Q2 2022 Essent Group Ltd Earnings Call
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 16th 2022, 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. Today, we released our quarterly financial results, which continue to reflect the favorable credit performance of our in force portfolio.
For the second quarter of 2022, we reported net income of $232 million as compared to $160 million $160 million a year ago.
Similar to last quarter, our results benefited from the release of Covid reserves associated with defaults from the second and third quarters of 2020.
On a diluted per share basis, we earned $2 16 for the second quarter compared to $1 42, a year ago and our annualized return on average equity was 22%.
From a macro standpoint, our long term structural outlook for the housing market is positive despite near term headwinds rising rates in response to inflation and home price appreciation have pressured affordability, resulting in a slowdown in housing activity and mortgage production.
However, the under supply of housing and a strong labor market should continue to support home prices and credit performance in the short term longer term, we believe that demographic trends are favorable and should continue to bolster housing demand.
At June 30th our insurance in force was 216 billion, a 6% increase compared to $204 billion a year ago. The credit quality of our insurance in force remains strong with a weighted average FICO of 746, and a weighted average original LTV of 92%.
Strong home price appreciation in recent years has enabled the accumulation of embedded home equity for a material portion of our book, while home price growth will likely moderate going forward. This embedded value should mitigate the risk of future claims on our in force book.
Our 12 month persistency at June 30 was 73%, while the three months annualized persistency was 82% the weighted average note rate of our book is in the mid 3% range, while 81% of our insurance in force is comprised of 2020 and later vintages. Our in force portfolio remains well positioned after there.
Recent rise in rates with higher rates translating to higher persistency.
We continue to execute upon our diversified and programmatic reinsurance strategy.
In the second quarter, we closed in excess of loss forward transaction to cover an additional 20% of our 2022 niwa.
Combined with our 20% quota share transactions in the first quarter, 40% of our current year business is covered with forward reinsurance protection.
As of June 30, approximately 98% of our portfolio was reinsured.
Our reinsurance entity Essent re continues to write profitable GSE business and support our MGA clients.
As of June 30th annual run rate revenues are approximately $60 million, while a third party risk in force was nearly $2 billion we.
We remain pleased with Essent re's performance and its contribution to the profitability of our franchise.
Cash and investments as of June 30, our nearly $5 billion and the investment yield for the second quarter of 2022 was two 5% up from two 1% in the first quarter. The recent rise in rates is providing some tailwind for our investment portfolio as yields in the second quarter on new money approximated four P.
<unk>.
We continue to operate from a position of strength with $4 3 billion in GAAP equity access to $2 6 billion in excess of loss reinsurance and approximately $1 billion of available liquidity.
With a trailing 12 month operating cash flow of $613 million.
Our franchise remains well positioned from an earnings cash flow and balance sheet perspective.
As of June 30, our book value per share was $39 67.
An increase of 9% from $36 32, a year ago.
We remain committed to managing capital for the long term, taking a measured approach to maintain strengthen our balance sheet.
Given our financial performance during the second quarter I am pleased to announce that our board has approved a <unk> <unk> per share increase in our dividend of <unk> 22.
We continue to believe that dividends are a meaningful demonstration of the confidence we have in the stability of our earnings and cash flow as a result of our buy manage and distribute operating model now let me turn the call over to Dave.
Thanks, Mark and good morning, everyone. Let me review our results for the quarter and a little more detail.
For the second quarter, we earned $2 16 per diluted share compared to $2 52 last quarter and $1 42 in the second quarter a year ago.
Net premium earned for the second quarter of 2022 was $212 million and included $13 $1 million of premiums earned by Essent re on our third party business.
The net average premium rate for the U S mortgage insurance business in the second quarter was 38 basis points, a decrease of one basis point from the first quarter.
Net investment income increased $4 7 million or 19% in the second quarter of 2022 compared to last quarter due to higher yields on new investments and floating rate securities resetting to higher rates.
Other income in the second quarter was $1 6 million, which included a $5 $5 million loss due to a decrease in the fair value of embedded derivatives and certain of our third party reinsurance agreements.
This compares to $7 $2 million last quarter, which included a $4 $4 million gain due to the increase in the fair value of these embedded derivatives.
The provision for losses and loss adjustment expense was a benefit of $76 2 million in the second quarter of 2022 compared to a benefit of $106 9 million in the first quarter and a provision of $9 7 million in the second quarter a year ago.
As a reminder, last quarter as default in the second and third quarters of 2020, continuing to secure at elevated levels. We revised our estimate of the of the ultimate claim rate for these defaults from 7% to 4% during.
During the second quarter of 2022. These defaults continue to cure at elevated levels and we revised our estimate of the ultimate claim rate for these defaults from 4% to 2%.
As a result, the provision for losses. This quarter includes a benefit of $62 $9 million from the second and third quarter 2020 defaults.
Other underwriting and operating expenses in the second quarter were $42 million, an increase of $1 million from the first quarter.
The expense ratio was 20% this quarter, a slight increase from 19% in the first quarter of 2022 and the full year 2021.
We estimate that other underwriting and operating expenses will be approximately $170 million for the full year 2022.
During the second quarter, Essent group paid a cash dividend totaling $22 $4 million to shareholders.
As a reminder, <unk> has a credit facility with the committed capacity of $825 million.
Borrowings under the credit facility for interest at floating rates tied to a short term index.
As of June 30, we had $425 million of term loan outstanding with a weighted average interest rate of 292% up from $1, 99% at March 31.
Our credit facility also has $400 million of Undrawn revolver capacity that provides additional source of liquidity for the company.
At June 30, our debt to capital ratio was 9%.
During the second quarter, Essent guaranty paid a dividend of $100 million towards U S holding company.
The U S mortgage insurance companies can pay additional ordinary dividends of $303 million in 2022.
As of quarter end, the combined U S mortgage insurance business had statutory capital of $3 1 billion with a risk to capital ratio of 10 two to one.
Note that statutory capital includes $2 billion of contingency reserves at June 30 of 2022.
Over the last 12 months the U S mortgage insurance business has grown statutory capital by $253 million, while at the same time pain.
$347 million of dividends to our U S holding company.
Now, let me turn the call back over to Mark.
Thanks, Dave during the second quarter, our business continue generating strong earnings and robust returns our balance sheet capital and liquidity remains strong providing optionality in managing our business both offensive Lee and defensively.
We believe that our measured approach to deploying excess capital in the best long term interest of our franchise and stakeholders looking forward. We remain confident in the strength of our operating model and view Essent is well positioned in supporting affordable and sustainable homeownership now, let's get to your questions operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Mark Devries with Barclays.
Yes. Thanks.
Mark was hoping to get your updated thoughts on how you are thinking about deploying excess capital here.
And what might you need to see before you get a little bit more aggressive repurchasing the shares.
Yes, Mark good morning.
Good question and I would look at it a couple of ways I think in terms of returning.
Excess capital to shareholders, we increased the dividend I would say we feel that we still believe that's.
That's the best demonstration of the confidence we have in the sustainability of the cash flows and keep in mind sustainability is in good times and bad times. So you have to think about that given where we are in the current environment in terms of repurchases.
Just to remind you when we authorized a $250 million repurchase plan in may of 'twenty. One that was for 18 months through the end of this year.
We completed that.
In April of this year, we reinstituted, a reauthorized another $250 million really.
Obviously to give ourselves some flexibility. However, I think it was our intention when we said it was to have it run through this year and so again, we were going to pause and we paused. This quarter, we may pause another quarter or two and a lot of it's just going to be the visibility, it's twofold markets on a defensive side and whats.
The visibility that.
We've seen the economy, a lot of different data points, a lot of different opinions on where the economy is going.
Clearly you can sum it up for us and being Levered to unemployment right now credit is strong.
The low end consumer as you know has started to weaken but it's something we have our eye on eventually.
That could work its way up to our customer hasnt, yet haven't seen any real clues of it yet, but again you have to be prepared for that.
On the offensive side as we've stated in the past we are going to look to invest in or acquire other earning assets and we continue to do the work on it it's not a quarter by quarter assessment, it's not it's not burning a hole in our pocket, we have a long term view on it.
But you can't judge these things in quarter. So when you sum it all up.
Capital Begets opportunity, we like our capital position and where we are now, but its a quarter by quarter assessment really depending on how things unfold in the economy.
Okay got it thank you.
Your next question comes from the line of Rick Shane with J P. Morgan.
Thanks, everybody for taking my questions. This morning.
Mark.
There's an interesting dynamic.
Emerging right now which is that there is obviously concern about affordability related to new originations, but when we think about your portfolio you are in the industry.
<unk>.
A significant concentration in vintages with low rates a lot of embedded home price depreciation and obviously the third factor for <unk> income, which is going to fluctuate.
Do you when you really look at the risk here.
Is it sentiment driven.
Home price depreciation borrower's willingness to pay declines because it doesn't seem like when you think about the big vintages that theres really much that's going to distort the exist.
Policies affordability.
Good morning, Rick.
It's a good question I think you're zeroing in on I think probably not a well recognized strength of the portfolio. We have always said.
<unk> for US is really how we judge the business, because thats, where generates premiums that 2020. One vintage is really strong unusually strong probably historically just when you think about.
The two things that have happened to it.
Simultaneously, we have a book that's.
Rates at three 5%, so just from a stickiness or persistency standpoint, that's going to be around a lot longer than than we would have even modeled out when we first did it right. So if mortgage rates hovering around five where they are now I know that books, that's going to continue to generate.
Cash.
For quite a long period on the risk side, we have the embedded HPA. So the mark to market is well below where we price the business.
Originally so for that to be.
Harmed in any way youre going to need a significant kind of HPV declined almost to the point, where unemployment would be at levels, we haven't really seen.
For quite some time, so we feel pretty good about that portfolio and the cash that that continues to generate I would say more on the risk standpoint.
It's on a newer originations right. So it's the business you are booking now at higher HPA at higher rates central turnover faster right, given given where rates are and where they're expected to go kind of relative if you think of where the 10 years 10 year Treasury is today and historical spread to that and then you could.
See rates fluctuate above and below below 5%, but the elevated HPA is something that we definitely are keeping our eye on and I think the whole industry is so this is where this is where the engine really does the pricing engine to really do benefit the mortgage insurers because we can kind of.
Go in and out of markets a lot faster HSBC, just because of the way.
That the way, we filed IND filing algorithms versus ACA.
Actual rates, we can move a lot faster I think the industry prove that in COVID-19.
And it clearly here you can see with HPA not so much.
Certain markets have risen faster than others, but then it Ben you have to have a more forward looking view in terms of.
Supply and so forth, which are very very.
Instrumental to that but it really at the end of the day, where it comes down to unemployment rate, where so levered to unemployment so even at a super strong credit book.
745, if our borrower does lose their job they're going to.
Theyre going into fall I mean, we saw that in COVID-19 when unemployment spiked up so that our default. So again I think we are well built for it I think from a capital position were strong.
And so were expected I think longer term.
We would expect defaults to normalize I mean, we've had such a.
Ill benign credit cycle, the last geez five.
Five 810 years.
And your colleague call that a super credit cycle back four or five years ago, and he was spot on longer term.
Are we going to see.
Claims below 1% at steps a little hard to envision.
But even in a normalized claim environment.
Are you still looking at a business that has 40%, 45% combined ratio so still slippage right. So still operating margins in excess of 50%. So we're still pretty we're real positive on the industry going forward. So just even outside of your portfolio question its really looking forward.
And we continue to see.
We continue to see housing to be relatively strong just given that intrinsic demand.
The millennial buffer and we've seen everyone has seen the stats, but if you look at just the population that's in their twenty's today, its 45 million individuals in the average age of the first time homeowners and their early thirty's, So youre going to see $4 million to $5 million, new homeowners come on board for a while so again.
I always take the bigger picture, what's the context of the macro environment that we play in.
And we're in if you don't like housing, it's going to be hard till I guessing.
We continue to like housing and I think when you break down kind of that just the mechanics of the economics of the business given where we are in the economic environment I think we're still in pretty good shape.
Hey, Marc Thank you so much.
Youre welcome.
Your next question comes from the line of Doug Harter with Credit Suisse.
Okay.
I guess as you look out over the next 12 months or so.
Thanks, Matt.
The purchase market.
And therefore, what that might be for insurance in force growth.
I'm, sorry, you broke up a little bit Doug could you repeat that.
Sure just I guess as you look out over the next 12 months, how do you expect the purchase market the trend and what that might mean for your insurance in force.
Okay. Okay. So broke up I got I got I got the question, though I think we know purchases. We believe will be relatively strong. The next 12 months, maybe not at the level.
Clearly not at the level they were in the last 12 months. So I think part of our our volume is hidden a little bit by the larger loan balances. So the units and new units is a little bit lower but again I get back to that intrinsic demand.
So even at a 5% rate.
A lot of decisions around the purchases are life events.
Versus a family of four staring at the 10 year. So we continue to think.
The demographics will we'll have purchased a strong I think is it going to grow a lot over the next 12 months I'm not sure about that.
Doug just given the overall environment with inflation and where rates are and just still some of the uncertainty around the employment picture.
Great. Thank you Mark.
Okay.
Your next question comes from the line of Bose, George with K B W.
Hey, good morning.
It looks like your market share rebounded a bit and I know some of that is quarter over quarter noise, but just curious if theres any read through to price and whether youre more comfortable with pricing just given some of the price hardening that your peers with placebo.
I think well just in terms of market share in general I think our market share for the first half of the year was a little shy of 15. So again as you know these things tend to normalize over time I think in the quarter, though Bose.
I think we did sense some of the <unk>.
Some of the competitors backing up.
That was clear and it's a little it's an advantage for us in terms of Essent edge right, because thats, an edge doesn't rely solely on FICO scores in essence custom score it can read things differently.
Then our older models did so when we were a little closer to the market clearing price I think we can tend to to bring on a few more loans than we would want more outside of the market clearing price and clearly by design, we were outside of the market clearing price.
The third and fourth quarters are fairly evident.
And I know I sound like a.
A broken record, but this whole industry is just price.
<unk> out price and as the year of tops and share you have the lowest price. So I think our view is we're given given our focus on unit economics and longer term growing.
Growing book value per share, we're very comfortable being in the middle of the pack and I think our view is because thats, where the market really is in it.
I think we're trying to with our engine, we're trying to optimize our unit economics. So if we can get 15%, 16% share and just be a little bit better than the market on premium.
A little bit better than the market around expected losses, we feel like we have an expense advantage and we clearly have an advantage around the tax rate that's better Roe.
And again this is you're talking about this is a super competitive industry with very smart competitors, we're not going to outsmart them.
So to speak we're just going to try to out execute people.
Along those lines that I said and I think we've shown that over time and I think the engine gives us.
Another just another way too.
To squeak out a little bit better unit economics.
Okay great.
Helpful. Thanks, and then on the tax rate is anything.
Falling like in terms of the global minimum tax so any of the other tax discussions.
Discussions in DC that could impact your tax rate.
Yes, its pretty early in that I mean, any everything we've seen there hasnt there is not an impact but these things are always subject to change.
I think we're I think we're good for now.
Okay, Okay, great. Thanks.
Sure.
Your next question comes from Mihir Bhatia with Bank of America.
Good morning, Thanks for taking my question.
I wanted to maybe just go back to the price discussion from the Southern will go just wanted to ask about that.
Okay.
I appreciate your comments about <unk>.
The market clearing price.
Was curious on is.
How did that gap narrow or was it more yield competitors, taking actions getting closer to yours or did you also need <unk>.
Tweak your prices because you all view of the economy, maybe got better all of the risks coming in any additional color you can give us.
Yes, we just tried to undecided on whats happening competitively no no and that's a good question I think we talked about the first quarter that were a little bit of a bellwether.
For that clearing price and so I.
I believe a lot of a few of the competitors kind of tweak your pricing I think we could see it and again the way the way our engine works is we talk about diamonds.
Really good when we're close to the market clearing price if we're above it by a lot. It doesn't it doesn't it's not as effective so.
Our view is.
The competitors are quite a few of them based on what you can see with the share has started to tweak their pricing, which we think is a good thing I think it's a good sign right I think it's a sign that the.
The pricing has really started to bottom out, which we think is positive because again look at the environment.
It wouldn't surprise me in fact, we actually raised pricing towards the end of the second quarter again.
So just a wholesale above kind of we always have just a border of baseline race and we will look to.
Look potentially to do that in the back half of the year, depending on what others do.
Again, our goal here is to get kind of be in that middle of the pack and optimize unit economics, it's not to be if we're 20% share orange is not that good.
It's again, it's around it's around the margins, whereas incredibly effective if we're 20% share than our base rates lower than everyone else's.
It's relatively clear, but I think just from a investor macro standpoint, again, I think it's positive where the industry is going and it makes a ton of sense right, we're going into a period of uncertainty.
Everyone's expected claim.
Ray or probability of default in this environment has to go up and it did during COVID-19.
I thought the industry raised.
Very quickly. So this idea that it's a race to the bottom amongst <unk> I think it's I think it's.
I think it is mistaken I think the <unk> and the analyzing general price for their view on credit. So if they think credits really strong, but it's going to be strong over a period of time of the policy theyre going to price appropriately given the capital structure and leverage and all those sort of things.
So the moving up of it is really just.
It's just I think it's it's.
It is expected and.
Think you could end up seeing potentially higher pricing.
Over the next six months to 12 months.
Alright.
Thanks.
One other topic I did want to follow up on just some of the comments from this call and just in general right.
We have experienced as you said, even with strong credit cycle a few years.
Appreciate that so it can be is increasing on a forward basis, but a lot of your portfolio is kind of.
It is what it is and you had a lot of embedded HPA in the portfolio.
Consumers have had some wage growth.
How long the life of the existing portfolio I guess my question is just on the normalized delinquencies.
I missed that on new policies you maybe.
Just on your underwriting has to be accounted for that but do you get to a normalized delinquency ratio in the next two years realistically just given all the other dynamics and how strong the portfolio is or is it more realistic that it takes longer to get there.
Just normalized delinquency.
I think Rick alluded to it earlier, it's really bifurcated right. So the core that 2021 book is OMA is isolated.
And yes, we would expect.
I think whether the false go is going to be where unemployment goes in here.
We're just lever to unemployment so and so our view is unemployment could go up or defaults could rise and that kind of 2021 cohort, but we don't see a high level of claims coming out of it because of the embedded HPA I mean, it's a really.
So when we when we've talked to certain investors are worried about a housing recession of course everyone's natural you don't follow the industry everyone's natural inclination is to go back to.
To the great recession.
The great recession.
The portfolio that <unk> had versus today is literally night and day I mean, youre talking about a 750 FICO layered risk 30.
30% of the product originated in the great recession is no longer even eligible for the <unk>. So we have much better.
Kind of credit book.
We have.
Again like I said the in the embedded HPA and obviously, we have the reinsurance protection. So the Ams had that uncapped liability on their book.
Back back.
Pre crisis, we don't have that I mean, 98% of the book is covered so that whole mezz piece is being offloaded.
And so we feel good about that a couple of other things to think through just in terms of credit just not in that portfolio, but just going forward.
We said there is a little bit more risk given.
Given the elevated HPA.
Don.
Don't forget that the Gse's play a big role in that so the Gse's in fact, one of the GSE has tightened their credit box recently around the tails that were a big beneficiary of that so.
And as we said I actually I think we've said this on our road show one of the best thing that's happened to the to the semi industry. It was the adoption of the qualified mortgage rule I mean that is all of that non QM. That's being originated over the last few years would all be sitting in our portfolio and it's not so that's all what I call off the fairway.
Type type loans, and Theres, a different execution to that through the pls market, but that if that was if the gse's, we're taking on that risk that would be sitting in our portfolio. So.
I just think it's a much different dynamic both in the core portfolio and obviously the risk.
On the newer business is probably absent HPA is still is still pretty good risk.
Thank you thanks for taking my question.
Your next question comes from the line of Ryan Gilbert with BT.
Hi, Thanks, good morning, everyone.
On really great discussion around credit performance on I appreciate all the details just building on that.
Given the I guess the.
The quality of the enforce book and all the changes that have happened to the mortgage industry over since the financial crisis.
How are you sizing.
A realistic downside scenario in terms of mortgage loss rates.
When you're stress testing.
The portfolio or how should we think about what a realistic downside scenario is over the next couple of years as presumably unemployment should tick up higher.
Yes, I think it depends I mean, we run.
Zillion different scenarios, but I would point to that we kind of point to the barbell of it Ryan So most recently.
Reaffirmed at Moody's for our <unk> III rating as part of that we ran through another great recession.
Stress tests on our portfolio.
And we volunteered to do that because we think it's a great. We do it all the time internally, but it was we really wanted to get it.
Have some externalized looking at and if you go through that we do not lose money through a five year period. So we don't make a ton of money through some of that because it's a severe stress, but we don't deplete book value and I think that is really is such a key point.
You go to the great recession, the Ams depleted book value significantly and when you deplete book value is really no bottom for your stock where I think the way the industry will be in the next recession, whether it's mild moderate or severe take.
Take your pick if we're not depleting book value in a severe stress scenario that means the capital markets will be open and that means we can raise capital.
And whether it's debt or equity at a price that's enough to keep very similar to how the reinsurers do it.
Because again, if youre thinking.
Severe recession Youre also going to looking at an environment, where pricing is going to be significantly higher the pricing would be significantly higher the credit is going to be clean and we can just look to our post.
Look at early days of <unk>, and we were fortunate enough to hit the market post recession and the book was squeaky clean that will happen again.
We'll be around unfortunately, some of the <unk> were not around to enjoy that period, we will be and my expectation is so all of our competitors because they are structured the same way and I do think so what's going to happen. If you think about again point to the reinsurance community when.
When they have a cat event.
Generally pricing hardens in there they have the ability to raise capital off that and keep going I think the same.
The same thing will play out for the mortgage insurance industry and I think over time that will be reflected on our multiples once investors understand.
Kind of.
Sustainability and the strength of the model, which we've all and I give our competitors a lot of credit everyone's doing a lot of that that the same thing.
Safety or the strength around the reinsurance will play itself out in a severe stress and I think we're pretty we're pretty confident in that we're not confident we're going to make a ton of money through a severe stress I never said that.
I think it's a matter of the survivability and I think with the old view of the industry is that we're going to go out of business in a severe stress in fact that we were with an investor.
Months ago, who asked us that question and we had to work through this analysis, but if you don't follow the industry.
At the level you guys do in the animals do and certainly our investors know it well.
Our top 25 investors make up 80% of our shares outstanding and we don't have one hedge fund in it. So we have a very educated investor base.
And they understand kind of the dynamics of this the broader market.
Again, it's a niche industry. So it is harder.
For others to pick up on it but I think over time I think it'll be reflected so we're going to keep.
Working through it and do the things that we can control. So if we think we're going into an uncertain environment and what are we going to do we're going to raise pricing like we just talked about we're going to look at different msas and adjusted pricing, there and we're going to be a little bit more conservative.
At the Holdco in terms of cash and distribution and we're going to continue.
To have a measured approach across both again the business and what we do at the top of the house.
Okay got it really helpful second question on.
On purchasing IW.
That final homestead life decision in most families are not watching day to day fluctuations in the 10 year Treasury, but.
Mortgage rates are down maybe 100 basis points from last month and a half of the question that we're getting is.
Has that moved down in mortgage rates generated a pickup or a lift in purchase demand.
Based on the numbers that are rolling out for July it doesn't seem like that's the case, but I'm wondering if there's anything that you've seen in your.
Sure.
In your business that would suggest that theres been any green shoots or lift in demand over the last maybe few weeks or month.
Okay.
I wouldn't say anything in particular I would say again, we kind of have to express it in terms of kind of end IW for the industry rate Thats a good to me that's a good proxy.
The first quarter was 105 second quarter was 100 twentyish.
Our view is it will be lighter in the back half of the year that being set of July applications, where they didn't fall off and they were down moderately but they werent down.
They werent down a ton so I think the third quarter.
Don't know where it will be relative to the second quarter. My guess is it's a little bit lighter in the fourth quarter I think it's too early to tell depending on what rates are so I wouldn't call. It a green shoot I think purchases has actually held up pretty well I think really the issue on originations to us has been refinancing 98% of our book.
And it was purchased in the second quarter I mean, we had certain days Ryan or is like 99% purchase like we've never seen that in the history of the company. So I mean I know we haven't.
<unk> been around 10 years, but still.
That's quite remarkable so again I think just the intrinsic demand purchase will continue.
If there is fits and starts right just given where the rates are so I think it does take back.
Back to my earlier comment.
Not that people don't stare at it but even if rates are higher which they are it takes it takes folks a while to adjust.
To that to that new rates I mean purchases again longer term just given the intrinsic demand.
Of that.
The folks in their twenties right now I think we're set up still pretty good longer term I can it's tough to tell quarter by quarter.
Great. Thank you.
Youre welcome.
Your next question comes from Geoffrey Dunn with Dowling and partners.
Thanks, Good morning.
Mark I wanted to revisit the comments you made about the bulks could affect arrived from the 2021 cohort, but don't see a lot of claims coming out of that that goes in the comments you made in the past where.
New notices drive.
Reserving and then it's HPA and employment et cetera on that.
Can affect the ultimate claim.
So.
The problem is with no notice is going up that drives incurred losses higher infection pioneer's assets. So how do you approach to reserving for what is really a unique book of business.
You attempt to speculate at lower ultimate claim rates.
Late at severity assumptions based on HPA.
Or do you stick to a more conservative approach, which would imply the prospect for maybe more recurring favorable development down the road how do you how do you approach a book that you've never.
Had precedent for reserving for in the past.
Yes, it's a good question I would say well, we'll clearly 10 more to be more conservative.
It is an actuarial model that has gone back not just for our history, but we have all of the triad data.
We feel just more comfortable kind of and its a model that we review it quarterly and we probably make.
Tweak it at least once a year for for some for some items, but.
Sure I think in general we will stick with it I mean, we've gone off the model before we've gone off it twice in our history once during the Hurricanes and we just thought the second and third quarter cohorts of 2020, or so different that we felt like the model wasn't quite built for that and we kind of have used our <unk>.
<unk> estimate.
Of the 7% to get around that but as you remember we quickly went off of it we went off a bit after two quarters, which do create a lot of noise. So as we saw through 'twenty. One you saw.
And this portfolio you would see a borrower default declare forbearance accumulate reserves over 356 months period and boom They would cure and that's why you saw some of the.
Kind of the large ins and outs.
Around the reserve.
That will happen again, I mean, again, I think if folks get forbearance theyre going to tap into it I'm not sure we'll be the beneficiary as well as we were last time.
Just because jobs came back quickly, but I think in short, though Jeff we don't we're trying not the actuarial model is based on history. There is obviously a forward view to it but I don't think we feel comfortable enough.
To make those type of changes I think from a <unk> perspective.
I think the Gse's would probably rather CSP more conservative.
Okay, and then just in terms of how you thought about.
HPA in your pricing and your reserve Bank.
What levels were you assuming in the last couple of years relative to the actual performance. We are assuming a couple of percent and we saw low double digits or can you just kind of frame up your rough approach on HVA.
Yeah, Hey, good morning, Jeff, It's Chris So with regards to HVA within our modeling and certainly our pricing I would say we've taken a moderate view.
It does not reflect certainly the HPA actuals that you've seen over the last couple of years.
When we look at the unit economics, it's certainly more reflective of a I'll call. It a moderate view of HPA going forward.
Okay and as your reserves develop do you do any kind of mark to market for HPA or do you, let it play out in your claim rate.
Hey, Kevin.
<unk> stock, we do look at.
The HPA.
Of the defaults and we refresh that regularly.
So that does have an impact.
We will play itself through.
Our numbers.
We update them.
Okay. Thanks.
There are no further questions at this time I will turn the call back over to management for closing remarks.
Well I'd like to thank everyone for joining today and have a great weekend.
This concludes today's conference call you may now disconnect.
Okay.