Earnings Call Transcript - ESNT Q1 2020

Operator, Operator

Thank you all for joining us today for the Essent Group Ltd. First Quarter 2020 Earnings Call. We will now hear from Chris Curran, Senior Vice President of Investor Relations. Please proceed, Chris.

Christopher Curran, Senior Vice President of Investor Relations

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.

Mark Casale, Chairman and CEO

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 in 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 timelines. 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 refinance 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.

Lawrence McAlee, Chief Financial Officer

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.

Mark Casale, Chairman and CEO

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, Operator

Your first question comes from the line of Mihir Bhatia of Bank of America.

Mihir Bhatia, Analyst

Firstly, I hope everyone is staying healthy and safe. I wanted to start with your comment about anticipating a 10% to 15% forbearance rate. I believe you indicated your perspective aligns with Black Knight's prediction for 10% to 15% forbearance in Q2. Is that your maximum expectation for forbearance, or do you think it might increase a bit more in Q3 before it starts to improve as initial forbearance periods come to an end?

Mark Casale, Chairman and CEO

Mihir, it's Mark. I believe the outcome depends on the direction of the economy. Currently, we see a 10% to 15% forbearance rate from Black Knight as of June 30. If the economy recovers sooner as states begin to reopen, that might be considered the peak. However, if the economic slowdown continues, the peak might occur in the third quarter. It’s too soon to make a definitive judgment since we have not encountered any defaults yet.

Mihir Bhatia, Analyst

Understood. I was curious about your new business expectations. As you consider pricing and related factors, have you adjusted your pricing, or have your new business expectations changed due to capital considerations? Or is it primarily pricing influenced by a significantly different macroeconomic outlook?

Mark Casale, Chairman and CEO

Yes. It's primarily about the macro perspective. As I've mentioned before, we have a focus on unit economics. Based on our previous pricing, we experienced a claim rate of X. Currently, with the economic conditions, we anticipate a relatively stable Home Price Appreciation (HPA). Consequently, the expected claim rate is likely to increase, necessitating a price adjustment to ensure adequate returns. This situation is influenced by the economic environment and may change, especially if the economy deteriorates further or if HPA stagnates. This is a significant factor to consider, and time will reveal more. It's definitely not a capital issue for us. With $1.2 billion excess in PMIERs and cash at the holding company, we believe we are in a strong capital position. Furthermore, we have considerable financial flexibility, supported by our A ratings from Moody's and A.M. Best. We are confident in our ability to raise additional capital if necessary. If the situation worsens, more capital may be needed, but it could also be used to seize potential opportunities. As I’ve mentioned before, capital creates opportunities, which may become increasingly vital in challenging times.

Mihir Bhatia, Analyst

Understood. Can you quantify the amount of pricing changes you've made, even if it's just in general?

Mark Casale, Chairman and CEO

Yes, I will. In general, we've seen price increases across the board, both in our engines and cards. While competitors have raised prices on engines, we've not observed as much movement with cards, making our situation a bit different. Overall, I would estimate the increases to be around 10% to 15%. If you want to quantify that in basis points, we would expect an increase of about 4 to 5 basis points in premium.

Operator, Operator

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

Douglas Harter, Analyst

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?

Mark Casale, Chairman and CEO

We previously observed an upward trend, Doug. However, in light of rising unemployment, we anticipate a relatively flat change, possibly decreasing by 1% or 2%, which aligns with Moody's base case. We will differentiate by market area, as we can adjust pricing at both the market area and borrower levels. While overall we expect a flat to slightly decreasing trend, regional differences may arise. It is important to recognize that we are still early in this situation, and I think it would be premature to make firm predictions at this point. We are well-equipped to adjust pricing swiftly. Our lenders are supportive of our approach as we navigate these uncertain times. As an insurance company, our responsibility is to honor claims when borrowers are unemployed and unable to make payments, so we need to ensure that we are charging appropriately to sustain our ability to support lenders in need. This consideration extends beyond home prices to the broader role of mortgage insurance, which I believe will become increasingly significant over the next 3, 6, or 12 months. I see an opportunity to reshape the industry’s reputation. Many investors perceive that the industry is heavily tied to the economy and assume that mortgage insurers will face challenges when issues arise, as occurred in the last recession, which was largely driven by real estate and lacked adequate reinsurance. At that time, there was significant capital, but limited reinsurance, leading to uncontrolled liabilities. Decisions related to claims and rescissions were made rationally but were broadly criticized. This time, however, we are approaching matters differently. We have released bulletins on our handling of rescissions and our commitment to timely claim payments. I believe the industry shares this perspective, and ultimately, I think we will be viewed more positively once this situation resolves.

Douglas Harter, Analyst

From a fundamental perspective, could a different viewpoint of the industry lead to new business opportunities? What would that change mean for the business?

Mark Casale, Chairman and CEO

I believe that recasting will clearly enhance our reputation in Washington, DC. The government-sponsored enterprises have been supportive, but it's now our responsibility to support them and ensure we not only survive this situation but also thrive in it. That's our goal at Essent. When we consider some of our larger counterparties, particularly in the banking sector, their immediate concern is whether we will be able to pay claims. There's a significant focus on the industry, and we are ready to meet that challenge. Moving forward, as we assess the role of private mortgage insurance, we want to emerge from this stronger, both as a franchise and within the industry. The potential opportunities could lie in increased capacity and the industry's ability to manage this type of risk.

Operator, Operator

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

Mackenzie Aron, Analyst

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?

Mark Casale, Chairman and CEO

Yes. The excess of $1.2 million in PMIERs actually consists of capital currently held within the entities. We have a holding company cash amount of $280 million that we can use. If you consider the situation, based on comments from other mortgage insurers regarding the level of defaults we could manage with our excess PMIERs, I believe the threshold is slightly above 30% at this time, and this is based solely on the capital within those entities.

Mackenzie Aron, Analyst

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?

Mark Casale, Chairman and CEO

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 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.

Operator, Operator

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

Bose George, Analyst

First, just a clarification. The 30% figure you mentioned, Mark, that was just what seems achievable from the $1.2 billion at the insurance companies, rather than being closely tied to that number?

Mark Casale, Chairman and CEO

Yes, you're breaking up a bit, Bose. But yes, that's what is currently in the entities at this time, not counting the holdco liquidity.

Bose George, Analyst

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.

Mark Casale, Chairman and CEO

Yes. I would like to refer you back to our discussions in the fourth quarter regarding the Moody's CCAR stress test. One scenario in that test involved a shutdown of the reinsurance market for two years. As you may recall, this situation resulted in significant defaults for Essent, approximately 8% or 9%. To put that into perspective, considering we currently have around 700,000 loans, this translates to nearly 50,000 claims we would need to address over a five-year span, and this represents an earnings event rather than a capital event. This scenario occurs under the assumption that reinsurance does not return for two years. As for the reinsurance market, it's tough to speculate on when it might reopen. It's clearly inaccessible at the moment, and while we've received some inquiries, many levered buyers have been pushed out during this downturn, although cash buyers are showing signs of interest in returning. Right now, we cover nearly 90% of our book with insurance and maintain a quota share with ILNs extending up to September of last year, plus another quota share arrangement in place through the end of this year. We believe we have sufficient capital to manage this situation, allowing us some time. This strategic planning incorporates the need for additional capital, anticipating potential extended market closures. We feel fairly secure in our position through this year and potentially into next year, but we will actively seek ways to enhance our financial flexibility if the closures continue for an extended period.

Bose George, Analyst

Okay, great. I have a question about the GSE risk sharing. How should we consider that? I know it's really small, but what is the exposure compared to the primary MI side?

Mark Casale, Chairman and CEO

Yes, that's a good question. In our core business, we have mezzanine coverage in addition to our first loss position. In Essent Re, however, it's the opposite; we operate as the mezzanine holder and are positioned quite high in the structure. Currently, we believe we are in a strong position. If we were to encounter any losses, the losses would likely be more significant on the Essent Guaranty side. At this moment, we view those potential losses as relatively much smaller compared to our exposure to Essent Guaranty.

Operator, Operator

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

John Micenko, Analyst

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 an 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?

Mark Casale, Chairman and CEO

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

John Micenko, Analyst

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

Mark Casale, Chairman and CEO

Okay, I understand. Yes, I got it. I think it's fine, which is why we included it in the press release. The way the PMIERs were written is somewhat awkward since it was designed for hurricanes and earthquakes, not COVID-19, but it works adequately. The industry is having discussions with the GSEs and FHFA mainly to clean up some of the technical language. However, from our perspective at Essent, we believe this framework is effective as it is. We think it's applicable and makes sense. We must view forbearance from the borrower's standpoint. Having borrowers able to skip a few months' payments is beneficial, as defaults do not define our success; it's the claims we pay that impact the economy. Anything that supports borrowers in avoiding foreclosure is positive. The PMIERs have always been well-constructed and serve as a good asset test, which is advantageous for us. In this scenario, defaults to claims could take nearly two years. We disclosed our cash flow for the first quarter, and we have about two more years of cash flow before we even pay a claim. Hence, we believe the current cash assets present a solid test, and we do not feel additional actions are necessary. The key question for PMIERs will be whether it can support growth. Although the current market is heavily focused on refinancing, the purchasing sector appears stronger than anticipated. For context, our purchase applications for April exceeded those for March of last year, representing the highest volume since August. This suggests pent-up demand, which could lead to some upside leverage. In terms of our business, our purchases have shifted from about 85-90% to approximately 60% in April, and now it seems to be about 50-50. This isn't due to a collapse in purchases; rather, our refinance applications have reached unprecedented levels for the company. Both segments are performing well. The books are running down slightly more than expected, coupled with persistence on volume, prompting the need to consider capital to foster growth, which is a positive development for the industry. This situation is distinctly different from the Great Recession, where MIs faced heavy losses amid low initial volume. Back then, the industry’s new insurance written (NIW) was around $70-80 billion, whereas last year it hit approximately $380 billion. This year, we recorded over $90 billion in the first quarter compared to the high $50 billion range of last year. It's a robust market. From a PMIERs standpoint, the focus has been on whether MIs can meet claims and manage assets effectively, which is valid. However, there’s also a need for support of growth, which we are well-positioned for, given our strength in this area, allowing us to potentially facilitate substantial growth.

John Micenko, Analyst

The resilience of the purchase market in April and May is indeed surprising. This leads me to my second question regarding credit tightening. The FHA has made some changes, and while you typically don’t engage heavily in those markets, we’re now noticing an increase in overlays even within the conforming segment. The industry has adjusted prices to various extents. Is the current situation in the mortgage market overall a net positive regarding the tightening? From a growth perspective, does it create more or fewer opportunities? How do you foresee this playing out in the next six to nine months?

Mark Casale, Chairman and CEO

It's an interesting question. Regarding the GSEs on the conventional side, Fannie has tightened their guidelines, particularly around the tails. They’ve adjusted for loans above 95% LTV and below 700 credit scores, as well as on some layered risks. We estimate they've removed about 6% to 8% from the market, which isn't necessarily negative considering the current uncertain environment. It's unclear whether this will shift to FHA or other higher factors. Some may choose to increase their down payments on higher LTVs, effectively turning them into conventional loans. I view this as a net positive, especially when you consider the balance of volume and the credit involved. I credit the GSEs for their quick response and for taking actions we might have as well. While we may see a slight reduction in business, the market size remains large. It's challenging for me to discuss the FHA impact since there's been significant tightening there, which may affect some people, but it could also influence the conventional market.

Operator, Operator

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

Mark DeVries, Analyst

Could you remind us of the obligations you have at the holding company and what portion of that $280 million in cash you have?

Mark Casale, Chairman and CEO

Yes, you were breaking up, Mark. We have $280 million in cash, $425 million in outstanding debt, $200 million on the line, and another $225 million in term debt that is due in May of next year.

Lawrence McAlee, Chief Financial Officer

May '21.

Mark DeVries, Analyst

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?

Mark Casale, Chairman and CEO

I would say right now, there's no specific timing to consider. However, we believe we have considerable financial flexibility and we are in a strong position regarding excess capital. As I mentioned earlier, we are the strongest in the industry. Therefore, any actions we take in that area would come from a position of strength and would be aimed at growing the business.

Mark DeVries, Analyst

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?

Mark Casale, Chairman and CEO

We haven't yet seen the GSEs come to market in the reinsurance sector. There could be opportunities there, and it presents another option for us. Essent Re has always been a way for us to engage in the mortgage business. It will be interesting to see when they enter the market. We do have the capacity to take on additional risk if we believe the returns are favorable. This also depends on the actions of other reinsurers and whether they will return to the market or stay away. It's uncertain, but I believe we have some promising options available. Our history shows that it's been a solid business for us, and we've consistently participated in it. We have the opportunity to grow or invest more capital if the returns meet our expectations. Again, this is influenced by economic conditions and the behavior of other market participants who might choose to withdraw.

Operator, Operator

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

Chris Gamaitoni, Analyst

Larry, I have a question for you. Recognizing the assumption regarding the default-to-claim rate on initial delinquency is going to be difficult. How will you assess whether that assumption is accurate over the coming year, while loans remain in a forbearance period? What factors are you considering in your evaluation? Are they primarily driven by macroeconomic conditions, especially since these delinquencies are fairly unusual and borrowers do not have an incentive to become current until the forbearance term ends?

Mark Casale, Chairman and CEO

Chris, it's Mark. I believe you're correct. If you recall, during the events of Harvey and Irma, we made an initial estimate of what we anticipated the ultimate reserve would be. We reviewed this estimate quarterly, adjusting it based on what we observed at the time. The situation we are facing now is somewhat similar, although it isn't exactly like a hurricane in terms of cure rates. The reserve is meant to reflect our best estimate of our eventual payouts. This is particularly relevant now, as we might have a 12-month forbearance period, which could turn out to be a binary outcome. Therefore, the usual roll rate patterns may not apply in this context. We plan to reassess every quarter, focusing on factors like employment trends and the movement of default levels. Our analysis will consider economic indicators and the changes in defaults, particularly the reduction in defaults. We will keep a close watch on the overall level of defaults, evaluating where they stand at the end of June and making projections for what we anticipate in 12 months when we expect to make payouts, adjusting our estimates accordingly.

Operator, Operator

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

Christopher Curran, Senior Vice President of Investor Relations

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

Operator, Operator

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