Essent Group Ltd. (ESNT) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Essent Group Ltd. First Quarter 2020 Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Chris Curran, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Ian. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and Larry McAlee, Chief Financial Officer. Our press release, which contains Essent's financial results for the first quarter of 2020 was issued earlier today and is available on our website at essentgroup.com in the Investors section. Our press release also includes non-GAAP financial measures that may be discussed during today's call. The complete description of these measures and the reconciliation to GAAP may be found in Exhibit M of our press release. 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 18, 2020, and any other reports and registration statements filed with the SEC, which are also available on our website. Now let me turn the call over to Mark.

Thanks, Chris. Good morning, everyone, and thank you for joining us. Before getting into our first quarter results, I want to acknowledge that this is a very challenging time for all of us. Our thoughts go out to all the individuals, families and communities that are most impacted by the COVID-19 pandemic. Essent is committed to doing its part in helping to slow the spread of the virus. In mid-March, we successfully transitioned our platform to remote status to keep our employees safe and to continue providing best-in-class service to our clients. Now let's turn to our results. For the first quarter, we earned $150 million or $1.52 per diluted share compared to $128 million or $1.30 per diluted share for the first quarter a year ago. Our annualized return on equity for the quarter was 20%, and we grew adjusted book value per share to $30.89 as of March 31, 2020. We believe that the strength and sustainability of our buy, manage and distribute operating model puts Essent in a position of strength during this unprecedented time period. Strong capital and liquidity, along with third-party reinsurance, provides us confidence in managing our company during this time of uncertainty. While we can never predict the timing of a stress event, we believe our business model is well suited to navigate this challenging environment. At March 31, we have $3.1 billion of GAAP capital and access to $1.7 billion of excess of loss reinsurance, and our liquidity is strong. During the quarter, we generated $163 million of operating cash flow and have $280 million of cash and investments at holdco, after drawing $200 million on our revolver. While we do not have any immediate capital needs in our operating businesses, we believe that drawing on the facility was prudent in light of the worsening economy. As COVID-19 takes its toll on employment, we believe that defaults will increase during the second quarter and have a significant impact on our operating earnings. One of the metrics that we are following is the percentage of mortgages and forbearance being reported by Black Knight. Most recently, they reported that 8% of the loans are in forbearance and estimate that this rate could hit 10% to 15% by June 30, which is consistent with our view. As more information becomes available, we may adjust our expectations. We also believe that factors such as the federal stimulus, foreclosure moratoriums and forbearance may help borrowers resolve hardships prior to foreclosure or extend traditional default-to-claim time lines. As such, it is very difficult to predict the exact pattern at which defaults will age or cure as well as claim rates. We will record our best estimate of the ultimate loss on COVID-19 defaults in the period that they are reported to us. As we receive additional information, we may update these estimates in future periods. From a PMIERs perspective, we will apply the 0.3 factor to the asset requirements for defaulted loans resulting from COVID-19, including those in forbearance. At March 31, our PMIERs sufficiency ratio is the strongest in the industry at 200%, with $1.2 billion of excess required assets. On the business front, industry NIW has been robust during the first quarter and continued through April for both refi and purchase mortgages. Looking forward, we may see a decrease in purchase volume due to the current environment. However, we will have a better line of sight on this over the coming months. In response to the pandemic and a significant impact on the economy, we began raising premium rates in EssentEDGE and our custom cards. Looking forward, we will continue to develop and deploy pricing strategies based on the evolving economic environment. Finally, our Board of Directors approved a quarterly dividend of $0.16 per share to be paid on June 12. We will evaluate future dividends as we continue to navigate the economic environment. Our buy, manage and distribute operating model provides us confidence in managing our business, even though things could be challenging over the near term. Since the founding of Essent, we have built and managed this business for the long term, and we will continue to do so. Now let me turn the call over to Larry.

Thanks, Mark, and good morning, everyone. I will now discuss our results for the quarter in more detail. Net earned premium for the first quarter of 2020 was $206 million, which represents an increase of $29 million or 16% from $178 million in the first quarter of 2019. First quarter earned premiums are down $1.2 million compared to the fourth quarter of 2019. This is primarily due to a $3.5 million increase in ceded premiums associated with our Radnor Re 2020-1 transaction, which closed in January and the quota share, which became effective on September 1, 2019. Persistency declined during the quarter to 73.9% from 77.5% at year-end 2019. The average net premium rate for the U.S. mortgage insurance business in the first quarter was 48 basis points compared to 49 basis points in the fourth quarter of 2019 and 48 basis points in the first quarter a year ago. Note that these rates exclude premiums earned by Essent Re on our GSE risk share transactions. Single premium cancellation income continues to contribute favorably to the average net premium rate. Cancellation income was $14.6 million in the first quarter of 2020 compared to $14.8 million in the fourth quarter and $4.3 million in the first quarter a year ago. Investment income, excluding realized gains, was $21 million in the first quarter of 2020 compared to $22 million in the fourth quarter and $20 million in the first quarter a year ago. Investment income in the first quarter declined by $1.3 million compared to the fourth quarter of 2019 due to lower rates. This reduced interest on cash and short-term investments and shortened the lives on asset-backed securities, resulting in increased premium amortization. The yield on the investment portfolio in the first quarter of 2020 was 2.5% compared to 2.8% in both the fourth and first quarters of 2019. Net realized gains on the sale of investments in the first quarter of 2020 was $3.1 million compared to $833,000 in the fourth quarter of 2019. For the first quarter, we recorded a loss of $4.2 million for the change in fair value of embedded derivatives associated with the insurance-linked note reinsurance transactions compared to a loss of $3.6 million in the fourth quarter of 2019. These losses result from an increase in the spread between the forward LIBOR and U.S. treasury rates. Losses on the embedded derivatives are included in other income and our consolidated statements of comprehensive income. The provision for losses and loss adjustment expenses was $8 million in the first quarter compared to $11 million in the fourth quarter of 2019 and $7 million in the first quarter a year ago. The default rate on the U.S. mortgage insurance portfolio was 83 basis points at March 31, 2020 compared to 85 basis points at December 31. Looking forward, as Mark explained, we expect that our provision for losses and loss adjustment expenses will increase due to the expectations of increased defaults. Income tax expense for the first quarter of 2020 was 15.4% and was reduced in the quarter by $620,000 of excess tax benefits associated with the vesting of restricted shares and share units issued to employees. The consolidated balance of cash and investments at March 31, 2020, was $3.8 billion. The cash and investment balance of the holding company was $280 million, which includes the proceeds from the $200 million drawn under our revolving credit facility in March. Essent Group Ltd. paid a quarterly cash dividend totaling $15.7 million to shareholders in March. Consolidated debt outstanding under our credit facility at March 31, 2020, was $425 million with a weighted average interest rate of 2.9%. As of March 31, 2020, the combined U.S. mortgage insurance business statutory capital was $2.5 billion with a risk-to-capital ratio of 11.7:1. The risk-to-capital ratio reflects a reduction in risk in force associated with the affiliate quota share and a $3.6 billion reduction for reinsurance provided by third parties. Also, Essent Guaranty's available assets exceeded its minimum required assets as computed under PMIERs by $1.2 billion. Finally, at the end of the first quarter, Essent Re had GAAP equity of $1 billion, supporting $10.6 billion of net risk in force. Now let me turn the call back over to Mark.

Thanks, Larry. In closing, while we are pleased with our first quarter results, our focus is now on facing a challenging business environment as a result of COVID-19. I have stated previously that incorporating reinsurance in our business model has been transformational as our goal is to remove the boom and bust nature of a business like ours. Because of this, as well as our strong balance sheet, capital and liquidity, I believe that we are well positioned heading into these uncertain times. This environment will be a tremendous test for our buy, manage and distribute operating model. We believe that over time, Essent will demonstrate its resilience in mitigating volatility during a time like this. In doing so, we also believe that the business model will emerge stronger with a new sense of appreciation for private mortgage insurance and its role in supporting a robust and well-functioning housing finance system. Now let's get to your questions.

[Operator Instructions]. Your first question comes from the line of Mihir Bhatia of Bank of America.

Firstly, obviously, hope everyone is staying healthy and safe. And then I just wanted to start with your comment about expecting the 10% to 15%. I think you said your view was consistent with Black Knight for 10% to 15% forbearance in Q2. Is that the ultimate or peak forbearance expectation you have? Or do you think it can even -- it can go a little bit higher in Q3 before improving as initial forbearance periods expire, et cetera?

Mihir, it's Mark. I actually think it depends on where the economy goes. I think right now, it's our view that 10% to 15% is kind of what we're seeing from Black Knight, and that's as of June 30. So if the economy gets back on its speed a little bit earlier, as the states start to open up, you could say that -- you could call that to peak. But if it's a prolonged economic slowdown, the peak could actually happen in the third quarter. It's too early for us to tell given that we haven't really received any defaults yet.

Understood. And then just -- I was curious in terms of your new business expectations and just as you're looking at pricing and stuff, have you changed pricing or have you -- new business expectations first, just in terms due to capital considerations at all? Or is it all just pricing driven by a little -- clearly a different macro view that's changed?

Yes. It's more on the macro view, given -- remember, it's a bottoms up. You've heard me talk over time around unit economics. And based on our pricing previously, it was a claim rate of X. And given what we would see again right now with the economy, it's probably more of a flattish HPA. And because of that, your claim rate -- expected claim rate should rise, and you need to raise pricing to maintain kind of adequacy around return. So it's really driven by that, and that could change. That could change if the economy worsens, and we think HPA decreases further or stays the same. I think that has a lot to do with it. And again, time will tell. It's certainly not a capital issue. I think from a -- and I think that separates us a bit. I mean, at $1.2 billion of PMIERs excess, we have cash at the holdco, I think we're in a pretty strong capital position. And more importantly, Mihir, I think we have a lot of financial flexibility on top of that, given the A rating at Moody's, A rating at A.M. Best. We feel comfortable that we could raise additional capital should we need it. And my guess is if we need it, it could be, if things get worse, you would need more capital per se, but also could be to take advantage of opportunities. You've heard me say before, capital begets opportunities. And that may be more important in a time like this.

Understood. And then can you just, sorry, quantify the amount of pricing changes you've taken just -- even if it's just in general?

Yes. I will. I think I would say, in general, the price increases across the board, both in the engine and our cards, and I think we've seen pricing increases in engines from some of the competitors, we haven't seen it as much in the cards. And I think that's -- I think we're a little different there. But I would say, in general, kind of call it 10% to 15% across the board. So if you kind of want to put that in basis points, kind of a 4 to 5 basis point increase in premium we would expect.

Your next question comes from the line of Doug Harter of Crédit Suisse.

Mark, you touched on it a little bit, but can you just talk about what your expectations are for home price, the change in home prices and kind of how you view that changing in the current environment?

Again, we had an increasing, Doug, prior. But given the rise in unemployment, we kind of see flattish, maybe down to 1% or 2%, which is kind of consistent with -- if you look at the Moody's base case, we're not too far off there. We'll differentiate by MSA, right? And that's one of the things when we price, we have the ability to price by down to the MSA level, down to the borrower level. So we may -- so although in total, we see flattish to slightly down, it could be different depending on the geography. And that's really where we sit today. Again, that's why I think we want to make sure everyone's on the same page with us is that we're pretty early in this kind of crisis. And I think it's too early to call it one way or the other. I just think that's prudent. So I think we'll continue. I think with the engine, we have the ability to make pricing changes very quickly. I think even with the cards, I think our lenders were very supportive of the fact that, hey, we're going into these uncertain times. And remember, we're an insurance company. We're going to pay. Our job at the end of the day is when our -- the borrowers lose their jobs and unable to make their payments, it's our job to step up and pay those claims. So we want to be conscious that we're charging enough to be able to be here when our lenders really need us. And I think that's something to consider, too, when you think about all this, not just in terms of -- when you talked about home prices. But I think it's really the role of MI is really going to be important here as we go through this next 3, 6, 12 months, I believe it's an opportunity. And I mentioned in the script, I think it's an opportunity to recast the industry's reputation. I mean, most investors, I think, believe the industry -- we, obviously, are very levered to the economy. But when something happens, the MIs are all going to be in trouble. And that was what happened in the last recession. But remember, that was driven by real estate. And that was an industry that didn't have a lot of reinsurance. It had a lot of capital at that time, just didn't have a lot of reinsurance. So it was very much kind of an uncapped liability on their balance sheet. And then MIs made choices around claims and rescissions. And a lot of the reasoning was rational, but it got painted with a broad brush. And I think it's going to be different this time. I think our ability -- we've already come out with bulletins on how we're going to handle rescissions, how we're going to pay claims. Our goal is to pay claims in a timely fashion. And I think the industry is on board with me on the same -- looking at the same thing. And I think when this is said and done, I think the industry is going to be viewed differently.

I guess, when you talk about from a kind of a fundamental standpoint, if there is a different viewpoint of the industry as you lay out, could that mean different business opportunities? Or what might that -- what that recasting, what might that actually mean for the business?

Well, I think it's going to be -- I think it's going to be from -- when I said recasting, yes, I think it will improve our reputation in DC clearly. And I think that -- I think, we've -- the GSEs have been supportive, but now it's our job to be supportive of them and make sure that we can get through this in a strong fashion, not just survive it but thrive in it. And I think I think that's Essent's goal. And I think -- when we think of some of our larger counterparties, especially on the bank side, their immediate concerns are, are you guys going to be able to pay claims. So I think there's a lot of eyes on the industry, and we look forward to that challenge. So again, I think I would look at it that way. So as we look at the role of private mortgage insurance going forward, we want to make sure we come through this with the franchise and the industry stronger than it was previously. And I think the opportunities could be really in terms of whether there's just more capacity, ability for the industry to take on this type of risk.

Our next question comes from the line of Mackenzie Aron of Zelman & Associates.

First question. Can you just talk about the capital that's not counted in the $1.2 billion excess, whether it be holding company, liquidity or potential overcapitalization on your ILNs that could potentially be included, if necessary?

Yes. Well, the PMIERs -- the excess, the $1.2 million was actually capital that's in the entities right now, Mackenzie. So we have holdco cash of the $280 million that we get downstream. So if you kind of look at it from a -- I think we've heard some of the other MIs comment how -- what level of defaults could we handle with our excess PMIERS. And I think the number is close -- a little bit of north of 30% right now. And that's just with capital that's within the entities.

Okay. That's helpful. And then on the claim rates, obviously, there's been a lot of discussion over the last few days around potentially what those estimates could be and there's still a lot of uncertainty. But can you help us frame what your expectations are? And how you've treated those claim rates in the past on natural disasters and some of the considerations that you'll keep in mind as you set reserves beginning in the second quarter?

Sure. Sure. I mean, again, I think it's too early to tell. I think we're just starting to get a line of sight into the defaults, given kind of the Black Knight type information. In terms of how many of those defaults roll to claim, Mackenzie, I think it's too early to tell. I really do. So we've heard say some into default. It's more about default, it's not a claim event. I think it's too early to say that. We don't know really what the path of the economy is going to be. It certainly as the months go on, we'll have more visibility into it. And so what we said in the script is how we would handle this is when the defaults come in at the end of June, our reserve will be our best estimate of what that ultimate loss will be on those defaults, which is consistent with how we do it today. I mean that's what you do in reserving. When defaults come in, you give your best estimate. I think here, we'll do it that way, too. Then each quarter, we'll adjust that, up or down depending on what we think the ultimate loss would be.

Our next question comes from the line of Bose George of KBW.

First, just a clarification. The 30% number you mentioned Mark, that was just -- what's sort of doable from the $1.2 billion that's at the insurance companies, rather than at the [Technical Difficulty] to that number?

Yes. You're breaking up a bit, Bose. But yes, that's the -- that's what -- that's in -- that's not counting the holdco liquidity. That's just what's in the entities at this time.

Okay. Great. And then I just wanted to ask about the reinsurance market. I mean, to the extent the ILN market kind of remains on hold, it obviously makes a distribute part of the business model a little more challenging. How are you thinking of that, especially if that's on hold for an extended period? Do you look at more QSR? Or just your thoughts there would be great.

Yes. I mean, again, I think I would actually take you guys back to -- we talked about this in the fourth quarter when we went through the Moody's CCAR stress test. And part of that test was the reinsurance market shut down for 2 years. And as you guys remember, that was an earnings event for Essent, just -- and that's a -- that was a lot of defaults that went through that. Just to give you everyone a goalpost, that was close to 8% or 9% default. So if you just look at, those are 700,000 loans that we have today, that's almost 50,000 claims that we would pay, again, over like a 5-year period, and it's an earnings event, not a capital event. So that's over and that's assuming there's no reinsurance for 2 years. So in terms of the market, I think it's too early to tell when it's going to come back. It's clearly kind of closed right now. We've heard signs. We've gotten some calls. I think a lot of the levered buyers got flushed out in the downturn here. And a lot of the cash buyers are starting to look to come back. But I still think it's early. I think right now, again, remember, we have insurance on close to 90% of the book. We have the quota share. We have the ILNs up to September of last year, but we have the quota share from September through the end of this year. And clearly, we think we have enough capital to do that. So we have time. And I think we -- this is one of the things we built into the program in terms of us, we -- in terms of us holding this extra capital. I think we've always kind of assumed or at least modeled for what happens if the markets close down for an extended period, do you have time to kind of warehouse this? And so I think we're in pretty good shape for really through the end of this year. And then into next year, I think we still have enough capital to do it. But we'll clearly look for ways to increase our financial flexibility, should they be closed for an extended period of time.

Okay, great. And then actually, just a question on the GSE risk sharing, I suppose, you guys have. How should we think about that? I know it's really small, but just the exposure there versus the other -- the primary MI side.

Yes. It's a good question. Remember there, I mean, in the primary business, we have kind of mezzanine coverage on top of our first loss position. Within Essent Re, it's actually the opposite. So we're really kind of the mezz holder, and we're pretty far up in the structure. So right now, we feel like we're in pretty good shape. And if we were to suffer any losses, there would probably be -- there would be bigger losses, obviously, on the Essent Guaranty side. But right now, we feel like they're very -- on a relative basis, much smaller than our exposure to Essent Guaranty.

Your next question comes from the line of Jack Micenko of SIG.

Mark, we got the 70% haircut that's kind of codified, right? You've got the individual assistance. When you look at the industry capital rules today, do you think that's enough? Or if not, where else or what else would be logical? I know we're in untested sort of world with immediacy and the structure of these forbearance agreements. What else could or would make sense from a PMIERs perspective from your view?

I'm not sure I'm following the question, Jack.

Is what we have enough from your perspective on the capital relief on the forbearance loans or when you look at the PMERs construct, as a day-to-day operator, hey, there's something more that could make more sense from a regulatory shift or change perspective...

Okay. I get it. I get it. Yes. I got it. I got it. No, I think we're -- I think it's fine. And that's why we disclosed it in the press release. We think the way the PMIERs was written. It's a little clunky because it was written for hurricanes, earthquakes versus -- natural disasters versus the COVID-19. But it fits pretty well. It fits pretty well. So we don't think there -- I know we're -- the industry is in discussions with the GSEs and FHFA, but a lot of it is just to clarify the language, kind of like the language cleanup in terms of some of the technical aspect from it. But in terms of additional requirements, no, I don't -- from an Essent standpoint, I think we're fine with the way this is. We think it's very applicable. Because it makes a lot of sense. I mean, I think it's -- we think forbearance -- again, we have to take a look at this from a borrower perspective. I think having the borrower be dislocated the way they were and then able to take kind of skip a few months' payments is really a good thing as ultimately, defaults doesn't define us. It's going to be the claims we pay that has the economic impact. So anything that can help the borrower get back on their feet and not have to face foreclosure, we think is a good thing. And we think the PMIERs, as we've always said, it's always been very well constructed. It's an asset test, which is a good thing. And it's a big advantage for us, remember. Because in terms of default-to-claim in this scenario, it could be close to two years. So we disclosed kind of what our cash flow was for the first quarter. So we have another two years of cash flow coming in before we even pay a claim. So we think from a cash aspect, an asset, it's a good test, but we don't feel like there's anything else that needs to be done. I think the issue for PMIERs is going to be -- really, Jack, is going to be, can it support growth? Because I think the industry is, although it's a heavy kind of refi market right now, the purchase market is stronger than we think. And I'll give you guys some stats. Our April -- and we don't really talk about the current quarter too much, but I think it's important now. Our purchase applications for April were higher than they were in March of last year. So it's not perfect, but they were the highest applications we've had since August of last year. So it's kind of like a fourth quarter phenomenon, but it's actually getting to be a little bit larger. And we're a little surprised. To be honest, I'm surprised that it's this strong, given everyone's pretty much been locked up for 6 weeks. So I would say there's going to be some pent-up demand. So there is a little leverage there to the upside. From a percentage of our business, we've gone from, what, 85%, 90% purchase. I think in April, we were 60%, and it's probably running 50-50 now. It's not because purchase is falling to the floor -- excuse me, the refinances are -- I mean, our refinance applications are the highest they've ever been in the history of the company and by a lot. So it's a little bit of both. And I think that bodes well. So you got to -- the books running off a little bit more than we thought with persistency. But with that volume, you got to start thinking about capital to support growth, which I actually think is a good thing for the industry. And I think that's another differentiator from the Great Recession. If you remember there, the MIs were suffering with losses, but the front end was really small. So let's go back to 2009 and 2010, the industry NIW was like $70 billion, $80 billion, where last year, it was $380 billion something like that. And this year, it could be -- the first quarter clocked in an over $90 billion versus, I guess, high $50s billion last year. So it's a pretty strong market. And I think that's -- I think from a PMIERs perspective, everyone has been looking at it, like, do the MIs have enough to pay all their claims and satisfy all their assets? That's fine, but there's also going to -- you're going to need it to support growth. And I think you may see -- I think that's where I think we have an advantage, given the amount of kind of strength we have in it. We have the ability to support probably a lot more growth.

The resilience of the purchase market is surprising in April, May, you're right. That's actually a good segue to my second question. There's been a lot made about credit tightening. The FHA has raised -- I know it's jumbo shut off. And you don't really play in those markets in a big way as an industry. Now you're starting to see more overlays even in the conforming side of the world. The industry has raised prices to a varying degree. Is what's happening in the mortgage market overall a net positive in terms of the tightening? Is it from that growth perspective? Is that creating more or less opportunities? And how do you think that ultimately plays out over the next 6 to 9 months?

It's a good question. I think for the GS -- on the conventional side, which I'm more -- obviously, we're in the middle of -- Fannie tightened their guidelines, really through the engine, kind of around the tails. And I would say a little bit on the above 95s and the below 700s, also on some of the layered risk. Our estimate is they probably took a 6% to 8% out of the market. So that's not the worst thing from a tail standpoint. I guess, especially given kind of where we are in terms of the uncertain environment, what happens there, does it go to FHA or some of the higher factors? It may or people may just put -- on the higher LTVs, they may just put more money down and it kind of becomes a conventional loan. So I actually think it's a net positive because you got to look at it, again, in terms of your balance and the volume with the credit that you're taking on. And I give -- I think I give the GSEs a lot of credit. I mean, they reacted quickly. And they did a lot of the things that we probably would have done, too. So again, we may get a little less business. But like we said earlier, look how large the market is. So it's hard for me to talk about the impact on FHA. And I know there's been a lot more tightening there. And it could squeeze folks, but I think some of that could spill over into conventional market, too.

Your next question comes from the line of Mark DeVries of Barclays.

Could you remind us of obligations you have at the holding company? And kind of what level of that $280 million of cash you [Technical Difficulty].

Yes. You broke up there, Mark. But the $280 million we -- cash there, we have $425 million of debt outstanding, $200 million on the line and another $225 million on the term that is due, I think, of May of next year.

May '21.

Okay. Got it. And then just curious, Mark, I know you don't want to tip your hand. On the timing of potential capital raises, I mean, it sounds like given your significant excess and your ability to absorb really high losses, there's not necessarily a need to support the writing company. But obviously, if that need ever arose, that's the last time you want to be raising capital. Costs obviously go up. And you're clearly kind of conservatively levered anyway. So I'm sure you can find all kinds of accretive uses for any debt proceeds. Just your thoughts on timing and kind of access and cost?

I would say right now, there's no real sense of timing other than -- I think we believe we have a lot of financial flexibility. I think we're fine in terms of the capital excess. And like I said, I think we're the strongest in the industry. So anything we did on that side would be at a position of strength, Mark, where we thought we could use it to grow the business.

Okay. Got it. And then just one last question. I mean, given the significant widening we've seen in the capital markets around insurance transactions and kind of the increase in the cost of capital there, are you seeing greater opportunities to participate in risk-sharing transactions?

Well, we haven't yet because the GSEs haven't produced any -- haven't come to market yet in the reinsurance market. So we may see opportunities, and that's an interesting -- that's another place that gives us some optionality. We've always said Essent Re is another way for us to participate in the mortgage business. So I think it's going to be an interesting question when they come. We clearly have some ability to take on probably additional risk, should it be warranted, meaning we feel like the returns are strong. And it depends on what some of the other reinsurers will do. So are they going to step back into it? Or are they going to kind of stay away from the business? Time will tell, Mark, but I do think we're probably -- we have some nice optionality there. And we've always said it's been a good business for us. We've been kind of a steady participant in it, and we always have the chance. There's always the optionality for us to potentially grow or put some extra capital to work there, should we like the returns. Again, that depends on where the economy is going to be and all those sort of things. And maybe some of the other participants who are maybe on the outskirts of the industry, so to speak, kind of back away.

Our next question comes from the line of Chris Gamaitoni of Compass Point.

Larry, I have a -- this question is for Larry. Acknowledging the default-to-claim rate assumption on the initial delinquency is going to be challenging. How do you evaluate whether that's correct or not over the next year, while loans are still in a forbearance period? What factors are you looking at on development, are they just macro-driven, given that these delinquencies are relatively unique and borrowers don't really have to become current or don't have an incentive until the term of the fragrance is over?

Chris, it's Mark. Let me take a stab at that. I think you're right. I think, if you remember, when we had Harvey and Irma, we took an upfront kind of our best estimate of what we thought the ultimate reserve would be and then we pretty much looked at it every quarter and said that we need to increase it or decrease it depending on what we're seeing. And I think it's very similar here, not that it's hurricane like in terms of cure rates or anything like that, but in terms of -- really, that's what you're supposed to do with the reserve. It's your best estimate of what you're ultimately going to pay. And I think it's very applicable here, right, because you have potentially a 12-month forbearance. So it could almost be a binary event. And so I think just kind of having kind of the normal roll rate patterns really aren't going to apply here. So I would think every quarter, we'll look at it. And it will be kind of what we just said, what does the employment look like, where do those level defaults go to. And so it's more of the kind of the economic factors that we would look at and also kind of also the paydowns on default, so really the decrease in defaults. So we'd look at like the absolute level. We'll have a view, right, of what the level of default is, what they are, say, at the end of June and then kind of what we think they'll be in 12 months when we ultimately pay, and then we'll adjust accordingly.

There are no further questions over the phone lines at this point. I turn the call back over to the presenters.

Okay. Well, thanks, everyone, for your time today, and I hope you have a great weekend.

This concludes today's conference call. You may now disconnect.