Q3 2024 NMI Holdings Inc Earnings Call
Good day and welcome to the N M. I Holdings third quarter 2024 earnings Conference call.
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Speaker Change: I would now like to turn the conference over to John Swenson.
And then my management. Please go ahead.
John Swenson: Thank you operator, good afternoon, and welcome to the 2024 third quarter conference call for National M. I.
I'm, John Swenson, Vice President of Investor Relations and Treasury.
Joining us on the call today are Brad Shuster executive Chairman.
John Swenson: They had a policy of president and Chief Executive Officer, and Ross within banker Chief Financial Officer.
John Swenson: Actual results for the quarter were released after the close today.
John Swenson: The press release May be accessed identifies website located in Nashville, and <unk> dot com under the investors tab.
John Swenson: During the course of this call we may make comments about our expectations for the future.
John Swenson: Actual results could differ materially from those contained in these forward looking statements.
John Swenson: Additional information about the factors that could cause actual results or trends for differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC.
John Swenson: And then to the extent the company makes forward looking statements. We do not undertake any obligation to update those statements in the future in light of subsequent developments.
John Swenson: No one should rely on the fact that the guidance of such statements is current at any time other than the time of this call.
John Swenson: Also note that on this call we may refer to certain non-GAAP measures in today's press release and on our website. We've provided a reconciliation of these measures to the most comparable measures under GAAP.
Speaker Change: I will turn the call over to Brett.
Brett: Thank you John and good afternoon, everyone.
Brett: I am pleased to report that in the third quarter National MRI again delivered strong operating performance.
Brett: Continued growth in our insured portfolio and record financial results.
Brett: Our lenders and their borrowers continued to turn to us for critical down payments support and in the third quarter. We generated $12 2 billion, then IW volume ending.
Brett: Ending the period with a record $207 5 billion of high quality high performing insurance in force.
Brett: In Washington, our conversations remain active and constructive.
Brett: And we believe there is broad recognition in D. C about the value that the private mortgage insurance industry provides.
Brett: Offering borrowers downpayments support and efficient access to mortgage credit while also placing private capital in front of the taxpayer to absorb risk of loss in a downturn.
Brett: Okay.
Speaker Change: At National online, we recognize the need to provide borrowers with a fair and sustainable opportunity to access the housing market.
Brett: Establish a community identity and build long term wealth through homeownership.
Brett: And we are proud to have helped nearly 2 million borrowers to date.
Brett: Overall, we had a terrific third quarter and are well positioned to continue to lead with impact.
Brett: Drive value for our people our customers and their borrowers.
Brett: Our shareholders going forward.
Speaker Change: With that let me turn it over to Adam.
Adam: Thank you Brad and good afternoon, everyone.
Adam: Nationally my continued to outperform in the third quarter delivering significant new business production consistent growth in our insured portfolio and record financial results.
Speaker Change: We generated $12 2 billion of Ni W volume and ended the period with a record $207 5 billion of high quality high performing primary insurance in force.
Speaker Change: Total revenue in the third quarter was a record $166 1 million, we delivered GAAP net income of $92 8 million or $1.15 per diluted share and a 17, 5% return on equity.
Speaker Change: Overall, we had an exceptionally strong quarter and are confident because we look ahead.
Speaker Change: The macro environment and housing market have remained broadly resilient in the face of elevated interest rates are.
Speaker Change: Our lender customers and their borrowers continue to rely on us in size for critical Downpayments support.
Speaker Change: And we see an attractive and sustained new business opportunity fueled by long term secular trends.
Speaker Change: We have an exceptionally high quality and short portfolio covered by a comprehensive set of risk transfer solutions and our credit performance continues to stand ahead.
Speaker Change: Our persistency remains well above historical trend and when paired with our strong and IW volume has helped to drive consistent growth and embedded value gains in our insured book.
Speaker Change: Yeah.
Speaker Change: And we continue to manage our expenses and capital position with discipline and efficiency building a robust balance sheet that supported by the significant earnings power of our platform.
Speaker Change: Notwithstanding these strong positives however, macro risks remain and we've maintained a proactive stance with respect to our pricing risk selection and reinsurance decisioning. It's an approach that has served us well and continues to be the prudent and appropriate course.
Speaker Change: In the third quarter, we continued to make targeted changes to further manage our mix of new business by risk cohort in geography and in October we secured a series of new reinsurance treaties that will provide us with forward flow coverage comprehensive risk protection and efficient P mirrors funding for our next.
Speaker Change: Several years of new business production.
Speaker Change: More broadly we've been encouraged by the continued discipline that we see across the private market.
Speaker Change: Underwriting standards remain rigorous and the pricing environment remains balanced and constructive.
Speaker Change: Overall, we had a terrific quarter delivering strong operating performance continued growth in our insured portfolio and record financial results.
Speaker Change: Looking ahead, we're well positioned to continue to serve our customers and their borrowers invest in our employees and their success drive growth in our high quality insured portfolio and deliver through the cycle growth returns and value for our shareholders with that I'll turn it over to Aurora.
Aurora: Thank you that and I'm pleased to report that we again achieved record financial results in the third quarter total revenue was a record $166 1 million and we delivered GAAP net income of $92 8 million or $1.15 per diluted share and a 17.5% return on equity.
Speaker Change: Hey.
Speaker Change: We generated $12 2 billion as niwa volume and our primary insurance in force grew to 207 5 billion up 2% from the end of the second quarter and 7% compared to the third quarter of 2023.
Speaker Change: 12 month Persistency was 85, 5% in the third quarter compared to 85, 4% in the second quarter.
Speaker Change: Persistency continues to serve as an important driver of the growth in embedded value of our insured portfolio.
Speaker Change: Net premiums earned in the third quarter were a record $143 3 million compared to $141 2 million in the second quarter and $130 1 million in the third quarter of 2023.
Speaker Change: Net yield for the quarter was 28 basis points consistent with the second quarter core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was $34 three basis points also unchanged from the second quarter.
Speaker Change: Investment income was $22 5 million in the third quarter compared with $20 7 million in the second quarter and $17 9 million in the third quarter of 2020 trade at.
Speaker Change: We saw continued growth in investment income during the period as we deployed new cash flows and rolling maturities at favorable new money rates.
Speaker Change: Total revenue was a record $166 1 million in the third quarter up 2% compared to the second quarter and 12% compared to the third quarter of 2023.
Speaker Change: Underwriting and operating expenses were $29 2 million in the third quarter compared to $28 3 million in the second quarter.
Speaker Change: Our expense ratio was 21, 3% in the quarter compared to 21% in the second quarter.
Speaker Change: We had 5712 default at September 30th and our default rate was 87 basis points at quarter end compared to 76 basis points at June 30th.
Speaker Change: Claims expense in the third quarter was $10 3 million compared to 276000 in the second quarter and $4 8 million in the third quarter of 2023.
Speaker Change: We have a uniquely high quality insured portfolio and our credit experience continues to benefit from the discipline with which we have shaped our book the strong position of our existing borrowers and the broad resiliency was seen in the housing market.
Speaker Change: Interest expense in the third quarter was $7 1 million and reflects the run rate savings, we achieved with a successful debt refinancing in may.
Speaker Change: GAAP net income was $92 8 million up 1% from compared to $92 1 million in the second quarter, and 11% compared to 84 million in the third quarter of 2023.
Speaker Change: Diluted EPS was $1.15 up 1% compared to $1.13 in the second quarter and 14% compared to one dollar in the third quarter of 2023.
Speaker Change: Total cash and investments were $2 8 billion at quarter end, including $148 million of cash and investments at the holding company.
Speaker Change: We have $425 million in outstanding senior notes and our $250 million revolving credit facility remains undrawn and fully available.
Speaker Change: Coburn S&P upgraded our financial strength and issuer ratings to a minus and triple B minus respectively.
Speaker Change: We're pleased that they recognize the quality of our insured portfolio track record of underwriting performance and profitability and broadly balanced and diversified capital structure and their decision.
Speaker Change: Shareholders' equity as of September 30th was $2 2 billion and book value per share was $27 and 67%.
Speaker Change: Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $28 71 up 4% compared to the second quarter and 17% compared to the third quarter of last year.
Speaker Change: In the third quarter, we repurchased $16 $9 million of common stock retiring 443000 shares at an average price of $38.04.
Speaker Change: As of September 30th we had 108 million of repurchase capacity remaining under our existing program.
Speaker Change: In October we entered into a series of new quota share and excess of loss reinsurance treaty, which together will provide us with poor snow coverage and comprehensive risk protection for our next several years of new business production and an estimated 4% pre tax cost of capital.
Speaker Change: Reinsurance has long been a core pillar of our credit risk management strategy working to mitigate the potential impact of credit volatility in our insured portfolio and has consistently provided us with a deep secure and efficient source of growth capital to fund our P nears need.
Speaker Change: We have significant experienced strong secondary market relationships and a track record of leading with innovation across the risk transfer spectrum.
Speaker Change: The deals we have just secured are among the best we've ever achieved in terms of their cost capacity and duration and serve to highlight the quality of our insured portfolio and the differentiation we have achieved through our comprehensive credit risk management framework.
Speaker Change: At quarter end, we reported 3 billion of total available assets under P mirrors, and $1 7 billion of risk based required assets access available assets for $1 3 billion.
Speaker Change: Overall, we achieved standup financial results during the quarter delivering consistent growth in our high quality insured portfolio record topline performance continued expense sufficiency and strong bottom line profitability and returns and with that let me turn it back to Adam.
Adam: Thank you Aurora, we had a terrific quarter once again delivering significant new business production consistent growth in our insured portfolio and record financial results looking ahead, we're confident.
Speaker Change: We have a strong customer franchise.
Speaker Change: I wanted team, that's driving us forward everyday and exceptionally high quality book covered by a comprehensive set of risk transfer solutions, a robust balance sheet and the significant earnings power with our platform.
Speaker Change: We are leading the market with discipline and distinction and are well positioned to continue delivering differentiated growth returns and value for our shareholders. Thank you for joining us today I'll now ask the operator to come back on so that we can take your questions.
Speaker Change: Well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: The first question comes from Terry MA from Barclays. Please go ahead.
Terry MA: Hey, Thank you good afternoon.
Terry MA: Maybe just starting with credit the year over year increase in new notices this quarter accelerated in the cure rate was also lower so I'm. Just curious if there was anything episodic that you observed or are we just starting to see a more material impact vintage seasoning kind of play a role.
Speaker Change: Yeah, Terry I'll I'll take that.
Speaker Change: Look I'd say broadly speaking we are greatly encouraged by the credit performance of our portfolio overall, including the trends that you're noting in our default population. Some of that obviously is the broad resiliency that we continue to see in the housing market and strength of the economy. They saw quite a favorable backdrop, but more importantly, though our existing borrowers remain.
Speaker Change: Well situated we have an incredibly high quality book.
Speaker Change: All objective measures and we're continuing to see that translate through to industry, leading credit experience at September 30th our default rate was 87 basis points, which we track as the lowest in the industry by far our default count did increase as you noted in the third quarter I would say this one it should be expected.
Speaker Change: It really reflects a combination of what we would call normal seasonal trends and also the growth in natural seasoning of our portfolio and I know theres been a lot of focus through the course of our calls for the industry on these items and so I do want to elaborate a bit and make sure that everyone fully understands what we've talked about.
Speaker Change: What it is that we're talking about when we say seasonal and seasoning dynamics in terms of seasonality.
Speaker Change: We typically see an uptick in default experience as we move through the second half.
Speaker Change: The year in the first half of the year borrowers benefit from what I'll call net cash inflows right. Some of them receive bonuses and many more of them are receiving tax refunds all of which bolsters credit performance in the first half one it helps borrowers who are in default sure out of their default status and it.
Speaker Change: Also helps ensure that performing borrowers stay current on their loans when we roll into the second half of the year. Those net cash inflows are replaced by net cash outflows in the third quarter. What we typically see is that those inflows themselves stop right, it's not bonus season or time for tax refunds and so that lack of.
Speaker Change: Inflow coming in until the third quarter causes a seasonal shift in credit experience that seasonal seasonal shifts then continues in the fourth quarter. When many households increased their spending for the holidays and so a new outflow actually comes in that's what it is and we talked about when we see seasonal patterns in our credit.
Speaker Change: Performance, our default population in default experience in.
Speaker Change: In terms of growth and seasoning, we've talked about this one for a while now we simply have a larger portfolio and expect our default count will increase with the growth in natural seasoning of our book, particularly as our more recent 2022, and even 2023 production begin to come into a period.
Speaker Change: Of normal Washington currents and so that's really what came through there was nothing else to it that we would point to in the third quarter.
Speaker Change: Yeah.
Speaker Change: Got it that's helpful color and then I think you mentioned in your prepared remarks, you guys made some targeted changes by risk cohort can you, maybe just give a little bit more color and maybe just talk about what you observe to kind of make you implement these changes. Thank you.
Speaker Change: Sure.
Speaker Change: Look I would say broadly speaking.
Speaker Change: We're always monitoring the market, we're always tracking developments in the risk environment.
Speaker Change: And we always talk about risk based pricing as a as a dominant theme and that is changes in the risk environment.
Speaker Change: That will make changes in our pricing we do this all the time.
Speaker Change: The third quarter, the magnitude of changes our posture towards engaging in the market, where we see value, where we see opportunity none of that fundamentally shifted.
Speaker Change: We're still broadly encouraged by what we're seeing across all markets nationally, where we do see differences, but we've seen them now for a few quarters is differences emerging in certain local markets right sure, Florida, and Texas being in the headlines, but some other areas.
Speaker Change: Where we saw some of the most significant house price increases during the pandemic rally, but we're now seeing a a fairly sharp supply demand in what I call affordability constraints emerge and so we continually are refining.
Speaker Change: Where we are in rate GPS and that was the case again in the third quarter just as it has been at every point since we introduced the engine.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: The next question comes from Bose George from K B W. Please go ahead.
Bose George: Everyone. Good afternoon actually I wanted to ask about the mark to market LTV on the delinquent portfolio. Your claims paid has been pretty minimal and as long as home prices remain steady or is that a.
Bose George: Reasonable expectation that claims payable remained low.
Speaker Change: No I I will give you the mark to market on the defaulted portfolio, which is roughly 73%.
Bose George: And so that's but has come down a little bit quarter over quarter and that sort of to be expected as our 2022 population Adam made reference to the seasoning of the portfolio, but as those vintages, which inherently have a little bit less embedded equity just given the HBA paths over the past two years.
Bose George: Yes.
Bose George: But that is the number its 73, yeah and both as to your question on expectations for actual claim payments out the door. We established reserves for loans that are in default status in delinquent status.
Bose George: Based on our expectations of our ultimate claim exposure and responsibility for those loans and so we can't tell you where the actual dollars out the door will trend.
Bose George: But obviously, we're establishing reserves with an expectation that you know some subset of the loans that are in our default population today well progressed through towards a claim a whole outcome and we'll have to obviously satisfy our obligation there.
Speaker Change: Okay, great. Thanks, and then actually just switching to the investment portfolio I didn't know if you said this but what's the new money yield versus the current yield on the portfolio.
Speaker Change: So the the current yield on the portfolio was three 1% churn obviously interest rates are bouncing around quite a bit, but we're seeing new money being put to work in and around 5%.
Speaker Change: Okay, great. Thanks.
Speaker Change: The next question comes from Doug Harter from UBS. Please go ahead.
Doug Harter: Oh, Thanks, hoping we could talk a little bit more about kind of the competitive dynamic friend IW yeah.
Doug Harter: This quarter saw one player kind of take significant share while everyone else was kind of.
Doug Harter: In a similar situation. So can you just.
Speaker Change: Theyre expand on what you're seeing in terms of of our pricing on new business.
Speaker Change: Yeah, well, maybe I'll comment first on pricing and just give a broader perspective on on news. What we see is that industry pricing is generally stable and we would say rational we're really encouraged by the discipline that we see across the market and.
Speaker Change: But we interpret as a really deliberate approach that the industry is taking we think today, where are where we should be at a point of balance where most importantly, we've got to make sure that we're fully inherently supporting our customers and their borrowers and at the same time using rate among other tools, but using rate to appropriately protect our balance sheet.
Speaker Change: Our returns and our ability to deliver long term value for shareholders, that's where we see the market today.
Speaker Change: Today in terms of the the movements you noted look there's always some amount of movement quarter to quarter, there's always going to be some natural fluctuation in part just based on how your customers are doing right. If you're winning more business from a set of customers who themselves are on the upswing you could see a natural pick up in the opposite holds true as well.
Speaker Change: And then layer on to that the fact that everyone has their own point of view right, everyone is making their own decisions on risk on mix on rate adequacy. All the time and so you can you can see things naturally move around a little bit we can't really speculate as to what the decisioning strategy or what's happening inside one of our competitors, but over.
Speaker Change: Raul.
Speaker Change: We have seen discipline in.
Speaker Change: In the market and in a broadly constructive and balanced pricing environment for quite some time and that remains the case today.
Speaker Change: Alright, great I appreciate that.
Speaker Change: Okay.
Speaker Change: The next question comes from Nate Workman of Bank of America. Please go ahead.
Nate Workman: Oh, good afternoon, and thanks for taking my question you guys previously guided to put incremental operating expense growth.
Nate Workman: Just some more internal investments, but your expense ratio is still train towards that low end of like 28% to 25% that long term range I'm just curious like how do you expect expenses to trend from here and like what would get you closer to that high end of that range.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Sure I'm happy to take that so it is it was a strong quarter and we're always managing the business with discipline and efficiency and we're pleased to have delivered the 23% expense ratio that you saw this quarter in terms of quarter to quarter movements. There. There's nothing particular in the quarter that I would point to and although we do.
Speaker Change: Expect natural growth in our expense space I'm, just and in line with our normal inflationary trends.
Speaker Change: I don't I don't think there's anything specific that I'd point to in terms of near term investments that we are going to make that are fundamentally going to alter that picture, yet, but we're going through our planning process now just sort of thinking both in the immediate term it over the long term and you know as you should expect right, where we're here to manage our business for the long term and for the long term means that we need to.
Speaker Change: Making long term investments and so just the natural areas investing in our people our systems, our risk management strategies and our growth will continue to be a focus for us and obviously doing that in a way that allows us to maintain the discipline that.
Speaker Change: That we've achieved so far is something we're focused on.
Speaker Change: Right. That's helpful and then on persistency and it was very stable quarter over quarter.
Speaker Change: But we did see somebody great movement onto the tail end of the quarter I'm. Just curious if you saw any changes there to persistency like inter quarter, and we expect that to change in the near term.
Speaker Change: Yeah look I'd say.
Speaker Change: As we look forward I'll talk about the look forward and then and talk about you know anything we noted.
Speaker Change: Certainly persistency remains well above historical trend today, and as we look out into Q4 and into next year.
Speaker Change: We do expect that that will remain the case, but that will probably see some natural trending off of our recent peaks as we go forward in terms of the rate volatility that we saw intra quarter.
Speaker Change: Oh boy it was.
Speaker Change: It was just so so quick right I mean it right.
Speaker Change: <unk> down by 100 basis points or so, but just for such a short period of time.
Speaker Change: And then bounce back up so sharply and so quickly that if it doesn't.
Speaker Change: We wouldn't expect that to have a meaningful impact will give us meaningful insight into say sensitivities within the portfolio. We did see a little bit of uptick in refinancing activity, which is valuable right. It's an opportunity for us to capture some incremental then IW recapture whatever thing location from our portfolio, but we're talking you know.
Speaker Change: A matter of weeks of opportunity there.
Speaker Change: It makes sense that's all for me. Thank you.
Speaker Change: Yeah.
Speaker Change: The next question comes from Maxalt Fritcher from <unk>. Please go ahead.
Maxalt Fritcher: Hi, I'm, calling on for Mark Hughes can you give us a sense on how you see mortgage activity trending thus far in <unk> and for Q2 of windmill.
Speaker Change: I guess the first few days in November.
Speaker Change: Sure maybe I'll give you a broader perspective, because we don't we don't provide intra period updates or candidly guidance on our own.
Speaker Change: Production, but I'll talk just more broadly about the market and kind of how we see the opportunity developing as we roll into a into next year.
Speaker Change: Generally speaking, we expect that the new business opportunity in the semi market will be similar next year to what we've seen this year, which for US is a very strong year overall, where the long term secular drivers of demand and activity that we've talked about them as key continue.
Speaker Change: To come through where resiliency in house prices supports incrementally larger loan sizes and we're.
Speaker Change: Candidly with rates moving higher again affordability constraints drive an increasing number of borrowers to the private market for downpayment support.
Speaker Change: Our sense is that 2024.
Speaker Change: M I industry and IW volume is pacing to be you know roughly call. It around 285 billion plus minus or so and we expect a similarly attractive environment. In 2025, obviously things can always shift you know depending on how rates continue to develop and how the macro environment evolves that could create.
Speaker Change: Some incremental opportunity or headwind, but our outlook is still quite positive for where the industry will trend next year.
Speaker Change: Yeah, that's great color that's all for me. Thank you.
Speaker Change: The next question comes from Geoffrey Dunn from Dowling. Please go ahead.
Geoffrey Dunn: Thanks, Good afternoon.
Geoffrey Dunn: Are you able to share the profit commission threshold on the next U S. R.
Geoffrey Dunn: Sure they need to be on the quota.
Geoffrey Dunn: Quota shares so there's quite a bit of detail on the <unk> and <unk>.
Geoffrey Dunn: Our 10-Q on this as a subsequent event footnote, which will give you all the details.
Geoffrey Dunn: But the profit commission is up to 62% on our 2025 odd quota share Treaty. We also fully placed are 20% in 2026 quota share treaty at the same profit commission level and we partially placed our 2027 quota share.
Geoffrey Dunn: At 861% threshold.
Speaker Change: Okay. Yeah. So these are tied for the lowest and take a look.
Geoffrey Dunn: Lowest margins right highest profit commissions that we've ever achieved and we locked in three years' worth of coverage is the worst that theres a little bit of lots of places a stub for 27, but they're they're terrific terrific deal and we're really happy with the execution, we were able to achieve.
Geoffrey Dunn: Right.
Speaker Change: And then the average provision for notice this quarter was down sequentially is that mixture going on over there.
Speaker Change: Any fundamental changes in our reserving assumptions.
Speaker Change: Yeah. So look we carried.
Speaker Change: A couple of things.
Speaker Change: We carried at the end of the third quarter roughly 25, a 25000 dollar Ah sorry, $24000 average reserve for any idea at September 30, and that compares to about 25000 per N O D. At at June 30th So I'd say no fundamental shifts there right our default population.
Speaker Change: In Q3 has generally similar attributes to our default population at the end of.
Speaker Change: The second quarter right in terms of ticket FICO DTI LTV other key variables, there's always small differences in the underlying that can come through as small differences in our reserve picks and should be called particular, just because we have such a small number of defaults themselves you can get small differences that that sort of roll through.
Speaker Change: But you know.
Speaker Change: Generally speaking no.
Speaker Change: <unk> really shifted and I'd say more broadly, though one of the keys for us that we've talked about for a while now is that for reserving purposes, and generally in terms of embedding conservatism and discipline in how we manage but explicitly for reserving purposes that we continue to anchor more to our downside forecast when were setting reserves, we did that at Q.
Geoffrey Dunn: Three just as we had done in the second quarter.
Speaker Change: Okay. Thank you.
Speaker Change: As a reminder, if you have a question please press star one.
Speaker Change: The next question comes from Rick Shane from J P. Morgan. Please go ahead.
Rick Shane: Hey, everyone. Thanks for taking my question this afternoon.
Rick Shane: I'd like to talk a little bit about dip.
Speaker Change: Default formation cumulative default formation over time.
Speaker Change: <unk>.
Speaker Change: When does formations sort of peak, obviously I realize it's accumulative, but when do you when do you see the trajectory start to flatten out in terms of timeline for it before.
Speaker Change: It's a great question, Rick So what I say is obviously a lot depends on the environment in which those loans themselves were originated how those borrowers are situated in what develops after they took out their mortgage REIT and if you know the the 'twenty 2020 'twenty, one vintages will have far from normal experience because of.
Speaker Change: The the record run of house price appreciation the buoyant labor market that we have right for an extended scratch and still have on the labor side after those.
Speaker Change: Origination years, but if we step back from any specific year unintended instead, just talk conceptually.
Speaker Change: Conceptually what we typically see is that peak loss encouraged for a vintage occurs roughly between year three and year six after the origination and if you think about it just makes sense right. So essentially when our borrowers taken out alone right, they're making the decision to buy a home.
Speaker Change: That decision is driven one by life events. Typically there are many of them may have gotten married had kids want to put down roots in a particular community. It's oftentimes a financial decision right. They may do the rent versus buy calculus, and they'll also look at housing as a way for them to save and does that and build wealth over the long term I'd say, there's a very high.
Speaker Change: Emotional aspects to it right for many borrowers they are taking on the single largest financial obligation that they'll ever carry.
Speaker Change: And when you make that decision you don't do it lightly right, what you're really saying is you're providing a signal around the confidence that you have in your job prospects. The confidence you have in your household financial profile your ability to service carry that debt to stay current on it and obviously had a successful outcome with that purchase but like any.
Speaker Change: Forecast right like any forecast the ability to to predict with accuracy.
Speaker Change: It goes down the longer out longer in the forecast horizon that you stretch and so that that indication that sort of personal indication statement and confidence that borrowers are signaling typically holds true for those first three years barring a meaningful shift in the environments in which they've made that decision, but by the time you get to your three year or so.
Speaker Change: All right it could start to frame a little bit you can have unexpected things that have developed at a stranger household position job changes job loss all things that can be introduced and so you typically see then that conviction. The performance can lag from your three by the time, though you get to your six a borrower who's been servicing their debt responsibly consistently.
Speaker Change: For six years, even if their original forecast if you will doesn't hold that original statement theyre, making affirmative statement about their position and their wherewithal to service the debt may have shifted but they have found ways. They built equity they built wells they've generally advanced in their careers they've enjoyed some amount of wage growth and it becomes saying obviously.
Speaker Change: Different story in year, six and on it. So that's why we tend to see from years three through six as to the pattern within your three through six I'll give you. The the one that youre not going to want which is it depends it depends on the borrower it depends on the book the risk profile and the environment in which it's obviously developing.
Speaker Change: No Adam look at it it's a fair question and I will follow up with the question you don't want in a second but it is interesting to me because I would have assumed.
Speaker Change: To some extent that once you get in what you're describing makes total sense.
Speaker Change: My experience would have been once you sort of get through that first year and digest, what that means through a year that it becomes easier, but I think you're exactly right. It is job loss health divorced and the further out you go the higher the greater risks.
Speaker Change: Of course, yeah.
Speaker Change: You would say do you want to talk about things generically I'd love to talk about one thing specifically.
Speaker Change: And I don't want to put too fine a point on this but if we look at the 23 or the 22 cohort.
Speaker Change: So far versus the <unk>.
Speaker Change: 22 cohort last year at the same time, the 'twenty three cohort is actually doing.
Speaker Change: Tad bit battery.
Speaker Change: And again I don't want to over read into that but at least now as we look at the cumulative default table 22, which is the one that sort of jumps out.
Speaker Change: Is there anything fundamental.
Speaker Change: The mentally different about the 'twenty three cohort that should actually cause it to be a little bit better than the 22, all or should we extrapolate the 'twenty two for the 23.
Speaker Change: Well, we don't give any guidance. So I know you want to talk specifics, but it becomes a bit easier to say, we don't give you guidance what I will say, though is let me focus on I'll, just say broadly about the 22 and 'twenty three books.
Speaker Change: We think that they are performing exceptionally well, we're really pleased with how they've been developing.
Speaker Change: Those books for US are yeah, hi, incredibly high quality just like the rest of our portfolio. We have applied the same rigor to the risk selection and.
Speaker Change: And mix in shaping our 'twenty, two and 'twenty three production as we have always done if you look at the underlying risk characteristics on a vintage by vintage basis.
Speaker Change: There are quite similar no notable differences, we source comprehensive reinsurance protection for both of those vintages again, just as we've we've always always done so.
Speaker Change: I'd say not to highlight differences between the two of those vintages, but obviously between our more recent production and prior year vintages. The key difference that we've talked about for some time now is simply the embedded equity position that underpins our more recent book years compared to the older vintages borrowers who.
Speaker Change: Bought their homes more recently just <unk>.
Speaker Change: Haven't seen the same record Ron at house price depreciation as those borrowers who took out their loans and purchase their homes during the pandemic, but they're also benefiting I'd say broadly from still a strong macro backdrop right resilient housing market.
Speaker Change: And so I'd say as we model it I won't tell you how we model it out between 'twenty, two and 'twenty three.
Speaker Change: We do expect that both 'twenty, two and 'twenty three will incur higher cumulative claim costs than our earlier book years in 2021 and earlier again, it's really the equity dynamic.
Speaker Change: We expect that performance, though we will continue to track in a really constructive and encouraging way and I'll also share that our actual experience, though on both of those books is holding up quite well versus our original price expectations.
Speaker Change: Got it okay, yeah and again.
Speaker Change: Igniting the benchmarking data versus 'twenty, 'twenty, and 'twenty, 'twenty, one which could be to your best cohorts ever is is a little bit of a of a fault. So I appreciate the answer thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to management for closing remarks.
Speaker Change: Thank you again for joining us.
Speaker Change: We will be hosting our annual Investor day on Thursday November 21 in New York and will be participating in the Goldman Sachs Financial Services Conference on December 10th we look forward to speaking with you again soon.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Yeah.