Q1 2024 Radian Group Inc Earnings Call
Okay.
Good day, and thank you for standing by.
Speaker Change: Welcome to the first quarter 'twenty 'twenty for Radian Group earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising your hand, just raised to withdraw your question. Please press star one again.
Speaker Change: Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, John Damian Senior Vice President Investor Relations and corporate development. Please go ahead.
Speaker Change: Thank you and welcome to Radians first quarter 2024 conference call. Our press release, which contains radians financial results for the quarter was issued yesterday evening and is posted to the investors section of our website at Www Dot Radian Dotcom. This press release includes certain non-GAAP measures that may be discussed.
During today's call, including adjusted pretax operating income adjusted diluted net operating income per share and adjusted net operating return on equity a complete description of all of our non-GAAP measures maybe found in press release exhibit F and reconciliations of these measures to the most comparable GAAP measures maybe found in press.
Speaker Change: Exhibit G. These exhibits are on the investors section of our website.
Speaker Change: Today, you will hear from Rick Thornberry, Radians, Chief Executive Officer, and submit the Panda Chief Financial Officer also on hand for the Q&A portion of the call is Derek Brummer President of Radian mortgage insurance before we begin I would like to remind you that comments made during this call will include forward looking statements. These statements.
Speaker Change: Based on current expectations estimates projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially.
Speaker Change: For a discussion of these risks. Please review the cautionary statements regarding forward looking statements included in our earnings release and the risk factors included in our two twenty-three Form 10-K, and subsequent reports filed with the SEC.
Speaker Change: They're also available on our website now I'd like to turn the call over to Rick.
Rick: Good afternoon, and thank you all for joining us today I am pleased to share that we had a strong start to the year, which resulted in excellent operating results for radian in the first quarter.
Richard Gerald Thornberry: These results demonstrate the embedded economic value of our high quality and growing mortgage insurance portfolio, the strength and quality of our investment portfolio continued effective management of our capital position and our ongoing strategic focus on managing operating expenses.
I will start by sharing a few financial and business highlights.
We increased book value per share by 12% year over year generating net income of $152 million and delivering a return on equity of approximately 14%.
Rick: We grew revenues by 3% year over year, the $319 million during the quarter. Our primary mortgage insurance in force, which is the main driver of future earnings for our company grew 4% year over year and reached an all time high of $271 billion.
Rick: We continue to leverage our proprietary analytics and radar rates platform to identify and capture economic value in the market.
Rick: Which resulted in $11 $5 billion of high quality, New insurance written in the first quarter.
Rick: We continue to see very positive credit performance in our mortgage insurance portfolio with a two 1% default rate at March 31, a.
Rick: The decline from a default rate of two 2% in the prior quarter.
Rick: Radian Guaranty, our primary operating subsidiary paid its fifth consecutive quarterly ordinary dividend of $100 million.
Rick: To Radian group, our holding company during the first quarter.
Rick: Our overall capital and liquidity positions remain strong with our available holding company liquidity, increasing to approximately $1 $1 billion at our Pmiers cushion for Radian Guaranty was $2 3 billion.
Rick: As previously announced we successfully completed a $625 million senior notes offering and redeemed $525 million of our senior notes due March 2025 during the quarter. This is part of a series of transactions aimed at reducing our holding company leverage to below 20%.
Speaker Change: By year end, Samantha will walk through this in a few minutes.
Speaker Change: I also want to highlight that our mortgage conduit business is building momentum in the market with a growing list of customers selling the flows.
Speaker Change: As a strategic extension of our successful model for aggregating managing and distributing mortgage credit risk. We are distributing loans to a growing number of institutional investors in evaluating the opportunity to develop a mortgage backed securitization program in the near future.
Speaker Change: Samantha will cover the rationale for the changes to our segment reporting with respect to our title real estate services and real estate technology businesses that were previously aggregated reported as our home genius segment.
Speaker Change: These businesses continue to be impacted by the headwinds in the mortgage and real estate market environment, and we have been highly focused on aligning expenses to reflect the market opportunity we see for each business.
Samantha: As I've mentioned on previous calls, we do think about and assess these three businesses separately.
Samantha: Our real estate services business, including single family rental due diligence Oreo management and valuations has remain profitable and maintains a leading market position.
Speaker Change: Our title business, which has undergone meaningful expense reductions to align to the current environment.
Speaker Change: Maintains a solid market position and continues to add new customers. We believe this business is well positioned to benefit from an improved mortgage market.
Speaker Change: Our real estate technology business branded home genius.
Speaker Change: As a real estate platform as a service model.
Speaker Change: Our platform utilizes our proprietary homogeneous Iq.
Speaker Change: Which combines data and analytics with computer vision and AI powered tools to help consumers make smarter home buying and owning and selling decisions.
Speaker Change: This technology business has been most impacted by the mortgage and real estate market conditions.
Speaker Change: As such.
Speaker Change: We're taking actions in the second quarter to significantly restructure our expense run rate related to this business we.
Speaker Change: We expect to provide an update on the actions, we're taking and the impact on our expenses during our second quarter call.
Speaker Change: Turning now to the housing market recent industry forecasts projected total mortgage origination market for 2024 of approximately one eight trillion.
Speaker Change: Which would represent an increase of 15% compared to 2023.
Speaker Change: This is lower than the outlook at the start of year based on the updates related to the expected decline in mortgage interest rates. This year, which is now projected to be less and come later than originally forecasted.
Speaker Change: Based on the origination forecast, we estimate that the private mortgage insurance market will be approximately 300 billion.
Speaker Change: In 2024, consistent with the prior year.
Speaker Change: I believe it's worth noting the positive impact that we expect from the continuing higher interest rate environment in terms of increasing our investment portfolio returns and maintaining strong persistency benefiting our insurance in force. Additionally, despite higher interest rates and impacts on affordability.
Speaker Change: Housing market remains supply constrained, which we expect will keep overall home value is stable to slightly positive from an HPA perspective.
Speaker Change: It is also important to note here that most borrowers in our insured portfolio has significant embedded equity in their homes, which helps to mitigate the risk of loss by decreasing both the frequency and <unk>.
Speaker Change: Severity of paid claims, which positively impact our default and care trends.
Speaker Change: In fact, we estimate that as of the first quarter, 89% of our insurance in force policies at at least 10% embedded equity and 80% of our defaulted loans had at least 20% embedded equity.
Speaker Change: Overall, our outlook for the mortgage insurance business remains positive.
Speaker Change: As you've heard me say before our business model is proven and our company is built to withstand economic cycles. This has been significantly strengthened by the P. Myers capital framework dynamic risk based pricing and the distribution of risk into the capital and reinsurance markets. We believe this is recognized on capital.
Speaker Change: On both sides of the aisle and that we are well positioned to fulfill our important role in the housing finance system.
Speaker Change: Submit I will now cover the details of our financial and capital positions.
Speaker Change: Thank you Rick and good afternoon to you all we started the year with another strong quarter of operating results producing net income in the first quarter of $2024 $152 million or <unk> 98 cents per diluted share compared to 91 cents per diluted share in the fourth quarter are transitory.
Speaker Change: Adjusted diluted net operating income per share was slightly higher than the GAAP metric at $1 <unk> for the first quarter compared to 96 cents for the previous quarter.
Speaker Change: We generated a 14% annualized return on equity in the first quarter, which helped to grow our book value per share, 12% year over year to $29 <unk>.
Speaker Change: This book value per share growth is in addition to our regular stockholder dividends, which were $37 million during the quarter, reflecting our previously announced increased quarterly dividend of $24 <unk> per share.
Speaker Change: We also repurchased $50 million of our shares during the first quarter, demonstrating our commitment to returning excess capital and enhancing value for our stockholders.
Speaker Change: Turning now to the detailed drivers of our results.
Speaker Change: Revenues continued to be strong in the first quarter of 2004, we generated $319 million of total revenues during the quarter, a 3% year over year increase slides 10 through 12 in our presentation include details on our mortgage insurance in force portfolio as well as other key factors impacting our net.
Speaker Change: Yes.
Speaker Change: Our primary mortgage insurance in force grew 4% year over year to an all time high of $271 billion as of the end of the first quarter generating $234 million and net premiums earned in the quarter.
Speaker Change: Contributing to the growth of our insurance in force was 11% a half billion dollars of new insurance written in the first quarter of 2004.
Speaker Change: <unk> 10, 6 billion during the fourth quarter of 'twenty three.
Speaker Change: While higher interest rates continue to provide a headwind for new originations. It has also significantly benefited the persistency rate of our existing insurance in force, which remained high at 84% in the first quarter based on the trailing 12 months compared to 82% a year ago.
Speaker Change: Provide more detail on our persistency trends on slide 10.
Speaker Change: We expect upper assistance to remain strong given current mortgage rates and the overall economic outlook.
Speaker Change: As of the end of the first quarter, 85% of our insurance in force had a mark good to date of six 5% or less.
Speaker Change: Given current mortgage interest rates, which meaningfully exceed these levels along with the expectation that rates will stay higher for longer. These policies are less likely to cancel due to refinancing in the near term.
Speaker Change: As shown on slide 12, the in force premium yield for our mortgage insurance portfolio remained stable in the quarter as expected at $38 two basis points.
Speaker Change: With strong persistency rates in the current positive industry pricing environment, we expect our in force portfolio premium to remain stable for the remainder of the <unk>.
Speaker Change: Benefits, we are experiencing in this higher than anticipated environment from high persistency rates on investment income, which I'll discuss next help demonstrate the durability of our mortgage insurance business model invaded Interstate environments.
Speaker Change: Net investment income grew 18% year over year to $69 million in the first quarter.
Speaker Change: There isn't a net investment income has been driven by increases over the past year in both the size and the average yield of our investment portfolio.
Speaker Change: We continue to reinvest cash flows in the higher rate environment, We expect our average investment portfolio yield and quarterly net investment income to increase further throughout 2024.
Speaker Change: Illustrating the benefits of a higher rate environment to our financial results.
Speaker Change: Our unrealized net loss on investments reflected in stockholders equity was $362 million at quarter end.
Speaker Change: We expect that our strong liquidity and cash flow position will provide us with the ability to hold these securities to recovery of the unrealized losses, which would equate to $2 39 that is expected to accrete back into our book value per share at over time.
Speaker Change: I will now move on to our provision for losses.
Speaker Change: Credit trends continue to be extremely positive once again in the first quarter of 2004, our defaults continue to cure at rates greater than our previous expectations, resulting in releases of prior period results that in recent years have significantly offset reserves established for new defaults.
Speaker Change: A favorable loss experience continues to be driven primarily by the significant embedded homeowner equity, resulting from the strong home price appreciation experienced in recent years.
Speaker Change: On slide 16, we provide to transfer our primary default inventory.
Speaker Change: Our primary default inventory declined by approximately 1000 loans during the first quarter to approximately 21000 loans at quarter end, our skills outpaced new default you present in our portfolio default rate of two 1% at March 31, 2020 forward a decline from two 2% in the prior quarter.
Speaker Change: Uh huh.
Speaker Change: I would like to highlight a new disclosure that we have included on slide 17, which details the progression of cumulative TR for each quarterly new default cohort over the past several years.
Speaker Change: As shown on that slide at your trends have been very consistent and positive in recent periods with approximately 90% of default scaring within four quarters, and 97% gearing within eight quarters meaningfully exceeding our initial expectations.
Speaker Change: And during the first quarter of 2024, we had the highest quarterly cure rate in more than 20 years as measured by the number of killers in the quarter compared to the beginning default inventory.
Speaker Change: The number of new defaults reported to us by services was approximately 11800 in the first quarter of 2004, a decline of 6% from the previous quarter.
Speaker Change: We continue to maintain our default to claim roll rate assumption for new defaults at 8%, which combined with a slightly lower claim severity assumption resulted in $54 million of loss provision for new defaults reported during the quarter.
Speaker Change: The reserve development on prior period defaults of $61 million more than offset this provision for new defaults due to the favorable cure trends just discussed as well as the benefit from lower claim severity trends.
Speaker Change: As a result, we recognized a net benefit of $7 million and our mortgage insurance provision for losses in the first quarter.
Speaker Change: Yes.
Speaker Change: I will now discuss our segment reporting change related to homogeneous.
Speaker Change: That is previously we had aggregated our tightened real estate services and real estate technology businesses as a separate reportable segment named homogeneous effective this quarter, we are including the results of these businesses in our all other category.
Speaker Change: This change reflects the way, we manage and evaluate these businesses individually and incorporates materiality considerations consistent with current accounting guidance.
Speaker Change: It also aligns with the presentation of our mortgage conduit business, which we also report and all other along with holding company investment income.
Speaker Change: As a result of our ongoing expense savings efforts are combined consolidated cost of services and other operating expenses were $92 million in the first quarter of 2020 for a year over year decrease of $2 million or 2% compared to the first quarter of 'twenty three.
Speaker Change: While we continue to actively manage our operating expenses and seek opportunities for additional efficiencies. It is important to note that these expenses can fluctuate from quarter to quarter due to changes in items, such as variable incentive compensation and similar to prior years, we do expect expenses to be elevated in the second quarter of 2000.
Speaker Change: Full due primarily to the timing of our annual share based incentive grants.
Speaker Change: Moving to our capital available liquidity and related strategic actions.
Speaker Change: The financial position of our primary operating subsidiary Radian Guaranty remains strong radian guaranty's excess pmiers available assets over minimum required assets remained stable during the first quarter at $2 3 billion.
Speaker Change: That's P. Myers question was after taking into account an additional $100 million ordinary dividend paid by Radian Guaranty to Radian group in the first quarter its fifth consecutive quarterly dividend of $100 million.
Speaker Change: As we have noted previously radian guaranty's ordinary dividend capacity is driven by statutory unassigned funds balance each period.
Speaker Change: We've added a new schedule to slide 21 to show the drivers of unassigned funds in more detail.
Speaker Change: This deal highlights the role of contingency reserve releases and supporting our quarterly dividends as they help to offset new reserves, we established each quarter.
Speaker Change: No that they didnt guarantee is releasing these reserves in material amounts.
Speaker Change: Expect the size of the quarterly ordinary dividend payments to increase beginning in the second quarter.
Speaker Change: This is consistent with our previously provided expectation for radian guarantee to pay $400 million to $500 million of ordinary dividends to Radian group during 2024.
Speaker Change: During the first quarter of 2024, we completed the first steps to address upcoming debt maturities, which extended the term of our senior notes outstanding.
Speaker Change: With a plan to pay down the 2024 senior notes later this year Radian will have no senior note debt due until 2027 lowering leverage interest expense and overall debt outstanding by year end.
Speaker Change: We issued $625 million of unsecured senior notes at an attractive coupon of six 2% and a well received investment grade debt offering during the quarter and used a portion of the proceeds to fully redeem $525 million of our higher coupon 662, 5% senior notes.
Speaker Change: That had been scheduled to mature in March 25.
Speaker Change: We intend to use the balance of the funds raised along with available holding company liquidity to pay off our full $50 million of senior notes that mature in October of 2024.
Speaker Change: We expect to reduce our holding company debt to capital ratio to below 20%. Following the retirement of the senior notes later this year.
Speaker Change: Additionally, we repurchased one 8 million shares during the first quarter at a total cost of $50 million.
Speaker Change: As of the end of the first quarter, our current share repurchase authorization had $117 million remaining and expires in January 2025.
Speaker Change: As demonstrated by this past quarter's repurchase activity and our track record in recent years, we believe that share repurchases provide an attractive option to deploy our excess capital.
Speaker Change: As a result of the net impact of these first quarter activities, our available holding company liquidity increased to approximately $1 $1 billion at the end of the first quarter.
Speaker Change: Also have an undrawn credit facility with borrowing capacity of $275 million, providing us with significant financial flexibility.
Speaker Change: I will now turn the call back over to Rick.
Richard Gerald Thornberry: Thank you Samantha.
Richard Gerald Thornberry: Before we open the call to your questions I want to highlight that our results for the first quarter continue to reflect the resiliency of our company and varying interest rate environments.
Richard Gerald Thornberry: As well as the strength and flexibility of our capital and liquidity positions.
Richard Gerald Thornberry: We expect a consistent earnings and cash flows generated from our large enforce mortgage insurance and <unk>.
Richard Gerald Thornberry: <unk> portfolios to allow us to continue operating from a position of strength and delivering value to our customers policyholders and stockholders.
Richard Gerald Thornberry: I would like to recognize and thank our dedicated and experienced team for the outstanding work. They do every day.
Speaker Change: Now operator, we would be happy to take questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.
Speaker Change: And our first question comes from Bose George of J P. W. Your line is open.
Bose Thomas George: Hey, everyone. Good afternoon.
Bose Thomas George: First wanted to ask about capital return you noted obviously your leverage is going to be below 20% by the end of the year.
Bose Thomas George: Could we see a ramp up in buybacks in 2025, just given the.
Bose Thomas George: The leverage capital levels et cetera.
Speaker Change: Yeah. Thanks.
Bose Thomas George: So as I mentioned in my prepared remarks in the first quarter, you saw us buyback $50 million of shares we continue to buy back shares. So as we look at the remaining quarters of this year as well as 2025, but you asked about we do intend to continue buying back our shares we do believe that our shares continue to trade bill.
Bose Thomas George: So their intrinsic value.
Bose Thomas George: <unk> mentioned that our current purchase authority of $117 million as of March 31.
Speaker Change: And as you know we have demonstrated a track record of managing capital and we've returned about $1 $9 billion in the last five years and we will continue to do so.
Bose Thomas George: One other important factor to keep in mind and I think I mentioned that in my prepared remarks is if you look at radian guarantee in the amount of dividend capacity, we have in radian guaranty. It continues to be really strong. So as those dividends are paid back out the holding company. We will continue to return capital back to shed.
Bose Thomas George: Holders to both dividends as well as share repurchases.
Speaker Change: Okay, Yeah that makes sense I mean, I guess the question is also a little more just on the cadence because it does look like your flexibility and the capital levels.
Speaker Change: Going to improve quite meaningfully or put you in a position to kind of ramp that up and when I look at your dividend plus the current buybacks still say $350 million a year versus your earnings which are obviously much higher than that so.
Speaker Change: Yes, that's yes, it gives us room for it to kind of ramp up as a result, I think there is room for it to ramp up we've not given specific guidance on a number yet.
Bose Thomas George: As we go forward.
Bose Thomas George: The rest of the quarters in the year and we have even more visibility to radian guaranty Andi didn't guarantees performance be me take a look at that and give you more specific guidance, but at this point I think we've not given a specific guidance on how much we intend to repurchase obviously and if you look at our historic track record we are repurchasing about 50.
Bose Thomas George: <unk> million dollars each quarter.
Bose Thomas George: And we are paying dividends as you know we pay the highest dividend in the sector and our dividend is the highest amongst all VM ipos.
Bose Thomas George: Okay.
Speaker Change: Just to add I would add so that's his comments. Thanks Bill for the question is really just to emphasize the fact.
Speaker Change: Similar to our track record really speaks for itself in terms of being willing to kind of jump in and return capital to shareholders through both dividends.
Speaker Change: I think we feel the capital strength of our business every day.
Speaker Change: Important part.
Speaker Change: Of the return profile of our business going forward and so we will continue to keep you updated.
Speaker Change: Great. Thanks, a lot.
Speaker Change: Thank you one moment our next question.
Speaker Change: And our next question comes from Terry MA of Barclays. Your line is open.
Terry Ma: Alright. Thanks. Good afternoon. So your default rate remains pretty low I'm just curious how does your book seasons is there a range, we should expect that default rate to migrate to and then secondly, do you expect your share trends that you saw on page or slide 17 of your deck to change materially.
Terry Ma: Migrates up.
Derek V. Brummer: Hey, Terry Derek in terms of maybe a.
Derek V. Brummer: Thought right, it's hard to estimate exactly where it ends up it depends upon the seasoning of the origination vintages and the overall macroeconomic environment that being said in kind of the range. We're in I could see it ticking up a bit.
Derek V. Brummer: Remaining sub 3%. So if we continue with the current macroeconomic conditions I would see it kind of being secondly below where it was pre pandemic levels in terms of churn rate I think it's been pretty consistent if you look at the cure rate I think we have a chart on one of our slides showing that that cure rate if you'd look at it on here.
Speaker Change: Over a year basis has been pretty consistent so in the first quarter, 34% I think the previous year is 33%. So again, assuming similar macroeconomic conditions.
Speaker Change: I would expect that cure rate to continue to be pretty strong that trend we've seen over the last several years and I think the slide that Eric was referencing is slide 17, and the number is if you look at the first column with the zero quarter column. If you just track that from top to bottom. It gives you a good sense of how consistent that trend has been.
Speaker Change: So to what Eric just mentioned.
Speaker Change: 35% in Q1, 34% in Q1 of 'twenty 333 in Q1 of 2028% in Q1 of 'twenty. One so really good trend with increasing cure rates. If you look at it on a seasonal basis.
Speaker Change: Got it that's helpful.
Speaker Change: Then on your reserve policy. So the claims frequency and severity has obviously come in better than what you've reserved for.
Speaker Change: Im just curious whats it going to take for you to get maybe get a little less conservative in your reserve assumptions going forward.
Speaker Change: Yes, I think that it's a good question I think our reserve assumptions are our best estimate as of today, we obviously want to make sure that we retain a level of <unk>.
Speaker Change: I would say prudence as we think about projections and how we think about reserving.
Speaker Change: I think the way we do it today, we've been pretty consistent over the last few quarters.
Speaker Change: Take our new defaults.
Speaker Change: Playa default to claim roll rates, which we have kept it to 8% for the last few quarters.
Speaker Change: In terms of what the average severity I think the assumption be make it comes to about 62000, and that's our assumption for the first quarter and then we apply a heck out of.
Speaker Change: <unk>, 5% related to Rescissions and denials.
Speaker Change: So again I think we are trying to take a through the cycle view as we think about how to resolve.
Speaker Change: And Thats, how our reserving policy is set and so there isn't if.
Speaker Change: I would say an element of prudence.
Speaker Change: As we think about performance through the cycle.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question comes from Doug Harter of UBS. Your line is open.
Speaker Change: Thanks.
Douglas Michael Harter: As you guys think about.
Douglas Michael Harter: You are kind of your excess capital position.
Douglas Michael Harter: Or are you thinking about.
Douglas Michael Harter: Other ways to potentially deploy it into the business, whether that's repurchasing some other.
Douglas Michael Harter: Reinsurance or are there other uses that you would be considering.
Douglas Michael Harter: Maybe submitted I can tag team. This thanks, Doug This is Rick.
Richard Gerald Thornberry: I guess I'll just speak to our track record of being fairly diligent strong fiduciary is around managing capital.
Richard Gerald Thornberry: Taking advantage of opportunities that present themselves either through.
Richard Gerald Thornberry: Free kind of trapped capital in our operating businesses looking at ways to restructure to again Liberum capital.
Richard Gerald Thornberry: We've done things around different.
Richard Gerald Thornberry: Our islands. This past year, we've bought shares back we have the highest dividend rate. So I think as we think forward. There's a whole waterfall of options that we think through and tried to be really good stewards of capital as we manage through some of this thinking.
Richard Gerald Thornberry: Thinking through kind of a through the cycle view, but I think youre going to continue to see us.
Richard Gerald Thornberry: I should also mention as Samantha mentioned in her remarks, we do plan to use some of our holdco liquidity to pay down. The 2020 fours that are due October one I think so a day. So we've got a really thoughtful approach as we go forward. The good the good challenge that we have.
Richard Gerald Thornberry: Have is we do have considerable excess capital this freeing up from radian guarantee up to Holdco and I think thats going to continue to provide us opportunities to think about how we further deploy that to the benefit of our shareholders. So I think I would just speak to our track record we never talk forward.
Richard Gerald Thornberry: About kind of our actions for a whole lot of whole lot of good reasons, but I think our plan is thoughtful our approach has proven to be thoughtful and we're going to continue to find ways to optimize our returns for shareholders and I think the only other thing I would add I just want to make sure I answer your question related to insurers reinsurance, Doug and let us know.
Richard Gerald Thornberry: <unk>.
Speaker Change: What you were getting too so as you can see a FEMA as excess available assets was two <unk> two 8 billion as of the first quarter and the increase in.
Richard Gerald Thornberry: In that access really happened in the fourth quarter of last year. When we executed a couple of reinsurance transactions and if you remember we mentioned that we like the D&C theyre getting at that point in time, and we went ahead and executed those transactions having said that.
Richard Gerald Thornberry: The B minus access is not a constraint that really guides how much capital we can free up from Radian Guaranty to Radian group.
Richard Gerald Thornberry: Just to give you some additional disclosure on that we did add I would say a footnote on slide 21 to make sure that we are explaining that a little bit more clearly so if you look at what is our constraint. It does for how much capital we can get out of Radian Guaranty, It's really our unassigned funds and that's driven by.
Richard Gerald Thornberry: The performance of Radian Guaranty, both on a statutory net income basis, but also the contingency reserve releases that we are in.
Richard Gerald Thornberry: Now seeing in Radian guaranty. So if you think about our constrained from a capital perspective. It is really unassigned funds and not the excess P. Myers assets that we have which is driven much more by how much reinsurance D&O. So I just wanted to make sure that I highlight that for you that it is really driven much more by.
Richard Gerald Thornberry: Our unassigned funds and they didn't get it.
Speaker Change: I appreciate that answer and just a follow up is there a minimum unassigned funds number you need to hold or just how do we think about the ability to kind of deal.
Richard Gerald Thornberry: Yes.
Richard Gerald Thornberry: Back to an earlier question about using most of your net income.
Richard Gerald Thornberry: To think about that.
Richard Gerald Thornberry: I mean, we could we could sleep all of it so it's really a zero million. So as long as it's positive we can sweep of all of it from Radian Guaranty to Radian group.
Richard Gerald Thornberry: And as you can see I mean, this is still a pretty new development for us like Q1 was really the first time when we are starting to see this trend of contingency reserve releases, you'll see the $108 million this quarter versus about five for the previous four quarters.
Richard Gerald Thornberry: So I think as long as it is positive yet able to speed that up to Radian group.
Richard Gerald Thornberry: I think the important point about that is that it rebuilds every quarter right through earnings contingency reserve releases, so it sort of.
Richard Gerald Thornberry: It's not a fixed number that were capped.
Richard Gerald Thornberry: As you can tell from the chart that <unk>, referring to that's one quarters, bill, but that quarter builds each quarter, we have earnings in contingency reserve releases. So.
Richard Gerald Thornberry: We're in a really long.
Richard Gerald Thornberry: Positive cycle relative to free cash flow capital flow from Radian guarantee up to Radian group.
Speaker Change: I appreciate the answer thank you.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: And our next question comes from Mihir Bhatia of Bank of America. Your line is open.
Richard Gerald Thornberry: Hi, This is Nate richemont from Mihir.
Nate Richemont: First question was on a homogeneous I know has been to emphasize from the accounting perspective, but just curious if you think about it on like an operational perspective, and I know the credit environment isn't that supportive, but will still be like a focus on growth and it is something that you'll think you'll reinvest and as the rate environment gets a little better.
Speaker Change: Yes first of all thank you for the question.
Richard Gerald Thornberry: Let me just kind of walk you through because I think it's just good.
Richard Gerald Thornberry: Add to kind of the understanding of what our what our plans are for these three businesses. So as I've talked in the past about the.
Richard Gerald Thornberry: The group, formerly referred to as <unk> segment.
Richard Gerald Thornberry: Was comprised of three businesses, one of which was title what was real estate services, which is our so far due diligence business Oreo and valuations business and the third was our home genius technology platform business and they're all at different stages of development of maturity. So the segment decision really some of the walk through was a decision.
Richard Gerald Thornberry: In terms of kind of presentation and kind of assessing those businesses in that context, but for each of the businesses. The title business has gone through a meaningful expense reductions.
Richard Gerald Thornberry: During the cycle very challenging cycle as you know, but it maintains a really solid market conditions in our market position and it has been adding customers along the way really expanding the base of the customers significantly.
Richard Gerald Thornberry: Getting great feedback from the customers, we do business with so we think that that business is positioned for growth as the market improves to your point, our real estate services business is a business that has remained profitable through the cycle not as profitable less profitable, but so profitable it's a.
Richard Gerald Thornberry: Business, where we have a tremendous market position, a leading market position across those products and we continue to see as the market evolves.
Richard Gerald Thornberry: <unk> and improves opportunities for that to grow and then unrelated. So those two businesses were really operated under the Arabian brand as we go forward.
Richard Gerald Thornberry: The third business, our real estate technology business, which was really the home genius brand as we go forward.
Richard Gerald Thornberry: That business, which leverages really kind of all of our innovative data and analytics in computer vision and AI, we call it a whole GSI Q.
Richard Gerald Thornberry: As has probably been most impacted by the market conditions as any startup that's trying to find its way into market adoption I think some of the factors around mortgage lenders and specifically real estate.
Richard Gerald Thornberry: Realtors and brokers.
Richard Gerald Thornberry: With all the litigation and changes coming out of that market has been challenged and so what we've done is we've taken.
Richard Gerald Thornberry: Taken the team the team has done exceptional work, we believe it's highly unique based upon my own independent kind of feedback I've gotten from other market experts, but we're going to we've taken the position that we had to.
Richard Gerald Thornberry: Begin to.
Richard Gerald Thornberry: Significantly reduce expenses around our investment in that business.
Richard Gerald Thornberry: And part of that was to also alter our market focus from our go to market and that's where we focus. So today, we're focused on continuing to invest in the platform, albeit at a lower level team highly qualified team.
Richard Gerald Thornberry: Highly focused team are very appreciative of their efforts.
Richard Gerald Thornberry: But we've also.
Richard Gerald Thornberry: Turning to our market focus towards really identifying partners for that business and we will as we go forward we will.
Richard Gerald Thornberry: On two things kind of our progress along that business from.
Richard Gerald Thornberry: As we explore different partnership opportunities, but also around kind of the impact of our expense savings as we go forward so those businesses.
Richard Gerald Thornberry: Point about the market conditions as I think.
Richard Gerald Thornberry: Appropriate and we think each one of them has a different path.
Richard Gerald Thornberry: Focus each of the teams on the opportunity we see for each one of them across what we believe to be the proper expense space.
Speaker Change: Awesome, that's super helpful and then switching gears a little bit.
Speaker Change: You guys pointed out really think cure activity has been like pretty strong.
Richard Gerald Thornberry: Just curious if anything has structurally changed in term in terms of borrower behavior or how services are dealing with these defaults and I'm just trying to get better understanding of like how the use of like modifications or remediation programs are being used to lead to either more cures or a longer time to foreclosure.
Richard Gerald Thornberry: Yes. This is derrick it's been pretty consistent with the trend. So I think it is a few things that's driving it one employment market remained strong so re employment rates are high importantly embedded equity. So if you look at the default inventory that new defaults that are coming into the portfolio continue to have a lot of embedded equity and then a change really that.
Richard Gerald Thornberry: Im happen post financial crisis, and even post <unk>.
Richard Gerald Thornberry: Called the pandemic are all of the programs put in place to help servicers to make sure that.
Richard Gerald Thornberry: Our ability to pay if they have embedded equity to make sure. They have sufficient time to recover which is very important for us.
Richard Gerald Thornberry: Since we don't pay claim until Theres kind of that transfer of title. So I don't think theres been any shift in terms of what we've seen very consistent in terms of I think the nature of the defaults to the transition of the deposits through the inventory and that's what we're looking at so as you kind of think about share rates, what you're really looking for in terms of trends or the complexion.
Richard Gerald Thornberry: And the type of new defaults that are coming in we haven't seen a significant change there the amount of embedded equity and then the macroeconomic environment and on all of those dimensions. It's remained remarkably stable over the last several years.
Speaker Change: Okay Awesome, that's all from me thank you.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Richard Gerald Thornberry: And our next question comes from Hamed <unk> of <unk>. Your line is open.
Hamed: Hey, guys. So I'm, mostly here from BTG I hope, you're all doing well.
Hamed: Maybe first one on ROE.
Hamed: It looks like the last few quarters, you've been putting up call it 14% to 16% can.
Hamed: Can you maybe just talk about the sustainability of that ROE over the next year or so and how should we think about sort of upside downside range going forward.
Speaker Change: Yes. Thanks for the question. So on so I think if you look at our current quarter as we mentioned I think our adjusted net auto net operating ROE was 14, 5% for the quarter last year, we posted a 15% Roe.
Speaker Change: We think that these are really healthy returns that we continue to generate on our business now when we look forward I would say that.
Speaker Change: Loss ratios currently.
Speaker Change: Are really low and in fact negative and we think that going forward as we again think about through the cycle performance. We don't plan I would expect that the loss ratios continue to remain.
Speaker Change: Remained where they are today and we don't expect loss ratios to begin to return to more normalized levels now obviously when that happens that would flow through into auto but as of now I think over the last few quarters. We have continued continue to generate the 14% to 16% alloys that youre seeing in that business.
Speaker Change: One other point just to highlight too is that the other side of the numerator denominator question is all of the excess capital.
Speaker Change: So we hold both with Radian group and Radian Guaranty submit that went through earlier, but I guess my comments as well.
Speaker Change: $1 $1 billion of.
Speaker Change: Yes.
Speaker Change: Liquidity at Holdco, plus $2 3 billion of excess Pmiers.
Speaker Change: Play through the what Sumit will walk through the example of the.
Speaker Change: How the capital flows from Radian guarantee up to reading group, but today.
Speaker Change: Part of that ROE is also being reduced by a significant amount of excess capital embedded within the business and so we will continue to explore that side of the equation as well so as we kind of some gives and takes right now, but I think we.
Speaker Change: We don't like to give forward estimates on ROE, but I think if you look at both parts of that Youll kind of get a sense for what the normalized ROE used for this business through the cycle.
Speaker Change: Yes.
Speaker Change: That's a good point.
Speaker Change: And then second one on services it looks like the gross margin has sort of stabilized in the mid twenty's here over the past quarter or two I guess two questions. There do you view that as sort of a sustainable run rate as we go through the year and then maybe can you just talk about where margin normalizing when once you sort of restructure the segment here.
Speaker Change: Actually I am trying to reference to the numbers that you are speaking to when you say margins can you just kind of gross margin.
Speaker Change: On the business.
Speaker Change: Yes.
Speaker Change: So services revenue minus direct cost of services, Alright, Gotcha Gotcha, Okay, yes, yes.
Speaker Change: I think again I would just say.
Speaker Change: Submit to feel free to add to that I'd say, we're at this point, we're not going to give any kind of forward guidance relative to these businesses I do think I.
Speaker Change: I do think that the.
Speaker Change: Second quarter and I know you all will hold us to this which I. Appreciate is we will give some more insight into some of the changes that we're making across those businesses I.
Speaker Change: I would say is that we are during the second quarter I would say as we think about these businesses going forward. Our objective is to continue to improve.
Speaker Change: The trajectory of those businesses from a growth and contribution point of view.
Speaker Change: Some of the changes that we're making here in the second quarter, along with all the changes that we've made through the cycle to kind of rebalance to the to the opportunity I think we will.
Speaker Change: I'll have more of an opportunity to update in the second quarter and be a little bit more precise and I think as you saw our operating expenses in the first quarter.
Speaker Change: It came down by about 13% on a quarter over quarter basis.
Speaker Change: And last year, if you remember we had taken out about $77 million of expenses.
Speaker Change: Between cost of services and other operating expenses.
Speaker Change: I think at this point, we've not given a again a specific guidance on further expense reductions I think the 2023 numbers I think if you look at our current expense base.
Speaker Change: That's what I would use from a modeling perspective, but as Rick mentioned as we take more actions and have anything specific to report on we would give you more guidance on that.
Speaker Change: Vic metric.
Speaker Change: Alright, so I mean that comment in regards to the cost of services.
Speaker Change: Cost or the Opex overall be $82 6 billion.
Speaker Change: I think it's the overall, yes. So then when I look at the guidance. We've given you last year. We had said that we will take out about 60 to 80 million out and that was overall both on opex as well as cost of services and we took out $77 million so pretty much at the high end of that range. So I would say, it's overall I think you look.
Speaker Change: At it on a combined basis and I think we'll continue to give you more disclosure on that as we go forward.
Speaker Change: Okay I understood. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Thank you I'm showing no further questions at this time I would like to turn it back to Rick Thornberry for closing remarks.
Richard Gerald Thornberry: Well, thank you for joining us today for the call and hopefully we were able.
Richard Gerald Thornberry: Table too.
Richard Gerald Thornberry: The questions that were most most important to you and we appreciate your interest in radian.
Richard Gerald Thornberry: We look forward to talking to many of you all in the coming days weeks months.
Richard Gerald Thornberry: We will be back together here after our second quarter's completed but thank you again for joining us today and have a great day appreciate it.
Speaker Change: This concludes today's conference call. Thank you for participating and you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.