NMI Holdings Inc

NASDAQ:NMIH

Earnings Call Analysis

National MI Reports Record Revenue and Strong Growth Amid Resilient Housing Market

In the third quarter, National MI achieved a record revenue of $166.1 million and a GAAP net income of $92.8 million, or $1.15 per diluted share, reflecting a 17.5% return on equity. They generated $12.2 billion in new insurance written, raising their primary insurance in force to $207.5 billion—up 7% year-over-year. The company's persistency improved slightly to 85.5%. Despite some macro risks, the housing market remains resilient. Looking ahead, they expect the MI industry’s new insurance written volume in 2024 to be around $285 billion, maintaining positive market conditions and significant opportunities for growth.

Record Financial Performance

In the third quarter of 2024, National MI achieved record financial results, reporting total revenue of $166.1 million, a 2% increase from the second quarter and a remarkable 12% growth compared to the same quarter last year. The company also showed robust net income of $92.8 million, translating to $1.15 per diluted share, demonstrating a slight improvement over previous quarters. A solid 17.5% return on equity underscores the company's financial health and effective capital utilization.

Strong Market Position

National MI reported significant business activity with $12.2 billion in new insurance written (NIW), resulting in a total primary insurance in force of $207.5 billion, which is up 2% from the previous quarter. This consistent growth highlights the company's capacity to navigate the current housing market successfully, despite higher interest rates. The persistency of 12 months remained stable at 85.5%, indicating high customer retention and confidence in the company’s services.

Expense Management and Efficient Operations

Operating expenses in the third quarter stood at $29.2 million, a slight increase from $28.3 million in the second quarter. Still, the expense ratio improved to 20.3%, compared to 20.1% in the prior quarter, reflecting effective cost management strategies. As the company anticipates natural growth in expenses alongside inflationary trends, maintaining operational efficiency remains a focal point.

Credit and Risk Management

The third quarter saw an uptick in defaults, with the default rate rising to 87 basis points, up from 76 basis points in the second quarter. Despite this increase, the company maintains one of the lowest default rates in the industry, supporting the strength of its insured portfolio. Underwriters continue to apply rigorous standards, and recent improvements in risk management practices bolster the outlook for future performance. The company has secured new reinsurance treaties to enhance its risk management framework, ensuring continued protection and operational stability.

Positive Outlook for Growth

Looking ahead, management predicts that the mortgage insurance industry will maintain strong demand. They anticipate NIW volume in 2024 to approach $285 billion, supported by resilient housing prices and an ongoing need for down payment assistance as affordability challenges arise. This optimism about sustained business opportunities aligns with the broader economic context, suggesting that National MI is well-positioned for continued growth in the coming years.

Shareholder Value Enhancement

In alignment with its commitment to shareholder value, National MI completed a stock repurchase totaling $16.9 million during the quarter. The company also reported a book value per share of $27.67, marking a 4% increase from the prior quarter and a substantial 17% year-over-year. This growth reflects not only operational success but also prudent capital allocation strategies aimed at returning value to shareholders.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the NMI Holdings Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to John Swenson, NMI Management. Please go ahead.

[John Swenson, executive]

Thank you, operator. Good afternoon, and welcome to the 2024 third quarter conference call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Adam Pollitzer, President and Chief Executive Officer; and Aurora Swithenbank, our Chief Financial Officer.

Financial results for the quarter were released after the close today. The press release may be accessed on NMI's website located at nationalmi.com under the Investors tab.

During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC. If and to extent the company makes forward-looking statements, we do not undertake obligation to update those statements in the future in light of subsequent developments. Further, no one should rely on the fact that the guidance of such statements is current at any time other than this call.

Also note that on this call, we may refer to certain non-GAAP measures. In today's press release and on our website, we provided a reconciliation of these measures to the most comparable measures under GAAP.

Now I'll turn the call over to Brad.

[Bradley Shuster, executive]

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the third quarter, National MI again delivered strong operating performance, continued growth in our insured portfolio and record financial results. Our lenders and their borrowers continue to turn to us for critical down payment support. And in the third quarter, we generated $12.2 billion of NIW volume, ending the period with a record $207.5 billion of high-quality, high-performing insurance in force.

Washington, our conversations remain active and constructive, and we believe there is broad recognition in D.C. about the value that the private mortgage insurance industry provides, offering borrowers down payment support and efficient access to mortgage credit while also placing private capital in front of the taxpayer to absorb risk and loss in a downturn.

At National MI, we recognize the need to provide borrowers with a fair and small opportunity to access the housing market, establish a community identity and build long-term wealth through homeownership, and we are proud to have helped nearly 2 million borrowers to date. Overall, we had a terrific third quarter and are well positioned to continue to lead with impact and drive value for our people, our customers and their borrowers and our shareholders going forward.

With that, let me turn it over to Adam.

[Adam Pollitzer, executive]

Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the third quarter, delivering significant new business production, consistent growth in our insured portfolio and record financial results. We generated $12.2 billion of NIW volume and ended the period with a record $207.5 billion of high-quality, high-performing primary insurance in force.

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. Overall, we had an exceptionally strong quarter and are confident as we look ahead. The macro environment and housing market have remained broadly resilient in the face of elevated interest rates. Our lender customers and their borrowers continue to rely on us in size for critical down payment support, and we see an attractive and sustained new business opportunity fueled by long-term secular trends.

We have an exceptionally high-quality insured portfolio covered by a comprehensive set of risk transfer solutions and our credit performance continues to stand ahead. Our persistency remains well above historical trend and when paired with our strong NIW volume has helped to drive consistent growth and embedded value gains in our insured book. And we continue to manage our expenses and capital position with discipline and efficiency, building a robust balance sheet that's supported by the significant earnings power of our platform.

Notwithstanding these strong positives, however, macro risks do 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. In the third quarter, we continued to make targeted changes to further manage our mix of new business by risk cohort and 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 PMIERs funding for our next several years of new business production.

More broadly, we've been encouraged by the continued discipline that we see across the private MI market. Underwriting standards remain rigorous, and the pricing environment remains balanced and constructive. Overall, we had a terrific quarter, delivering strong operating performance, continued growth in our insured portfolio and record financial results. 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 Swithenbank, executive]

Thank you, Adam. 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. We generated $12.2 billion of NIW 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.

12-month persistency was 85.5% in the third quarter compared to 85.4% in the second quarter. Persistency continues to serve as an important driver of the growth and embedded value of our insured portfolio.

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. 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 34.3 basis points also unchanged from the second quarter.

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 2023. We saw continued growth in investment income during the period as we deployed new cash flows and rolling maturities at favorable new money rates.

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. Underwriting and operating expenses were $29.2 million in the third quarter compared to $28.3 million in the second quarter. Our expense ratio was 20.3% in the quarter, compared to 20.1% in the second quarter.

We had 5,712 defaults at September 30 and our default rate was 87 basis points at quarter end compared to 76 basis points at June 30. Claims expense in the third quarter was $10.3 million compared to $276,000 in the second quarter and $4.8 million in the third quarter of 2023.

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 we've seen in the housing market.

Interest expense in the third quarter was $7.1 million and reflects the run rate savings we achieved with our successful debt refinancing in May. 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. Diluted EPS was $1.15, up 1% compared to $1.13 in the second quarter and 14% compared to $1 in the third quarter of 2023.

Total cash and investments were $2.8 billion at quarter end, including $148 million of cash and investments at the holding company. We have $425 million of outstanding senior notes and our $250 million revolving credit facility remains undrawn and fully available.

In October, S&P upgraded our financial strength and issuer ratings to A- and BBB-, respectively. 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 in their decision.

Shareholders' equity as of September 30 was $2.2 billion and book value per share was $27.67. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $28.71, and up 4% compared to the second quarter and 17% compared to the third quarter of last year.

In the third quarter, we repurchased $16.9 million of common stock retiring 443,000 shares at an average price of $38.04. As of September 30, we had $108 million of repurchase capacity remaining under our existing program. In October, we entered into a series of new quota share in excess of loss reinsurance treaties, which together will provide us with forward flow coverage and comprehensive risk protection for our next several years of new business production at an estimated 4% pretax cost of capital.

Reinsurance has long been a core pillar of our credit risk management strategy working to mitigate the potential and volatility in our insured portfolio and has consistently provided us with a deep, secure and efficient source of growth capital to fund our peers' needs. We have significant experience, strong secondary market relationships and a track record of leading with innovation across the risk transfer spectrum. 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.

At quarter end, we reported $3 billion of total available assets under Premier's and $1.7 billion of risk-based required assets. Excess available assets were $1.3 billion. Overall, we achieved standout financial results during the quarter, delivering consistent growth in our high-quality insured portfolio, record top line performance, continued expense efficiency and strong bottom line profitability and returns.

And with that, let me turn it back to Adam.

[Adam Pollitzer, executive]

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. We have a strong customer franchise a talented team that's driving us forward every day, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions, a robust balance sheet and the significant earnings power of our platform. We are leading the MI 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.

[Operator]

[Operator Instructions] The first question comes from Terry Ma from Barclays.

[Terry Ma, analyst]

Maybe just starting with credit. The year-over-year increase in new notices this quarter accelerated and the cure rate was also lower. So I'm just curious if there is anything episodic that you observed? Or are we just starting to see a more material impact of vintage seasoning trying to play a role?

[Adam Pollitzer, executive]

Yes, Terry, I'll take that. 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 set quite a favorable backdrop. More importantly, though, our existing borrowers remain well situated. We have an incredibly high-quality book by all objective measures, and we're continuing to see that translate through to industry-leading credit experience.

At September 30, 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'd say this -- one, it should be expected, and 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 there's been a lot of focus through the course of calls for the industry on these items. And so I do want to elaborate a bit and make sure that everyone understands what we talked when we -- what it is that we're talking about when we say seasonal and seasoning dynamics.

In terms of seasonality, we typically see an uptick in default experience as we move through the second half of 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, cure out of their default status, and it 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 inflow coming in into the third quarter causes a seasonal shift in credit experience that seasonal shift then continues in the fourth quarter when many households increase their spending for the holidays. And so a new outflow actually comes in. That's what it is that we talk about when we see seasonal patterns in our credit performance at default population and default experience.

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 and natural seasoning of our book, particularly as our more recent 2022 and even 2023 production begin to come into a period of normal loss incurrence. And so that's really what came through. There's nothing else to it that we would point to in the third quarter.

[Terry Ma, analyst]

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 observed to kind of make you implement these changes?

[Adam Pollitzer, executive]

Sure. Look, I'd say, broadly speaking, we're always monitoring the market. We're always tracking developments in the risk environment. And we always talk about risk-based pricing as a dominant theme, and that has changes in the risk environment develop that will make changes in our pricing. We do this all the time. In the third quarter, the magnitude of changes are posture towards engaging in the market where we see value, where we see opportunity. None of that fundamentally shifted. 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? So Florida and Texas being in the headlines, but some other areas where -- we saw some of the most significant house price increases during the pandemic rally, but we're now seeing a fairly sharp supply/demand and what I call affordability constraint emerge. And so we continually are refining where we are in Rate GPS, and that was the case again in the third quarter just as it's been at every point since we introduced the engine.

[Operator]

The next question comes from Bose George from KBW.

[Bose George, analyst]

I wanted to ask about the mark-to-market LTV on the delinquent portfolio. Obviously, your claims paid has been pretty minimal. And as long as home prices remain steady. Is that a reasonable expectation that claims paid will remain low?

[Aurora Swithenbank, executive]

I will give you the mark-to-market on the defaulted portfolio, which is roughly 73%. And so that has come down a little bit quarter-over-quarter and that's sort of -- it should be expected as our 2022 population out amid reference to the seasoning of the portfolio. But as those vintages, which inherently have a little bit less embedded equity just given the HBA path over the past 2 years. But that is the number at $73.

[Adam Pollitzer, executive]

Yes. And Bose, to your question on expectations for actual claim payments out the door. Look, we established reserves for loans that are in default status and delinquent status, based on our expectations of our ultimate claim exposure and responsibility for zones. And so we can't tell you where the actual dollars out the door will trend. But obviously, we're establishing reserves with an expectation that some subset of the loans that are in our default population today will progress through towards a claimable outcome, and we'll have to obviously satisfy our obligation there.

[Bose George, analyst]

Okay. Great. And then actually just switching to the investment portfolio. I don't know if you said this, but what's the new money yield versus the current yield of the portfolio?

[Aurora Swithenbank, executive]

So the current yield on the portfolio is 3.1%. And obviously, interest rates are bouncing around quite a bit, but we're seeing new money being put to work in and around 5%.

[Operator]

The next question comes from Doug Harter from UBS.

[Douglas Harter, analyst]

Hoping we could talk a little bit more about kind of the competitive dynamic for NIW. This quarter saw one player kind of take significant share while everyone else was kind of in a similar situation. So can you just expand on what you're seeing in terms of pricing on new business? .

[Adam Pollitzer, executive]

Yes. Look, maybe I'll comment first on price and then just give a broader perspective on moves. 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 what we interpret as a really deliberate approach that the industry is taking. We think today where we should be at a point of balance where most importantly, we've got to make sure that we're fully and fairly 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, our returns and our ability to deliver long-term value for shareholders, that's where we see the market today. In terms of 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 pickup and the opposite holds true as well. 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 could 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 overall, we've seen discipline in the market and a broadly constructive and balanced pricing environment for quite some time, and that remains the case today.

[Operator]

The next question comes from Nate Rickman of Bank of America.

[Unknown Analyst]

You guys previously guided to like incremental operating expense growth. You used some more like internal investments, but your expense ratio is still trending towards that like low end of like 28% to 25% in that long-term range. I'm just curious like how you expect expenses to trend from the year and like what would net you closer to that high end of that range?

[Aurora Swithenbank, executive]

Sure. I'm happy to take that. So it was a strong quarter, and we're always managing the business with discipline and efficiency, and we're pleased to have delivered the 20.3% expense ratio that you saw this quarter. In terms of quarter-to-quarter moves, there's nothing particular in the quarter that I would point to. And although we do expect natural growth in our expense base, just in line with normal inflationary trends, 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.

[Adam Pollitzer, executive]

Yes. We're going through our planning process now. I'm just sort of thinking, both in the immediate term and over the long term. And as you should expect, right, we're here to manage our business for the long term and for the long term means that we need to be 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 we've achieved so far is something we're focused on.

[Unknown Analyst]

That's helpful. And then on persistency, it was very stable quarter-over-quarter, but we did see some like great movement onto the tail end of the quarter. I'm just curious if you saw any changes there to persistency like intra-quarter? And do you expect that to change in the near term?

[Adam Pollitzer, executive]

Yes. Look, I'd say, as we look forward, I'll talk about the look forward and then talk about anything we noted. Certainly, persistency remains well above historical trends today. And as we look out into Q4 and into next year, 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, boy, it was it was just so quick, right? I mean rates lagged down by 100 basis points or so, but just for such a short period of time and then bounce back up so sharply and so quickly that it doesn't -- we wouldn't expect that to have a meaningful impact or give us meaningful insight into, say, sensitivities within the portfolio. We can see a bit of uptick in refinancing activity, which is valuable, right? It's an opportunity for us to capture some incremental NIW, recapture whatever is in rotation from our portfolio, but we're talking a matter of weeks of opportunity there.

[Operator]

The next question comes from Maxwell Fritscher from Truist.

[Maxwell Fritscher, analyst]

I'm calling on for Mark Hughes. Can you give us a sense on how you see mortgage activity trending thus far in 4Q, October in the, I guess, first few days in November?

[Adam Pollitzer, executive]

Sure. Maybe I'll give you a broader perspective because we don't provide intra-period updates or candidly, guidance on our own production. But I'll talk just more broadly about the market and kind of how we see the opportunity developing as we roll into next year. Generally speaking, we expect that the new business opportunity in the MI 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 as key continue to come through, where resiliency in house prices supports incrementally larger loan sizes and where candidly, with rates moving higher again, affordability constraints, drive an increasing number of borrowers to the private MI market for down payment support.

Our sense is that 2024 MI industry NIW volume is pacing to be roughly, call it, around $285 billion plus/minus or so, and we expect a similarly attractive environment in 2025. Obviously, things can always shift depending on how rates continue to develop and how the macro environment evolves, that could create some incremental opportunity or headwind, but our outlook is still is quite positive for where the industry will trend next year.

[Operator]

The next question comes from Geoffrey Dunn from Dowling.

[Geoffrey Dunn, analyst]

Are you able to share the profit commission threshold on the new

[Aurora Swithenbank, executive]

Sure. The -- on the quota shares, so there's quite a bit of detail in our 10-Q on this. There's a subsequent event put now, which will give you all the details, but the profit commission is up to 62% on our 2025 quota share treaty. We also fully placed our 20% 2026 quota share treaty at the same profit commission level, and we partially placed our 2027 quota share at a 61% threshold.

[Adam Pollitzer, executive]

Yes. So Geoff, these are tied for the most -- say, the lowest margins, right, highest profit commissions that we've ever achieved. And we locked in 3 years' worth of coverage as were said there's a little bit that we'll have to place as a stub for '27, but they're terrific, terrific deals, and we're really happy with the execution we were able to achieve.

[Geoffrey Dunn, analyst]

Right. And then the average provision for notice this quarter was down sequentially. Is that mix driven? Or are there any fundamental changes in your reserving assumptions?

[Adam Pollitzer, executive]

Yes. So look, we carried -- a couple of things, we carried at the end of the third quarter, roughly $25,000 -- sorry, $24,000 average reserve for NOV at September 30, and that compares to about $25,000 per NOD at June 30. So I'd say no fundamental shifts there, right? Our default population in Q3 has generally similar attributes to our default population at the end of 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 particularly just because we have such a small number of defaults themselves. You can get small differences that sort of roll through. But generally speaking, nothing really shifted. And I say more broadly though, 1 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 we're setting reserves. We did that at Q3 just as we had done in the second quarter.

[Operator]

[Operator Instructions] The next question comes from Rick Shane from JPMorgan.

[Richard Shane, analyst]

I'd like to talk a little bit about default formation -- cumulative default formation over time. When does formation sort of peak, obviously, I realize it's cumulative, but when do you see the trajectory start to flatten out in terms of time line for

[Adam Pollitzer, executive]

It's a great question, Rick. So I want to say, obviously, a lot depends on, right, the environment in which those loans themselves originated, how those borrowers are situated and what develops after they took out their mortgage, right? And if the 2020 and 2021 vintages will have far from normal experience because of the record run of house price appreciation, the buoyant labor market that we have, right, for an extended stretch and still have on the labor side after those origination years. But if we step back from any specific year and instead just talk conceptually, what we typically see is that peak loss incurrence for a vintage occurs roughly between years 3 and year 6 after the origination.

And if you think about it, this makes sense, right? So essentially, when a borrower is taking out a loan, right, they're making the decision to buy a home that decision is driven, one, by life events. Typically, that many of them may have got Mary had kids want to put down roots in a particular community, 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 build wealth over the long term, there's a very heavy emotional aspects to it, right? For many borrowers, they're taking on the single largest financial obligation that they'll ever carry. 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, stay current on it and obviously have a successful outcome with that purchase.

But like any forecast, right, like any forecast the ability to predict with accuracy goes down, the longer out, the longer in the forecast horizon that you stretch. And so that indication, that sort of personal indication statement and confidence that borrowers are signaling typically hold true for those first 3 years, barring a meaningful shift in the environment in which they've made that decision. But by the time you get to year 3 or so, right, it could start free a little bit. You can have unexpected things that have developed that have 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 years 3 by the time that you get to year 6, a borrower who's been servicing their debt responsibly consistently for 6 years. even if their original forecast, if you will, doesn't hold, that original statement they're 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 wealth. They generally advanced in their careers. They've enjoyed some amount of wage growth and it becomes then obviously a different story in year 6 and on. And so that's why we tend to see from years 3 through 6.

As to the pattern within year 3 through 6, I'll give you the 1 that you're 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.

[Richard Shane, analyst]

No, Adam, look, it's a fair question, and I will follow up with a question you don't want in a second. But it's interesting to me because I would have assumed to some extent that once you get -- what you're describing makes total sense. 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, divorce -- and the further out you go, the higher -- the greater risk that, that occurs.

You had said you want to talk about things generically. I'd love to talk about 1 thing specifically. And I don't want to put too fine a point on this. But if we look at the '23 -- or the '22 cohort so far versus the '22 cohort last year at the same time. The '23 cohort is actually doing a tad bit better. And again, I don't want to overread into that. But at least now as we look at the cumulative default table '22 is the one that sort of jumps out. Is there anything fundamental fundamentally different about the '23 cohort that should actually cause it to be a little bit better than the '22? Or should we extrapolate the '22 for the '23.

[Adam Pollitzer, executive]

Well, we don't give you 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 '23 books. We think that they're performing exceptionally well. We're really pleased with how they've been developing. Those books for us are incredibly high quality, just like the rest of our portfolio. We have applied the same rigor to the risk selection and mix in shaping our '22 and '23 production as we have always done. If you look at the underlying risk characteristics on a vintage-by-vintage basis, they're quite similar, no notable differences. We sourced comprehensive reinsurance protection for both of those vintages, again, just as we've always done. So I'd say not to highlight difference in the 2 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 bought their homes more recently just haven't seen the same record run at house price appreciation as those borrowers who took out their loans and purchased their homes during the pandemic. But they're also benefiting, I'd say, broadly from still a strong macro backdrop, right, resilient housing market. And so I'd say as we model it, I won't tell you how we model it out between '22 and '23. We do expect that both '22 and '23 will incur higher cumulative claim costs than our earlier book years than 2021 and earlier. Again, it's really the equity dynamic. We expect that performance, though, 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 quite well versus our original price expectations.

[Richard Shane, analyst]

Got it. Okay. Yes. And again, recognizing the benchmarking needs versus 2020 and 2021, which could be two of your best cohorts ever is a little bit of a fall. So I appreciate the answer, Adam.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back to arrangement for closing remarks.

[Adam Pollitzer, executive]

Thank you again for joining us. We'll 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 10. We look forward to speaking with you again soon.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.