bit at this - or are you seeing any of that right now, and what should we be looking out for? Thank you.

Yes, I mean I think in terms of - I think the portfolio we've explained kind of - I think for the reasons for the credit, again, looking forward I think it's going to be really about the economy. So I would look at unemployment. I think those are probably more early indicators of the credit performance obviously. Someone loses their job, it's a little bit more difficult for them to make payments, again being said, as we mentioned earlier I think the strength of our portfolio and the FICO will help there. But certainly, we are still prone and it's probably is the big - we're subject to economic environmental risks. And I think - so unemployment would be one that I would point to look at.

Okay, great thank you. Thanks for taking my questions.

Your next question comes from Douglas Harter of Credit Suisse. Your line is open.

Thanks. Good morning. The pace of contribution to Essent Re accelerated this quarter. I was wondering if there's kind of anything behind there or just kind of looking to build up capital in the quarter?

Hey, Doug, it's Mark. No, it's really coming from the growth in the affiliate side of the business. The third party business is - remains steady, but as the Essent Guaranty continues to grow kind of outside of our expectations, 25% of that goes to Essent Re and it's really driving the capital needs at Essent Re.

And how do you think about or how close is Essent Re getting to the point where it might be sort of self-sustaining in terms of capital that's earnings based that's high enough?

Yes. As we mentioned in the script, given the growth, I would say we are still firmly in the capital consumptive mode really across the enterprise. The growth - we continue to contribute or invest capital in Essent Re and there is the potential that we would invest capital in Essent Guaranty, given where their growth is. So as much as we'd like to be kind of in that self-sustaining mode so to speak, it's the fact that we're growing so quick has actually kept us in the capital consumptive mode, which I think is a very positive sign.

That makes sense. Thank you, Mark.

Your next question comes from Geoffrey Dunn of Dowling & Partners. Your line is open.

Thank you. Good morning, guys. Mark, can you talk a little bit about capital structure? Obviously, this quarter you've termed out the credit facility and increased the capacity there, but you've tended to shy away from debt in the past, and the holding company's cash position's is getting bit thin and you're consuming capital. What are your thoughts mid-term? Are you looking to term out this debt, maybe take down some capacity and bring your leverage up to mid-teens? Is equity - and you're thinking at all - do you think you need to tap the equity markets or want to? How should we be thinking about capital structure for the next two, three years, given the growth terms?

Yes. I mean, given the strength of the growth as I said in - kind of the script, we're going to continue to look to increase our financial flexibility. The line of credit has been terrific, but as I said in the past, it's more of a temporary kind of bridge to more permanent capital. And I think we've invested or we see the opportunity to continue to invest capital across the enterprise that we will be looking and evaluating strategies to kind of increase our permanent sources of capital. Whether its debt or equity, again, I think it depends kind of where the markets are and kind of how we view leverage as you know but I wouldn't rule out either one.

Okay. And then I think it's generally accepted that the current pricing on the PMI or has typically assumed like 20%, 25% ultimate loss ratio. When pricing is set did it envision the quality of the books that Essent and other companies are putting on with a 750 average FICO and all the other factors?

Yes. I think it does. I mean I think it we still set the pricing that way and we - our portfolio has been this way for really since we started. So there's been no changes kind of to the economic, kind of unit economic model. Again, these are kind of more through-the-cycle pricing and unit economic estimates. So you don't want to price just for the good times and I think the industry has really done a good job especially over the last few years around maintaining that discipline. I mean again, we're still - a recession hasn't happened yet, but the likelihood of a recession happening over the next two to four years, I mean I would put in a relatively high level. So you just need to be careful about pricing for today, and again, as we look at pricing it's always kind of through the cycle and - so to speak so we don't want to adjust. And plus we have the PMIERs that we have to assess and look at that - to those capital standards, pricing comes into play with that too. So again, another good evidence that clear and transparent standards really maintain some pricing discipline.

Okay. So - but this goes back to the previous question, it seems like the normalization is more about economic pressure relative to where we are today, not any kind of product view towards 97 or anything like that?

Correct.

Okay. Thanks.

There are no further questions at this time. I will now return the call to management for closing comments.

Okay. Thank you, operator. We'd like to thank everyone for participating in today's call and have a great weekend.