Q1 2020 Earnings Call
Gentlemen, thank you for starting by and welcome to the essence Group Limited first quarter 2020 earnings call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to asked a question. During the session you will need to press Star then one on your telephone keypad. Please be advised.
This conference is being recorded if you require further assistance. Please press star zero on your telephone keypad Odella hand, the conference over to your Speaker today, Chris turn senior Vice President of the Investor Relations. Please go ahead Sir.
[noise]. Thank you again.
Good morning, everyone and welcome to our call.
Joining me today, our market sell chairman and CEO, and Larry Mcalee Chief Financial Officer.
Our press release, which contains essence financial results for the first quarter of 2020 was issued earlier today and is available on our website at Essent group Dot com and the Investor section.
Our press release also includes non-GAAP financial measures that may be discussed during today's call.
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These measures and the reconciliation to GAAP, maybe found in exhibit and of our press release.
Prior to getting started I would like to remind participants at 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 risks factors included in our form 10-K filed with the FCC on February 18 2020.
And any other reports and registration statements filed with the FCC, 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 for 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 cobot 19 pandemic.
So it 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 are in $150 million or $1.52 cents per diluted share compared to $128 million or $1.30 cents 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. An 89 cents as of March 30, Onest 20 Twond.
We believe that the strength and sustainability of our by managing distribute operating model puts asset 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.
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 30, Onest, 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 drawn $200 million on our revolver.
While we do not have any immediate capital needs and our operating businesses. We believe that drawing on the facility was prudent in light of the worsening economy.
As cobot 19 takes its toll on unemployment, we believe that defaults will increase during the second quarter and having a significant impact on our operating earnings.
Of the metrics that we are falling as a percentage of mortgages and forbearance being reported by Black Knight.
Most recently they reported that 8% of the loans aren't forbearance and estimate at this rate could hit 10% to 15% by June Thirtyth, 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 timelines.
As such it is very difficult to predict the exact pattern at which defaults wage or cure as well as claim rates, we will record our best estimate of the ultimate loss on Cobot 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 p. Myers perspective, we will apply the 0.3 factor to the asset requirements for defaulted loans, resulting from covert 19, including those in forbearance.
At March 30, Onest, our Pmires sufficiency ratio is the strongest in the industry, a 200% with $1.2 billion of excess required assets.
On the business front industry on that W. has been robust during the first quarter and continued through April April for both Rifai 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 and Essen edge 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 16 cents per share to be paid on June 12.
We will evaluate future dividends as we continue to navigate the economic environment.
Our by managing distribute operating model provides us confidence and managing our business, even though things can be challenging over the near term.
Since the founding investment we have built and manage this business for the long term and we will continue to do so now let me turn the call over to Larry.
Okay.
Thanks, Mark and good morning, everyone I will now discuss our results for the quarter more detail.
Net earned premium for the first quarter of 2020 was $206 million, which represents an increase of $29 million were 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 RIV 2020 Dash, one transaction, which closed in January and the quota share which became effective on September Onest 2019.
Persistency declined during the quarter to 73.9% from 77.5% at year end 2019.
The average net premium rate for the us 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 GFC 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.
Fair 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 shorten the lives on asset backed securities, resulting in increased premium amortization.
The yield on the investment portfolio in the first quarter 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 2020 was $3.1 million.
Compared to $833000 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 newt reinsurance transactions.
Compared to a loss of $3.6 million in the fourth quarter 2019.
These losses result from an increase in the spread between the forward LIBOR and us 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 us mortgage insurance portfolio was 83 basis points at March 30, Onest 2020, compared 85 basis points at December 30 Onest.
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 2020 was 15.4% and was reduced in the quarter by $620000 of excess tax benefits associated with the vesting of restricted shares and sharing units issued to employees.
The consolidated balance of cash and investments at March 30, Onest 2020 was $3.8 billion.
The cash investment balance at the holding company with $280 million, which includes the proceeds from the $200 million drawn under our revolving credit facility in March.
Yes in group limited paid a quarterly cash dividend totaling $15.7 million to shareholders in March.
Consolidated debt outstanding under our credit facility at March 30, Onest 2020 was $425 million with a weighted average interest rate of 2.9%.
As of March 30, Onest 2020, the combined us mortgage insurance business statutory capital was $2.5 billion.
With the risk to capital ratio of 11.7 to one.
The risk to capital ratio reflects a reduction in risk in force associated with the affiliate quota share and to $3.6 billion reduction for reinsurance provided by third parties.
Also essent guaranty is 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're pleased with our first quarter results. Our focus has now been facing a challenging business environment. As a result of coven 19 I stayed.
Previously that incorporating reinsurance and our business model has been transformational as our goal is to remove the boom and bust nature of the business like ours because of this as well as our strong balance sheet capital and liquidity I believe that we are well position heading into these uncertain times.
This environment will be a tremendous test for our by managing distribute operating model. We believe that over time Aesynt will demonstrated resilience and 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.
At this time, if you'd like to asked a question over the phone lines. Please press Star then one on your telephone keypad, we will pause from limits compiled the two and a roster.
Your first question comes from the line of Bahir Bhatia of Bank of America. Your line is open.
Hi, good morning, and thanks for taking my question.
Firstly, obviously hope everyone is staying healthy and safe and then I just wanted to start with your comment about expecting within the 15% up I think you said you can view was consistent with black Knight for 10% to 15% forbearance in Q2.
The ultimate all peak forbearance expectation you have what do you think it can even given go a little bit higher in Q3 before improving as initio full balance periods expire.
Et cetera.
Hey me here its mark I actually think it depends on where the 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 Thats as of June Thirtyth.
So if the economy gets back on us feel a little bit earlier as the state start to open up you could see that you could call that the peak.
But if it's a prolonged economic.
Slowdown.
The peak could actually happened in the third quarter, it's too early for us to tell given that we havent really received any default chip.
Understood.
And then just I was curious in terms of your new business expectations, and just you know as Youre looking at pricing and stuff have you changed pricing.
New business expectations first just to note due to capital considerations at all is it all just pricing driven by.
If a different little clearly a different macro view that's changed.
It's more on the macro view.
And 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 is probably more of a flattish HP a 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, we engage PA decreases further or stays the same I think that has a lot to deal with it and again time will tell.
It's certainly not a capital issue I think from.
And I think that separates us a bit I mean at $1.2 billion of Pmires excess we have cash at the Holdco I think we're in a pretty strong capital position and more importantly me here I think we have a lot of financial flexibility on top of that given the rating at Moody's a rating and am best we feel comfortable that we get a right.
Raise additional capital should we needed and my guess is if we needed 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 be gets 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 have 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 carts.
And I think we've seen pricing increases in engines from some of the competitors. We haven't seen is as much in the cards and I think Thats 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 four to five basis point increase in premium we would expect.
No thats helpful. Thank you I'll jump back in queue and give us the John Thank you.
Your next question comes from the line of Doug Harsher Credit Suisse. Your line is open.
Thanks.
Morgan you touched on a little bit, but can you just talked about what your expectations are for for home price.
The change in home prices and kind of how you view.
Yes, that's changing in the current environment.
Again, we had an increasing Doug prior but given the rising unemployment, we've kind of see flattish maybe down to one or two which is kind of consistent with if you look at them Moody's of base case, we're not too far off there will differentiate I must say.
Right and Thats one of the things when we price we have the ability to price spike down to the MSC 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 thats really where we sit today again, thats, where I think we want to make sure everyone's on a same page with US is that we're pretty early in this and this kind of crisis and I think it's too early to call. It one way or the other I just think thats prudent so I think we will.
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 reversed supportive of the fact that hey, you know we're going into these uncertain times.
Remember were insurance company, we're here to pay our job at the end of the day is when.
Our bar 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 we're charging enough to be able to be here went when our lenders really need us.
And I think thats something to consider too when you. When you think about all this not just in terms of talked about home prices, but I think it's really the role of EMI.
Is really going to be important here as we go through.
Go through this next three 612 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 believed the industry. We obviously are very levered to the economy, but when something happens in the mines 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 didnt have a lot of reinsurance that had a lot of capital to time, just didnt have a lot of reinsurance. So it was very much.
Yeah.
On cap liability on our balance sheet and then in mice made choices around claims in Rescissions and a lot of their reasoning was rational but it got payment with with a broad brush and I think thats going to be different. This time I think our ability we have already come out with bolton's 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 is onboard 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 can you talk about from a.
Fundamental standpoint, if there is a different viewpoint of the industry.
You laid out.
Could that mean different business opportunities or what might that.
But the recasting what might that actually mean for the business.
I think it's going to be I think it's going to be from when I say recasting, yes, I think it'll will improve our reputation in DC.
Clearly and I think that I think weve the gses have been supportive and now it's our job to be supportive of them and make sure that we can get through this and a strong fashion not just survive, but thrive in it and I think thats essence.
I think thats essence goal and I think when we think of some of our larger counterparties, especially in the bank side.
In other immediate concerns are you guys can be at a pay claims. So I think I think theres a lot of buys on on the on the industry.
And we look forward to that challenge. So again I think it 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 in the industry stronger.
Then it was previously and I think the opportunities could be.
Really in terms of whether there's just more capacity for the ability for the industry to take on.
This type of risk.
Great. Thank you Mark.
Your next question comes from the line of the tendency Erin.
Coleman and associates your line is open.
Thanks, Good morning.
First question.
Can you just talk about the capital that's not counted in the 1.2 billion dollar excess whether it be holding company liquidity or.
Let's turn to overcome Goldberg capitalization on your island that could potentially be included if necessary.
Well the Pmires one point the excess to 1.2 was actually capital that's in the entities.
Right now Mackenzie so we have holdco cash of the 280 that we get downstream. So if you kind of look at it from a.
I think we've heard some of the other optimized comment about what level of defaults could we handle.
With our excess P. Myers, and I think the numbers close it little bit us north of 30% right now and that's just with capital Thats within the entities.
Okay. That's helpful. Thank you and then.
On the claim rates, obviously, there's been a lot of discussion over the last few days around.
We have potentially what those estimates could be so a lot of uncertainty, but can you help us frame what your expectations are in.
How you've treated those this claim rates in the pass on natural disasters and some other considerations that you will keep in mind, if you set reserves beginning in the second quarter.
Sure sure I mean again I think it's it's too early to tell I think we're just starting to get so a line of sight into the false given kind of the black Knight type information in terms of how many of those defaults role to claim Mackenzie I think it's too early to tell I really do so we've heard say some into the fall.
Paul.
As for more about default is not a claim event I think it's too early to say that we don't know really what the path of economy is going to be.
It's 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, thats, what you do and reserving win win defaults can you give your best estimate I think here, we'll do it will do it that way to them each quarter, we will adjust that up or down depending on where what we think.
The ultimate loss would be.
Okay. Thank you Mark.
Your next question comes from line of both shortage of KBW. Your line is open.
Good morning, everyone. So close.
First just a clarification that 30% number you'd lots and lots but was just.
What's sort of the doable from the 1.2 billion Thats at the insurance companies right.
Yes.
Adults that yes, you're breaking up a bit.
Those b assets, that's what's that thats in that's not counting.
The Holdco liquidity, that's just which in the entities at this time.
Okay, great. Thanks.
Just one about the reinsurance market will be to the extent the island market kind of remains on hold.
Obviously makes it distribute part of the business model more challenging how are you thinking about especially thats on hold for an extended period you look at more QSR just your thoughts that would be great.
Yes, but again I think I would actually take you guys back to enter we talked about this in a fourth quarter. When we went through the mill Moody's see car.
Stress tests and part of that test was.
That that reinsurance market shut down for two years on as you guys remember that was.
As an earnings event for for Essent, just announced that was that was a lot of the fall. So one through that just stick I give you everyone a goalpost.
That was close to eight or 9%.
Fall. So if you just look at those are 700000 loans that we have today.
Thats almost 50000 claims that we would pay again over like a five year period, and it's an earnings event not a capital there so thats over.
And that is that's assuming there is no reinsurance for two 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.
Yes, we've gotten some calls I think a lot of the Levered buyers got 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.
We have insurance on close to 90% of the book, we have the quota share and we we have the island's 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 we thats is one of the things we built into the program into.
Terms of US we in terms of us holding this extra capital I think we've always kind of assumes or at least model for what happens if the markets close down enough for an extended period of time, the kind of warehouse to us 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 will clearly look for ways to increase our financial flexibility should should they be close for an extended period of time.
So okay, great. Thanks, and then actually just a question on the GRC, we're sharing exposed you guys.
How should we think about that I know, it's really small, but just the exposure that versus the other primary in nicely.
So it's a good question I remember there I mean in 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 them as 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 too 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 they're very out on a relative basis is much smaller than our exposure doesn't guarantee.
Okay, great. Thanks.
Okay.
Your next question comes from the line of Chapter Mccann.
Of S&P your line is open.
No that close enough good morning, guys.
Mark we got the 70% haircut.
On a go to slide right we've got.
The individual assistance.
When you look at the industry capitals today do you think.
That's the NOL.
Well, it's not where else are what else would be logical and there were and where untested sort of world with immediacy of and the structure. This will bring reached 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.
Okay.
I am.
Is what we have enough from your perspective on the capital relief.
On the forbearance loans or would you look at the Pmiers construct.
As a day to day, operator, hey, there something more that could make more sense from regulatory shift or change perspective, okay. I get it I get it added I got it now I think where I think it's fine and that's why we've we disclosed in our press release, we think the way the Pmires, which were in its a little clunky because it was written for hurricanes or earthquakes versus.
Natural disasters versus the coven 19, but it fits pretty well.
It's pretty well so we don't think there I know there's the industries in discussions with the Geo season official save a lot of its 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 no additional.
Requirements now I don't I don't from an essence standpoint, I think we're we're fine with the way. This as we think it's very applicable.
'cause 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 the 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.
It is really a good thing is ultimately defaults doesnt define us it's going to be the claims we pay that has 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 which is a it was a good thing and it's a big advantage for us remember because in terms of.
Default to claim and this scenario to 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 and before we even pay claims. So we think from a cash aspect and asset. It's a good task, but we don't feel like there is anything else that needs to be done.
I think the issue for P. Myers is going to be really jakone is going to be can it support growth because I think the industry is although it's it's a heavy kind of refi market right now the purchase markets is stronger than we think and I'll give you give you guys. Some stats our April and we were not really talk about the current quarter too much but I.
It's important now.
Our purchase applications for.
For 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 I were little surprised to be honest I'm surprised that it's the strong.
Given everyone's pretty much been locked up for six weeks. So I would say there's going to be some pent up demands. So there is a little leverage there to the upside.
From a percentage of our business we've gone from what 80, 590% purchase I think in April we were 60, and it's probably run at 50 50 now it's not because purchase is falling.
Is falling to the floor because of refinances are I mean, our refinance application to the highest they've ever been in the history of account and file a lot. So it's a little bit of both and I think that bodes well so you've 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 thats another differentiator from the great recession, you remember there the mines were suffering.
You know with losses, but the front end was really small so let's go back to 2009 in 2010, the industry and idle People's like 70 $80 billion.
They're in our last year was three decreased 80, something like that and this year could be the first quarter clocked in an over $90 billion versus I guess high Fiftys last year. So it's it's a pretty strong market and I think thats I think from a p. Myers perspective everyone's been looking at Oh.
To the Amies have enough to pay older claims and satisfy all their assets. That's fine, but there is also going to you're going to needed to support growth and I think you may see I think thats, where I think we have an advantage given the amount of kind of strength, we have and.
We have the ability to support probably a lot more growth.
That's the resiliency of the purchase market is surprising in April may you're right.
Thank you good segue to my second question, there's been a lot made about credit tightening.
Yes.
Hey has raised standards jumbo spinoff now you don't really play in those markets in a big way as an industry.
Now you're certain Seymour overlays, even in the conforming side of the world the industry's raise 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 six next six to nine months.
It's a good question I think for the Gs on a conventional side, which I am more obviously, we're in the middle of.
Fannie tightened our guidelines really through the engine in a kind of round that tails and I would say a little bit on above 90 fives.
And the below 700 saw so on some of the layered risk Rs them as they probably took.
In a 6% to 8% out of the market. So.
Thats not the worse thing from a tail standpoint, again, especially given kind of where we are in terms of the uncertain environment.
What happens there does it go to FHLB.
Some of the higher factors it may or people may just put.
On the higher higher Ltvs, they may just put more money down and it becomes.
Kind of becomes a conventional loan so I actually think it's a net positive because you got to look out of again in terms of your balance in.
The volume with the credit that are taking on and I give you know I think I give the sees 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 outlook how large the market is so.
It's hard for me to talk about the impact on FHLB and I know theres been a lot more tightening there.
The could squeeze it could squeeze folks, but I think some of that could spill over into conventional marketer.
Good thanks for taking the questions. Good luck.
Sure.
Your next question comes from line of Mark deliveries of Barclays. Your line is open.
Thank you can you remind us.
Obligations you have at the holding company in kind of what level of that 280 million of cash.
Pushing down delivering.
You broke up there mark but of the 280 million.
We cash there we have 425 million.
Debt outstanding at 200 million on the line and another 225 million on on the turned out as do I think of May of next year at 21.
Okay got it.
And then.
Just curious Mark you don't want to tip your hand.
On the timing of potential capital raises and it sounds like given your significant excess.
And your ability to absorb really high losses.
Theres not necessarily a need to support.
The writing company.
But obviously if that need ever rose.
That's the last time, you want to be raising capital.
Costs, obviously go up in your clearly kind of conservatively levered anyway. So I'm sure you can find all kinds of accretive uses.
You know for any debt proceeds just your thoughts on on timing and kind of.
So some costs.
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 of the capital access and like I said I think were 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.
Then just one last question.
Given the significant lightening, we've seen in in the capital markets around ensuring transactions.
The reason that.
Cost of capital there are you seeing.
Yeah, greater opportunities through participating in risk sharing transactions.
While we haven't yet because the end of the Gses haven't produced any in in having come to market yet.
In in the reinsurance market. So we may see opportunities and that's an interesting. It's another place that gives us some optionality and we've always said.
In recent 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 rigs should should it be warranted and meaning we feel like the returns are strong.
And it depends on what some of the other reinsurance 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 theres always the optionality for us to potentially grow or put some extra capital work. There should we like to returns again thats depends on where the economy is going to be Anna and all those sort of things and maybe some of the other participants who are.
Maybe on a on the outskirts of the industry, so to speak kind of kind of back away.
Okay got it thank you.
Your next question comes from the line of Chris STEMI, Tony of Compass point. Your line is open.
Hey, good morning, Thanks for taking Michael.
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Let Larry ABA.
Equipments for Larry.
Acknowledging the default to claim rate assumption on the initial delinquencies going to be challenging how do you will evaluate whether thats correct or not over the next year, while loans are still on a per Barents period, what factors that you're looking at on development into just macro driven given that these delinquencies are relatively unique and.
Borrowers don't really have to become current or don't have incentive until the term of the forbearances over.
Hey, Chris It's Marty let me take a stab at that I think I think you're right I think if you remember when we had our Harvey and arm, 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 so do we need to increase it or decrease 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 thus we are supposed to do with a reserve. It's your best estimate of which are ultimately going to pay and I think it's very applicable here right. Because you have potentially a 12 month forbearance, so can almost be a binary event.
And so I think adjusted 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 and it'll be kind of what we just said what is the employment look like where do those level defaults go too.
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 defaults are really the decrease in default. So we'd look at like the absolute level will have a view right of with the level defaults is.
What they are say at the end of June and then kind of what we think there will be when in 12 months when we ultimately pay and then we'll adjust accordingly.
Alright perfect. Thanks.
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 todays conference call you may now disconnect.
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