Open Lending Corporation

Good afternoon. Welcome to Open Lending's second quarter 2021 earnings conference call. As a reminder, today's conference call is being recorded. On the call today are John Flynn, Chairman and CEO, and Ross Jessup, President and COO, and Chuck Gell, CFO. Earlier today, the company posted its second quarter 2021 earnings release to the Investor Relations website. In the release, you will find reconciliations of non-GAAP financial measures, to the most comparable GAAP financial measures discussed on this call. Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent the company's views as of today, August 10th, 2021. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to today's earnings release and our filings with the SEC for more information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. And now I'll pass the call over to John for opening remarks. John?

Thank you, Operator, and good afternoon, everyone. Thanks for joining us for our Open Lending Second Quarter 2021 Earnings Conference Call. I'd like to start today by reviewing our second quarter highlights and the progress we've made on our growth objectives. Then I'm going to turn it over to Ross, and he is going to provide an update on our OEM opportunity. And then finally, Chuck is going to review our Q2 financial and our outlook for the full year 2021. Very pleased to report another record quarter at Open Lending. June and Q2 of 2021, we generated record levels of certified loan volume and the momentum has continued into the third quarter. Q2 2021 certified loans increased 148% year over year to 46,408 certs. Our core credit union and bank business generated 87% certified loan growth year over year in Q2 21. Our two OEMs combined have grown 136% year to date in 2021. We also reported revenue of $61.1 million, which was an increase of 177% and adjusted EBITDA of 46.1 million, which was an increase of 199% as compared to the second quarter of 2020. In addition, we signed an agreement with the third insurance partner, American National, a strategic accomplishment for us. These results were driven by strong execution by our team, signing new customers and further penetrating our existing lender customer base, as well as growth of the underserved market that we target. It's a tremendous opportunity of over $250 billion worth of loans originated annually by borrowers that are classified as near prime. We've only penetrated about 1% of this massive market. Traditionally, Near prime consumers, and these are consumers with FICO scores between 560 and 699, cannot obtain loans from prime lenders. As a result, these borrowers often get credits from subprime focused lenders that come with higher interest rates and lower approval amounts than what is appropriate for their credit score. What we do is enable lenders to make loans to consumers they would otherwise not make. deepening relationships with their existing customers and helping forge relationships with new customers. During the quarter, 22 contracts were executed with new lenders, and we currently have over 380 active lenders on the platform that have generated certified loans in the past 12 months. Of the 22 signed accounts in the second quarter, seven were Tier 1 accounts, classified as over $1 billion in assets, and one was a large regional bank with assets over $9 billion. We are focused on the Tier 1 accounts and believe they are the greatest opportunity to continue accelerating our growth. Momentum has also continued into July with five activations and six new contracts signed with over 15 live implementations underway. In certain cases where permissible, we will announce the names of these large new customers once they've gone live on our lender's protection platform. Our top 10 lenders, excluding OEMs, have increased their certification volume by 140% year-to-date 2021 as compared to 2020. And six of them have hit an all-time monthly cert volume record in June. During the quarter, we added five new credit unions and banks to the refinance program and now have over 20 financial institutions that are acting as funding sources behind these refinance channel partners. Our refinance volume was nearly 20% of our total search in the second quarter of 21, hitting record volume during June. As a result of our flexible business model, our refinance channel has accommodated consumers by allowing them to modify their existing terms and lower their payments. We also continue to explore third-party funding sources to purchase these loans as part of our long-term growth strategy. I just want to clarify that Open Lending is working with third parties on this effort, and we will not have any ownership or take any balance sheet risk. While the initiative is early, we are encouraged by the progress to date of these third-party funding institutions utilizing our lender's protection platform to underwrite and decision these loans. As you know, we provide a tremendous value to our lending partners as well as our insurance carrier partners. We provide a consistent flow of unique and profitable business, and the product is a completely turnkey operation for the carrier. The returns generated for the insurer, we believe, are well in excess of other lines of businesses due to the high underwriting profitability and the low capital charges. I mentioned earlier, We recently announced that we had signed a third insurance partner agreement with two affiliates of American National Group, enabling them to be additional providers of credit default insurance policies for open lending lender protection programs. This has been an important strategic initiative for us, and we're thrilled to be working with such a great team at American National. We do believe that there is more than enough value to support additional insurance carriers while continuing to deepen our valued relationships with our three existing carriers. So we're extremely pleased with the quarter, our progress growing our business, and the value we bring to our lending and insurance partners. But we're even more proud that we can provide the underserved near prime consumer access to a credit from a larger range of lenders with higher loan amounts, better interest rates, and appropriate down payments. So with that, I'm going to turn it over to Ross to review our OEM business and our progress on that front. Ross?

Thanks, John. As we have spoken previously, the OEM captive market is substantial and a major growth opportunity for us. As of today, we serve two OEM captives, which we expect to continue to ramp up and take advantage of more of our services. We are also in active discussions with other large-scale OEMs. As previously discussed, the typical sales cycle for these partnerships take time given their scale, but ultimately, we believe we'll be able to penetrate a substantial portion of the $1 billion addressable OEM captive market. John mentioned the benefits we provide to lenders and insurance partners associated with the underserved consumer. We also provide these benefits to the OEM. They can facilitate new car sales by expanding credit to near-prime consumers where they are not competitive today. They are also able to support car values by increasing financing availability for used vehicles. In addition, continued efforts around subvention functionality for OEMs unlock a much larger opportunity as lenders protection will be applicable to the new car market. The global chip shortage has been affecting all OEMs this year and their ability to keep up production of new cars. With the lack of new cars, OEMs are spending less on incentives than in the past. We expect this shortage to ease eventually and production levels to normalize. When this happens, car values should return to normal levels and create more inventory in our target markets. This shortage is simply creating a timing shift, but not a change to our eventual certification expectations and growth. To further expand on this, higher vehicle pricing means higher payment to income ratios and in turn increases the required insurance premium associated with the risk. Based on our experience, this correlates highly with default risk. This leads to higher interest rate offers and increased counter offers for near prime consumers. Accordingly, this has resulted in lower capture rates than in past quarters. Again, this is also timing and will normalize with the inventory levels return. The OEM captives also receive similar benefits other lenders realize from Lenders Protection, like higher yields, expanded offerings to non-prime customers, and risk mitigation from default insurance. They also experience credit loss relief under decisional standards, offsetting 70% to 80% of the expected losses. Additionally, by partnering with us, they increase repeat buyers and keep consumers in the captive customer ecosystem by increasing customer loyalty base. With that said, let me provide an update on OEM number one. In the second quarter 2021, we experienced certification growth of approximately 185% compared to Q2 of 20 and sequential certification growth of 33% compared to Q1 21. We are awaiting the expansion to other regions on our expanded loan terms from 72 to 75 months. but initial results have been favorable, and we expect this to be underway very soon. 75-month terms only represents 5% of their originations. As later discussed with OEM number two, this will grow with expansion. I mentioned the chip shortage earlier. This is impacting new car volumes as well because a significant portion of their volume is new vehicles. For OEM number two, certification loan growth was significant. up 42% Q2-21 compared to Q1-21. As a reminder, OEM number two was offline from April to October 2020 due to the COVID-19 pandemic. The chip shortage is also impacting this OEM, but we are excited our ramp is working as designed and will be a major part of our growth plan when the chip supply returns to normal levels. We expanded terms to 75 months in early April 2021. and have seen 75-month loan terms represent about 16% of their origination since April. As you know, we're in discussions with additional OEM prospects. Each of these prospect captives represents 30 to 100 million in revenue opportunity for us and collectively more than a billion in revenue. However, I want to remind everyone these are long sales cycles and require a lot of resources, and these large captives are juggling various projects and resources. We are actively discussing planning, scheduling, and sequencing the IT projects needed to go live at two other large-scale OEMs. Now, turn it over to Chuck to discuss Q2 financials and outlook in more detail.

Thanks, Ross. During the second quarter of 2021, we facilitated 46,408 certified loans compared to 18,684 certified loans in Q2 of 20, a 148% increase. As John mentioned earlier, we executed 22 contracts with new customers in the quarter and have over 15 active implementations with go-live dates in the next 60 to 90 days. Total revenue for the second quarter of 2021 increased 177% to $61.1 million as compared to $22.1 million in the second quarter of 2020. Profit share revenue represented $38.8 million of total revenue. Program fees were $20.6 million. and claims administration fees were $1.7 million. Now, we would like to further break down the $38.8 million in profit share revenue in Q2 of 21. Profit share associated with new originations in the second quarter of 2021 was $27 million or $582 per certified loan, as compared to $13.1 million or $701 per certified loan in the second quarter of 2020. Average profit share per certified loan was $623 and $619 per certified loan year-to-date 2021 and 2020, respectively. As previously disclosed, in April of 2021, we removed the vehicle value discount established as part of our underwriting changes implemented at the onset of COVID-19, which had the effect of increasing insurance premiums and corresponding profit share to us during the pandemic by approximately 15% per certified loan. Primarily as a result of transitioning back to pre-COVID underwriting standards, our average profit share unit economics returned to normal levels in the second quarter of 2021 that are now comparable to pre-COVID profit share unit economics. However, this change in underwriting increased our closure rates by over 20%, driving record certified loan volume and improving our competitive positioning in the market. Also included in profit share revenue in Q2 of 21 was $11.8 million change in estimated revenues from certified loans originated in previous periods as a result of the continued overall portfolio performing better than we had expected due to fewer defaults and claims and improved macroeconomic conditions. As a reminder, profit share is paid to us monthly by our insurance carrier partners from the underwriting profit associated with lender's protections risk. Under ASC 606, we recognize the estimated profit share upfront in the month the loan is certified based on our forecast of defaults, prepayments, severity, outstanding principal, and premium on a loan-by-loan basis. In addition, we have adjustments to our contract assets due to estimation of revenue from loans originated in previous periods on a prospective basis. In our supplemental earnings slides posted on our website today, We included new slides to further explain changes in contract asset, profit share revenue, and unit economic trends. We break down the change in estimates over the past six quarters between realized portfolio performance and prospective changes in assumptions for future periods. We would like to point out that during the last 12 months, over 80% of our positive changes in estimates under ASC 606 related to profit share revenue was due to actual realized portfolio performance. Basically, lower than projected claims and severity of losses in historical periods drove these positive changes, increasing our estimate of our contract asset, profit share revenues, and in turn drives strong near-term cash flows. Continued strong loan performance from a risk perspective will result in additional positive changes in our contract assets, profit share revenues, and near-term cash flows. We strategically shifted our channel mix in the quarter to maximize current market conditions while profit share unit economics remains strong across all channels. As you'll recall, insurance premium pricing is dependent on risk, and we constantly evaluate the best risk-adjusted opportunities in the market to deploy lender's protection. For example, the refinance channel has grown to nearly 20% of total certs in Q2 of 21 and exhibits high quality and predictable credit characteristics at a lower insurance premium and corresponding profit share. Our channel mix can change from quarter to quarter as we seek to capitalize on growth opportunities in the market. Now let me turn to gross profit. Gross profit was $57 million in the second quarter of 2021, an increase of 182%, driven primarily by a 148% increase in certified loans in Q2 of 21 as compared to Q2 of 20, and $11.8 million positive adjustment in second quarter of 2021 related to ASC 606. Gross margin was 93% in the second quarter of 2021 compared to 92% second quarter of 2020. Selling general administrative expenses were $12.1 million in second quarter of 2021 compared to $16.3 million in the previous year quarter. As a reminder, second quarter 2020 SG&A expenses included $11.3 million in one-time transaction costs associated with the business combination in Q2 of 20. Excluding these one-time expenses, SG&A increased approximately $7.1 million in Q2 of 21. The increase primarily represents costs associated with becoming a public company, such as professional and consulting services, and additional employee compensation and benefits related to headcount additions to enhance internal controls, financial reporting, and compliance functions, risk, information, and information technology for a public company. Operating income was $44.9 million in second quarter 2021, compared to $3.9 million in second quarter 2020. Net income for second quarter 2021 was $76 million compared to a net loss of $49.8 million in the second quarter of 2020. Adjusted EBITDA for the second quarter of 2021 was $46.1 million as compared to $15.4 million in the second quarter of 2020. There's a reconciliation of GAAP to non-GAAP financial measures that can be found in the back of our press release. We exited the quarter with $261.1 million in total assets, of which $57.1 million was unrestricted cash and $111.9 million was in contract assets and $68.3 million in net deferred tax assets. We had $164.1 million in total liabilities, of which $147.6 million was in outstanding debt after a $25 million pay down on our revolving credit facility in the second quarter of 2021. In April, we completed a follow-on equity offering of 10.3 million shares of our common stock and an offering price of $34 per share, and we repurchased approximately 613,000 shares of our common stock for $20 million, which was reported to Treasury stock at cost. In addition, in the quarter, we settled a long-term liability of $92.4 million under a tax receivable agreement from the merger at a discounted price of $36.9 million, or 40 cents on the dollar. and recognized a one-time gain on extinguishment of the TRA of $55.4 million from the settlement. We had approximately 126.2 million shares outstanding on June 30, 2021, and we posted an updated second quarter 2021 earnings supplemental to our investor relations website, which includes a slide that lays out our current share count. Now moving to our guidance for 2021. Despite the potential for the re-institution of government mandated measures to combat another wave of COVID-19, our guidance remains unchanged. Based on second quarter results and trends into the third quarter of 2021, we are reaffirming our previously announced guidance ranges as follows. Total certified loans to be between $161,000 and $206,000, which we'd like to point out is over 90% growth at the midpoint of the range over 2020. Total revenue to be between $184 million and $234 million. Again, over 90% growth at the midpoint of the range. Adjusted EBITDA to be between $125 million and $168 million. And adjusted operating cash flows to be between $81 million and $111 million. Now with that, we'd like to turn the call back over to the operator, and we're happy to take questions from the group. Thank you.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Joseph Vaffey with Canaccord. Please go ahead.

Hey, guys. Good afternoon. Great to see the continued really, really impressive results. And the LTP looks like it's just really gaining traction in the market. So just on OEMs number three and four, I know Rossi gave us a little bit of color there. I mean, clearly those guys must be seeing some of the cert numbers coming from the two other OEMs and, you know, I mean, I think at this point, you know, a lot of OEMs, you know, the cars are pretty similar out there and, um, you know, just, you know, maybe a little more color on three and four and some other guys out there should be paying attention by now. And then maybe I'll have a quick followup after that.

Yeah, Joe. And you're right. I mean, obviously our success that we've had in OEM number one and two is resonating with the others. And, uh, especially from a reference standpoint and all that. Our discussions are going very well. For both of them, they're at the IT level where we're working to scope out that endeavor. We definitely have senior buy-in to move forward. We are just trying to figure out where that is prioritized in the organization. We have face-to-face meetings going on. with that, and I'm really pleased with the progress, and also just from reviewing our policy and redlining of our agreements and all that. We're making a lot of great progress, and I'm anxious to share more at the appropriate time, but for sure they're seeing the need for that, and the fact that our company does well with used and new and there's certainly a benefit to the OEMs for that. I think just the way we've been able to maneuver around and change some of our attention to refinance to help mitigate some of the delay has done really well for the quarter.

Sure, that's great, Collar. This might be a tougher question to answer, but you know, if we were in a world where there was no chip shortage, I mean, you know, clearly results were great this quarter. I mean, could you kind of handicap how much you think, you know, a non-chip shortage environment would have perhaps, you know, helped volumes, you know, maybe not, you know, in Q2, but just, you know, how much boost would a non-chip shortage, you know, environment help the business, do you think, given its current momentum? Thanks a lot, guys.

I think if you're sitting there and back to normalization where you had everybody producing vehicles at full scale and then they were having to use incentives to move metal and the fact that we have that built in our platform and it works very, very well, they would definitely have felt the I guess the urgency to move forward a little faster. But they're all struggling. They're all having meetings to try to figure out how are they going to take the chips that they have and allocate that to the vehicles that actually are the best from a marketing standpoint. And a lot of those vehicles are the higher dollar SUVs. And so we're just excited that we're still able to grow in this environment. Our Our TAM is huge out there, and from the OEM perspective, we can grow within each one significantly more and definitely expand to several other OEMs over the next few years.

That's great. Thanks so much, Ross.

Your next question, Vincent Santic with Stephen.

Hey, thanks. Good afternoon. Thanks for taking my questions and a great result. So first, I'm sure you're going to get a lot of questions about the OEMs. I'm going to ask about the non-OEM side. And I'm just wondering if you can kind of go further in the bank and credit union pipeline that you've outlined, the 15 active implementations and so forth. If you can maybe help us, I know OEMs are larger volumes, but if you could help us maybe size up when you think about the bank and credit union opportunity, like when you add a credit union or a bank, how big is that? And also, you were talking about the opportunities with refi. I was wondering if you could talk about the growth you've experienced in refi versus the growth you've experienced on the purchase side.

Sure. This is John Flynn-Vincent. Yeah, I think what you're going to see, and I think we alluded to it a little bit in the earnings call, is that the credit unions and banks that we're starting to sign up that we're getting a lot of interest from are all what we consider to be more of the tier one accounts. We're starting to get the $8 billion credit unions, some of the banks that we've just recently signed. And again, I think we'll be in a position to announce some of their names shortly. But these are banks that are in the $20 billion and $30 billion asset size. And a lot of them are very interested in the turnkey operation that you just alluded to, the refinance. If they don't have to go out and create a division to do indirect lending and there's access to flow of consumers that recently bought cars and got too high of an interest rate, we have some of these banks telling us that their target goals are to do no less than a thousand deals a month. So some of these are on that bigger size. I think you've heard us talk in the past and we've got one very large credit union that just in the past Four months, five months have grown their cert volume from 450 to 500 certs a month to last month doing over 2,200 and wanting to climb that to 4,000 certs a month. We've got a lot of traction. We've got a lot of tailwinds behind us to push this forward. Ross alluded to Cecil. I think a lot of the inbound calls that we're getting from the larger shops are related to the fact that they're all going to need to comply with CECL in 23. And based on the KPMG webinar that we did together, they all have to have probably 13 to 15 months of getting ready for that. So I think we've got a lot of big things going on with the larger shops right now. And I think we're really starting to see the benefits of it.

OK, thanks. I appreciate that. Second question on the profit share. I really appreciate the detail you put into it, including how you've broken out the additional profit share you're recognizing on the current portfolio. On the prospective changes and assumptions, I'm wondering if you could maybe describe that in more detail, because I guess even if you're going back to pre-COVID levels, we're still much better than we were in 2019. So maybe if you could talk about the assumptions. And is this something where, you know, the actual cash profit share that you're recognizing above what you've already booked in the past, is that something we should be expecting going forward? Thank you.

Yeah. Hey, Vincent. It's Chuck. Good to talk to you. Yeah, thanks for the comment on the slide on understanding the contract asset and profit share. You know, your first question around the prospective changes and assumptions, you know, if you just kind of focus on Q2 of 21, the $11.8 million that was a change in estimate under 606. We thought it was helpful. And maybe I'll start with the realized portfolio performance. One of the things that we wanted to make sure we were clear on and everybody had a really good understanding is that the portfolio, we have conservatism in certain of our assumptions. We went through a 100-year worldwide pandemic over the last 12 months, 18 months now. And with the Delta variant, you know, we're all looking at now, you know, there's still some unknowns out there. So, you know, clearly we have some stress built into the model. And we also, you know, kind of looking out into, you know, even 22. But the portfolio has performed just exceptional from a credit perspective. You know, lower defaults, lower claims, which is really what's driving that change in estimate. And we thought it was really important to, you know, really educate that that's an increase to the contract asset and that's its accounts receivable. and revenue, and it turns to cash very quickly. So in that realized category, just that 11.8 for Q2, that 7.8 million, that's realized through June 30th of 2021. So that's actually realized portfolio performance that will turn to cash very quickly. And then if you move to the perspective changes and assumptions, that's just really our kind of near-term outlook on, yeah, things are better. The portfolio has continued to perform better than expected. But we still, like I said, have a little stress built out, obviously, into the future with when the stimulus stops, you know, with the Delta variant, the unknowns. So obviously, you know, a prudent process that we run and obviously, you know, bake all of that in, work very closely with our risk team and also look at, you know, the macro, you know, assumptions that are in the model. You know, if it's unemployment, if it's car sales, you know, consumer confidence, obviously Mannheim. So all of that's baked into the model in the process. So we felt like this color was really good and and would help folks understand that the change in estimate very much matters.

Okay, perfect. And that's very helpful. Thanks very much.

You bet. Thank you.

Next question comes from James Falsetti with Morgan Stanley.

Thank you very much. Sorry about the background noise here. I'm wondering if you can qualitatively walk us through how much the effect the stimulus itself has had on the business and how we should think about that rolling off impacting your business. It seems like, you know, obviously there's good car demand and prices are high, et cetera, but wondering how for a particular segment that you're providing insurance for, you know, could be impacted and how you're building that into your business planning.

Yeah, I mean, James, you said, right? How you doing? If you think about the stimulus, and I'll go back to the profit share slide that was on slide five of our supplemental. When we originally COVID-19 hit, we obviously had a COVID impact that's there on the slide, and none of us foresaw the government really putting the liquidity into the market in as much as they did and have. So I think that's definitely had an impact in a positive way. You can see it with you know, our portfolio, you know, our severity of losses are much lower than our historical averages, as well as our frequency of defaults. So I think those items and the stimulus has been a positive, you know, to the environment and been very helpful to the nearby consumer that we serve. So we believe that's been very positive to not only our credit and our portfolio, but also to the consumer. So I think it's had a huge impact.

James, this is Ross. I mean, I think just to pile in a little bit on that, you know, the higher car values on one hand have been very beneficial to us when it comes to what claims have come in and the lower claim severity than what we've experienced in the past. And that's part of, you know, what we've realized is those are actually claims that have happened, and our claim severity is down significantly compared to where we modeled. and have experienced in the past. So all those have been positive.

Yeah, and I'll jump in one more, James, and just kind of thinking about the portfolio and some of our comments. You know, our portfolio is showing similar delinquency and claim trends that other lenders have seen through this, you know, this timeframe, during the pandemic, and due to the stimulus benefits. So we're seeing the similar benefits.

Got it, and that makes sense. How about, you know, as you think about the end of stimulus then, you know, what kind of planning or things should we anticipate? Do you think, you know, a lot of those elements will reverse themselves and, and, you know, how does that impact like your OEMs and, and credit unions in terms of their like, um, interest in, in the product and how do you adapt? So, you know, I guess that's really what we're trying to get at is like kind of what do you think happens going forward?

Well, is it, we think about, you know, you think about our modeling and kind of as we go forward in the business, you know, we're already looking out to assume in the future that, you know, from a profit share in the 606 perspective that, you know, stimulus won't last forever and it will slow or eventually go away. So, you know, some of the severity of loss as well as the defaults as we kind of look out into the future because, you know, as you know, the profit share and claims are paid monthly even though under 606 we have to book it up front. You know, we monitor, you know, forward looking as well in our assumptions. So we feel like that's baked in with you know, as it relates to car prices and used car values as well. You know, we don't have those. You know, we take that into consideration. Those will eventually moderate as well.

Yeah, the one thing I'd add to that, Chuck, if you think through it and you look at that team of a $250 billion market, that was improved. You're going to have a lot of consumers, to Ross's point, a lot of them that have defaulted, defaulted with higher car prices. You're going to see some people's scores fall. I think the TAM is going to grow. So if you look at the rebound throughout all the crisis, people are going to continue to buy cars. Credit unions, banks, they haven't become geniuses overnight in underwriting near-prime loans. They just don't have the data. So I think we're always going to have that huge opportunity ahead of us to continue to fine-tune what we do and continue to have a big time to play in I think we did $2 billion worth of loans last year of a $250 billion market. So there's still a huge runway ahead.

That's great. Thank you very much. Thank you, James.

Your next question, John Hetch with Jeffrey. Please go ahead.

Hey, guys. Afternoon. Thanks very much. This is maybe more just some of the inquiry that is from Vincent and so forth on the call it the assumptions with the insurance counterparties. I guess what I'm more interested in is what's the cadence of how you guys are thinking of the normalization of credit and the normalization of used car prices? Are the current assumptions in the insurance underwriting model reflective of getting back to normalized levels of pricing and loss rates sometime next year? Or how do we think about how you process that change?

Yeah, I think for one is the chip shortage. When is that going to get back to the normal level to help out car production? And I think you have a variety of opinions on that. I think the majority of the folks think that this time next year will be, if not back to normal, certainly trending pretty close to that. It's going to be a gradual thing. It's just not happening overnight. And even if it's a balance of next year, that's what we have modeled that. We do believe that as values decrease, then our claim severity will increase. And again, like Chuck said, that is all stressed and factored into our 606 calculation.

Yeah, but I guess I'm not asking for guidance in any sense, but if if the normalization of pricing happens at a slower rate, then you could have some favorable readjustment in terms of economic value. It sounds like you're maybe being a little conservative in your forecasting.

Yeah, I mean, clearly, I mean, we're in an unusual time in all of our history, right? And so, yeah, but, you know, I think, you know, if you think about, you know, pricing and supply and demand, you know, ultimately, you know, if you go back to the great financial crisis even, you know, you know, pricing went up quickly, you know, obviously there was not a lot of supply and it moderates and comes back as in the demand, you know, comes back to normal levels and so does pricing. So, you know, we feel like, you know, with all the, you know, the macro that with, you know, Moody's, for example, and others that we follow, you know, these trends, you know, with unemployment and some of that, you know, that's baked in and, you know, we feel like it's the prudent way to look at it in this unusual time. And, But, you know, we do believe it will get back to normal levels and moderate.

Do you want to expand on that? You know, we're doing this so we do not have a reversal, you know, the essence of 606. Yeah, right.

Did we answer your question, John?

Yeah, no, I get it. I appreciate that very much. And then, you know, forgive me if you talked about, but I'm wondering, the variants out there and it seems like certain areas are getting disrupted. Yeah, maybe can you talk us through kind of volume trends, July and August, anything noticeable there?

Yeah, I'll start, and then, you know, John and Ross can jump in. But, you know, as John said in our, you know, prepared comments, you know, second quarter was a, you know, record quarter. June was a record quarter. You know, that momentum has continued into July, and, you know, our app volumes are very strong on lenders protection. You know, we were very encouraged last you know, by the, you know, the growth in our credit union and bank line. It was 87%, you know, year over year for Q2 quarter. So, you know, really a lot of momentum in our core business as well, you know, as the OEMs growth, you know, during a difficult time for the OEMs as the shortage gets worked through. But, you know, feel really good about, you know, where we're heading in the balance of the year from a, you know, CERT perspective as well as, you know, earnings and cash. And, which is why we reaffirmed our guidance and feel really good about the business and the execution.

I appreciate the call, guys. Thank you very much.

You bet. Thank you.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from Samir Kalucha with Deutsche Bank.

Hi. Thanks for taking my question. So one of the things I wanted to check on was the insurer number 3 How are the volumes trending there compared with the earlier two that you have? And then second, is there any color you can provide on the economics for the insurer three? How do they compare with the first two?

Sure. The economics are identical to the first two. That's one of the agreements we put in place is they all have to have the same economics for us so that there's no adverse selection for us to be sending one application to the one insurance carrier versus the other. And we just launched the third carrier on July 1st. So, you know, we're just now starting to see the volumes pick up. The beauty of it is they have no capacity issues. They're excited about underwriting as much as we can get to them. And, you know, we've got them in the mix to make sure they're getting volumes that will keep them happy. But they're excited about the business.

Great. Thanks. And just a quick one on the You talked about the unit economics on the profit per share. So it was a little bit lower and probably due to the mix. Is there like a long-term target or like an average that you have in mind that you would like to keep the number at? For example, last quarter 680 and this quarter is like 580. Is there a normalized target that you have in mind?

Yes, Samir. Yeah, I'll answer that. One of the things, if you picked up in our prepared comments, we basically removed our vehicle value discount, which was part of our underwriting standard changes when COVID-19 first started. And it was basically a 5% vehicle value discount that basically increased premium 15% in the COVID time or during the pandemic. We took that off in April of this year. So in essence, you know, we're back to the pre-COVID normalized profit share in that 580 range. You know, the mix and, you know, and obviously it's a risk adjusted, you know, everything we do at Lenders Protection and at Open Lending and, you know, mix in profit share and economics will change from, you know, from quarter to quarter and vary. But that's really, you know, the biggest impact on your analysis on the quarter over quarter.

Got it. Thank you.

And one thing I'd point out is you probably heard in the in the prepared comments that we also improved our closure rate about a lift of about 20%, which is obviously part of the record volume in certs, which is very helpful.

Got it. Thank you.

Your next question is from Bob Napoli with William Blair.

Hey, this is Adeeb Chowdhury on for Bob Napoli. Just one question from our end. So the company has super strong cash flow and it feels like you guys are going to continue to build cash. Could you talk a little bit about your capital allocation priorities and in particular your philosophy around M&A? Thank you.

Yeah, you bet. Yeah, obviously, you know, we generated, you know, generated significant cash flow in our operating model. And, you know, you think about, you know, for the quarter, just a little bit of capital uses and allocation. You know, we bought $20 million of our stock back and participated along buying shareholders as a piece of our capital allocation, as well as, you know, we're very successful buying back a long-term obligation under the TRA at a significant discount, which is about $37 million use of cash in capital. And as well, we paid down a little debt. You know, obviously, we believe for the balance of the year, we'll continue to generate, obviously, positive cash flow and as we think about uses of that cash going forward, those are very thoughtful decisions. We work very closely with our board and we'll keep the market and everyone up to date as we make decisions on that. But obviously we want to maintain a very strong balance sheet and ample cash to run and service our debt and invest in our business and our human resources and have a conservative financial policy by doing that. So Basically, in all of that, and our philosophy is opportunistic and focus on maximizing shareholder value. Great. Thanks very much. You bet. Thank you.

I would like to turn the floor over to John Flynn for closing remarks.

Thank you, everybody. We really appreciate the time and effort you put into following us. We love your continued support. As you can see, we're excited about the future of the company as well as the results we put up for the second quarter, and we look forward to continue to grow the company with your support. Appreciate everybody's help. Thank you.

Thank you. Thanks, everyone. Have a great day.

This concludes the teleconference. You may disconnect your lines at this time, and thank you for your participation.