Essent Group Ltd. (NYSE:ESNT) Q2 2022 Earnings Conference Call August 5, 2022 10:00 AM ET
Company Participants
Philip Stefano – Vice President of Investor Relations
Mark Casale – Chief Executive Officer
David Weinstock – Interim Chief Financial Officer
Chris Curran – President of Essent Guaranty, Inc.
Conference Call Participants
Mark DeVries – Barclays
Rick Shane – JPMorgan
Doug Harter – Credit Suisse
Bose George – KBW
Mihir Bhatia – Bank of America
Ryan Gilbert – BTIG
Geoffrey Dunn – Dowling & Partners
Operator
Good day and welcome to the Essent Second Quarter 2022 Earnings Conference Call. Please note today’s conference is being recorded. [Operator Instructions]
At this time, I would like to turn the conference over to Phil Stefano, Vice President of Investor Relations. Mr. Stefano, you may begin your conference.
Philip Stefano
Thank you, Erica. Good morning, everyone and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and David Weinstock, Interim Chief Financial Officer. Also, on hand, for the Q&A portion of the call is Chris Curran, President of Essent Guaranty.
Our press release which contains Essent’s financial results for the second quarter of 2022 was issued earlier today and is available on our website at essentgroup.com. Prior to getting started, I would like to remind participants that today’s discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today’s press release. The risk factors included in our Form 10-K filed with the SEC on February 16, 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.
Mark Casale
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 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 undersupply 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 30, 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 3-month 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 the 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 an excess of loss forward transaction to cover an additional 20% of our 2022 NIW. Combined with our 20% quota share transaction 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 is reinsured. Our reinsurance entity, the Essent Re continues to write profitable GSE business and support our MGA clients. As of June 30, annual run rate revenues are approximately $60 million, while our third-party risk in force was nearly $2 billion, we remain pleased with Essent Re’s performance and its contribution to the profitability of our franchise.
Cash and investments as of June 30 were nearly $5 billion and the investment yield for the second quarter of 2022 was 2.5%, up from 2.1% in the first quarter. The recent rise in rates is providing some tailwinds for our investment portfolio as yields in the second quarter on new money approximated 4%. 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 $630 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 strength in our balance sheet.
Given our financial performance during the second quarter, I’m pleased to announce that our Board has approved a $0.01 per share increase in our dividend of $0.22. 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.
David Weinstock
Thanks, Mark and good morning, everyone. Let me review our results for the quarter in a little more detail.
For the second quarter, we earned $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 1 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 in 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 continue to cure at elevated levels, we revised our estimate of the ultimate claim rate for these defaults from 7% to 4%.
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, Essent has a credit facility with a committed capacity of $825 million. Borrowings under the credit facility grew interest at a floating rate 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 2.92%, up from 1.99% at March 31.
Our credit facility also has $400 million of undrawn revolver capacity that provides additional sources 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 to its 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 10.2:1.
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 paying $347 million of dividend to our U.S. holding company.
Now, let me turn the call back over to Mark.
Mark Casale
Thanks, Dave. During the second quarter, our business continued generating strong earnings and robust returns. Our balance sheet, capital and liquidity remain strong, providing optionality in managing our business both offensively and defensively. We believe that our measured approach of deploying excess capital is 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 as well positioned in supporting affordable and sustainable homeownership.
Now, let’s get to your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Mark DeVries with Barclays.
Mark DeVries
Mark, I was hoping to get your updated thoughts on how you’re thinking about deploying excess capital here. And what might you need to see before you get a little bit more aggressive repurchasing the shares?
Mark Casale
Yes. Mark, I think 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 — we still believe 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 the $250 million repurchase plan in May of ’21, that was for 18 months through the end of this year. We completed that in April of this year. We reinstituted or 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’re going to pause — and we paused this quarter, we may pause another quarter or 2. And a lot of this is just going to be the visibility, it’s twofold market. It’s on the defensive side, what’s the visibility that we see in 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 in 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 hasn’t yet. I 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 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 it’s a quarter-by-quarter assessment really depending on how things unfold in the economy.
Operator
Your next question comes from the line of Rick Shane with JPMorgan.
Rick Shane
Mark, there’s an interesting dynamic that’s emerging right now which is that there is obviously concern about affordability related to new originations. But when we think about your portfolio, your — in the industry more broadly, there’s a significant concentration in vintages with low rates, a lot of embedded home price appreciation. And obviously, the third factor for affordability is income which is going to fluctuate. But do you — when you really look at the risk here, is it sentiment-driven that there’s home price depreciation, borrowers’ willingness to pay declines because it doesn’t seem like when you think about the big vintages that there’s really much that’s going to distort the existing policies affordability.
Mark Casale
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’ve always said insurance in force is really how we judge the business because that’s where it generates premiums. That 20 and ’21 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 3.5%. So just from a stickiness or persistency standpoint, that’s going to be around a lot longer than we would have even modelled [ph] out when we first did it, right? So mortgage rates hovering around 5% where they are now, I know that book 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, you’re going to need a significant kind of HPD decline, 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 it continues to generate, I would say, more on the risk standpoint, Rick, it’s on the newer originations, right?
So it’s the business you’re booking now at higher HPA at higher rates. So it will turn over faster, right, given where rates are and where they’re expected to go kind of relative if you think where the 10-year treasury is today and historical spread to that. And then you could see rates fluctuate above and 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 the engine really does. The pricing engines really do benefit the mortgage insurers because we can kind of go in and out of markets a lot faster, right, just because of the way that — the way we filed and filing algorithms versus actual rates, we can move a lot faster.
I think the industry proved that in COVID. And clearly, here, you can see with HPA, not so much certain markets have risen faster than others but then you have to have a more forward-looking view in terms of supply and so forth which were very, very instrumental to that. But really, at the end of the day, it comes down to unemployment, right? We’re so levered unemployment. So even at a super strong credit book 745 if our borrower does lose their job, they’re going to default. I mean we saw that in COVID when unemployment spiked up, so did our default.
So again, I think we’re well built for it. I think from a capital position, we’re strong. And so we’re expected. I think longer term, we would expect defaults to normalize. I mean we’ve had such a benign credit cycle, the last 5, 8, 10 years. I think your colleague called it a super credit cycle back four or five years ago and he was spot on.
Longer term, are we really going to see claims below 1%. That’s a little hard to envision. But even in a normalized claim environment, you’re still looking at a business that has 40%, 45% combined ratio. So still to slip it, 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, really looking forward and we continue to see housing to be relatively strong, just given that intrinsic demand of the millennial. And you’ve seen — everyone has seen the stats. But if you look at just the population that’s in the 20s today. It’s 45 million individuals and the average age of the first-time homeowner is in their early 30s. So you’re going to see 4 million to 5 million new homeowners come on board for a while.
So again, I always take the bigger picture and what’s the context of the macro environment that we play in. And we’re — and if you don’t like housing, it’s going to be hard to like Essent. We continue to like housing. And I think when you break down kind of the — 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.
Operator
Your next question comes from the line of Doug Harter with Credit Suisse.
Doug Harter
I guess as you look out over the next 12 months or so, I guess I expect kind of the purchase market to trend and therefore, what that might mean for insurance or growth?
Mark Casale
I’m sorry. You broke up a little bit, Doug, could you repeat that?
Doug Harter
Sure. Just I guess as you look out over the next 12 months, how do you expect the purchase market to trend and what that might mean for your insurance…
Mark Casale
Okay. Okay. Still broke up. I got the question though. Yes. I think purchases, we believe will be relatively strong in 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 volume is hidden a little bit by the larger loan balances. So the units — the 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 purchases or life events versus a family of 4 staring at the 10-year. So we continue to think the demographics will have purchases 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.
Operator
Your next question comes from the line of Bose George with KBW.
Bose George
Actually, it looks like your market share rebounded a bit. I know some of that is quarter-over-quarter noise but just curious if there’s any read through to pricing, whether you’re more comfortable with pricing, just given some of the price hardening that your peers have talked about?
Mark Casale
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 competitors backing up that was clear. And it’s a little — it’s an advantage for us in terms of EssentEDGE, right? Because EssentEDGE doesn’t rely solely on FICO score, it’s an Essent custom score. It can read things differently than our older models did. So, when — we’re a little closer to the market clearing price, I think we can tend to bring on a few more loans than we would when we’re outside of the market clearing price. And clearly, by design, we were outside of the market clearing price in the kind of the third and fourth quarters. It’s fairly evident. And I know I sound like a broken record but this whole industry is just price. It’s flat out price. And if your tops in share, you have the lowest price.
So, I think our view is we’re — given our focus on unit economics and longer term growing book value per share, we’re very comfortable being in the middle of the pack. And I think our view is because that’s where the market really is. And 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, be 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 ROEs.
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, as I said. And I think we’ve shown that over time. And I think the engine gives us another — just another way to squeak out a little bit better unit economics.
Bose George
Okay, great. That’s helpful. And then actually on the tax rate, is there anything that you’re following like in terms of the global minimum tax or any of the other tax discussions in D.C. that could impact your tax rate?
Mark Casale
Yes. It’s pretty early in that. I mean everything we’ve seen, there hasn’t — there’s not an impact but these things are always subject to change. But I think we’re good for now.
Operator
Your next question comes from Mihir Bhatia with Bank of America.
Mihir Bhatia
I wanted to maybe just start — go back to the price discussion from a second ago. I just wanted to ask about that. I appreciate your comments about being closed out of the market clearing price. What I was curious on is, how did that gap narrow? Was it more your competitors taking actions getting closer to yours? Or did you also need to like tweak your prices because your view of the economy maybe got better or the risk coming in? Any additional color you can give there because — we’re just trying to understand what’s happening with the competitive intensity?
Mark Casale
No, no, no, it’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 believe a lot of the — a few of the competitors kind of tweak their pricing and we could see it. And again, the way our engine works, is we talk about diamonds. It’s really good when we’re close to the market clearing price. If we’re above it by a lot, it doesn’t — it’s not as effective. So our view is the competitors or quite a few of them based on what you could 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 the pricing has really started at the 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 the wholesale above — we always have just a — or a baseline raise.
And we’ll look to — we’ll 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, our engine is not that good. It’s — again, it’s around the margins where it’s incredibly effective. If we’re 20% share, then our base rate is lower than everyone else’s. It’s relatively clear. But I think just from an 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, so everyone’s expect to claim rate or probability of defaultness environment has to go up. And it did during COVID. I thought the industry raised very quickly. So this idea that it’s a race to the bottom amongst MIs. I think it’s mistaken. I think the Essent and the MIs in general, price for their view on credit.
So if they think credit is really strong, it’s going to be strong over a period of time of the policy, they’re going to price appropriately given the capital structure and leverage and all those sort of things. And so the moving up of it is really just — it’s just — I think it’s expected. And I think you can end up seeing potentially higher pricing over the next 6 to 12 months.
Mihir Bhatia
That is interesting. 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, a strong credit cycle for a few years. I appreciate that uncertainty is increasing on a forward basis but a lot of your portfolio is kind of — is what it is and you’ve had a lot of embedded HPA in the portfolio. Consumers have had some wage growth. You have longer life on the existing portfolio.
I guess my question is just on the normalized delinquencies, I understand on new policies you maybe — and I understand your underwriting has to account for that. But do you get to a normalized delinquency rate here in the next year, 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 like just your normalized delinquency level?
Mark Casale
Yes. I think Rick alluded to it earlier. It’s really bifurcated, right? So the core of that 2021 book is isolated. And yes, we would expect I think where the defaults go is going to be where unemployment goes here. I mean it’s — we’re just levered to unemployment. And so our view is unemployment could go up, our defaults could rise in 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’ve talked to certain investors that are worried about a housing recession, of course, everyone is natural.
If you don’t follow the industry, everyone’s natural inclination is to go back to the great recession. But the — great recession, the portfolio that the MIs had versus today is literally night and day. I mean, you’re talking about a 705 FICO layered risk, 30% of the product originated in the great recession is no longer even eligible for the GSEs. So, we have a much better kind of credit book. We have again, like I said, the embedded HPA and obviously, we have the reinsurance protection. So the MIs had that uncapped liability on their book, back pre-crisis, we don’t have that. I mean, 98% of the book is covered. So that whole mess 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 at that portfolio but just going forward, we said there’s a little bit more risk given the elevated HPA. Don’t forget that the GSEs play a big role in this. So the GSEs, in fact, one of the GSEs has tightened their credit box recently around the tails but we’re a big beneficiary of that. So — and as we said, I actually think we said this on our roadshow, one of the best things that’s happened to the MI industry. It was the adoption of the qualified mortgage rule. I mean that is all of that non-QM 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 loans and there’s a different execution for that through the POS market. But that — if that was — if the GSEs were 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 pretty good risk.
Operator
Your next question comes from the line of Ryan Gilbert with BTIG.
Ryan Gilbert
Really great discussion around credit performance. I appreciate all the details. Just building on that, given the, I guess, the quality of the in-force book and all the changes that have happened to the mortgage industry over the — 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?
Mark Casale
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, we reaffirmed at Moody’s for our A3 rating is part of that we ran through another great recession stress test on our portfolio. And we volunteered to do that because we think it’s a good — we do it all the time internally but it was — we really wanted to get it, have some external eyes looking at it. And if you go through that, we do not lose money through a 5-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. When you go to the great recession, the MIs depleted book value significantly.
And when you deplete book value, there’s really no bottom for your stock, where I think the way the MI industry will be in the next recession, whether it’s mild, moderate, severe, 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. I mean because again, if you’re thinking severe recession, you’re also going to look 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 Essent, 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 MIs were not around to enjoy that period, we will be. And my expectation is so all of our competitors because they’re structured the same way. And I do think so what’s going to happen, if you think about, again, it points to the reinsurance community when they have a CAT [ph] event, generally pricing hardens and they have the ability to raise capital off that and keep going. I think the same — I think the same thing will play out for the mortgage insurance industry. And I think over time, that will be reflected in our multiples.
Once investors understand kind of the 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, the same thing, the safety or the strength around the reinsurance will play itself out in the severe stress. And I think 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 what — the old view of the MI industry is that we’re going to go out of business in a severe stress.
In fact, we were with an investor a month ago who asked us that question. And we had to walk through this analysis. But if you don’t follow the industry at the level you guys do and the analysts do and certainly, our investors know it well, I mean 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’s harder for others to pick up on it. But I think over time, I think it will 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, 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 adjust the pricing there. 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.
Ryan Gilbert
Okay, got it. Really helpful. Second question on purchase NIW. I get that buying a home is a life decision and most families are not watching day-to-day fluctuations in the 10-year treasury. But mortgage rates are down, maybe 100 basis points for the last 1.5 months. And the question that we’re getting is — has that moved down and 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 in your business that would suggest that there’s been any green shoots or a lift in demand over the last maybe few weeks or month?
Mark Casale
It’s — I wouldn’t say anything in particular. I would say, again, we kind of have to express it in terms of kind of NIW for the industry, right? That’s a good to me, that’s a good proxy. The first quarter was 105. Second quarter was 120-ish. Our view is it will be lighter in the back half of the year. That being said, July applications were — they didn’t fall and they were down moderately but they weren’t down — they weren’t down a ton. So I think the third quarter, I don’t know where it will be relative second quarter. My guess is it’s a little bit lighter. And then in the fourth quarter, I think it’s too early to tell, depending on where rates are. So I wouldn’t call it a green shoot, I think purchase has actually held up pretty well. I think really the issue around originations to us has been refinancing, 98% of our book was purchased in the second quarter. I mean we had certain days, Ryan, where it’s like 99% purchase. I think we’ve never seen that in the history of the company. So, I mean I know we’ve — it’s only been around 10 years but still that’s quite remarkable.
So again, I think just the intrinsic demand of purchase will continue, if there’s fits and starts, right, just given where the rates are. So I think it does take back to my earlier comment, not that people don’t stare at it but even if rates are higher which they are, it takes folks a while to adjust to that new rate. So I mean, purchases, again, longer term, just given the intrinsic demand of that — the folks in their 20s right now, I think we’re set up still pretty good longer term. I can’t — it’s tough to tell quarter-by-quarter.
Operator
Your next question comes from Geoffrey Dunn with Dowling & Partners.
Geoffrey Dunn
Mark, I want to revisit the comments you made about defaults could affect arise from the 2021 cohort but don’t see a lot of claims coming out of that. That echoes the comments you made in the past where new notices drive reserving and then it’s HPA and employment, et cetera, that can affect the ultimate claim. So the problem is with new notices going up, that drives incurred losses higher, it affects your PMIERs assets. So how do you approach the reserving for what is really a unique book of business, do you attempt to speculate at lower ultimate claim rates and speculate 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 approach the book that you’ve never had precedent for reserving for in the past?
Mark Casale
Yes, it’s a good question. I would say we’ll clearly tend more to be more conservative. I mean, it is an actuarial model that has gone back, not just for our history but we have all of the Triad data. It’s — we feel just more comfortable kind of — and it’s a model that we review it quarterly and we probably make — we’ll tweak it at least once a year for some items but for I think in general, we’ll 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 were so different that we felt like the model wasn’t quite built for that and we kind of used our best estimate of the 7% to get around that. But as you remember, we quickly went off of it. We went off of it after two quarters which did create a lot of noise.
So as we saw through ’21, you saw a — in this portfolio, you would see a borrower default, declare forbearance, accumulate reserves over 3-, 5-, 6-month 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, they’re 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 yes, I think in short, though, Geoff, we don’t trying not — the actuarial model is based on history. There’s 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 PMIERs perspective, I think it’s — I think the GSEs would probably rather see us be more conservative.
Geoffrey Dunn
Okay. And then just in terms of how you thought about HPA in your pricing and in your reserving? What levels were you assuming in the last couple of years relative to the actual performance? I mean, were you assuming couple of percent and we saw the double digits? Or can you just kind of frame up your rough approach on HPA?
Chris Curran
Geoff, it’s Chris. So with regards to HPA 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. So 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.
Geoffrey Dunn
Okay. And as your reserves developed, do you do any kind of mark-to-market for HPA? Or do you let it play out in your claim rate?
David Weinstock
Geoff, it’s Dave Weinstock. We do look at the HPA of the default and we refresh that regularly. So that it does have an impact and will play itself through our reserve numbers as we update them.
Operator
There are no further questions at this time. I’ll turn the call back over to management for closing remarks.
Mark Casale
Well, I’d like to thank everyone for joining today and have a great weekend.
Operator
This concludes today’s conference call. You may now disconnect.
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