Earnings Call Transcript - RDN Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the First Quarter 2024 Radian Group Earnings Conference Call. 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.

John Damian, Senior Vice President, Investor Relations and Corporate Development

Thank you, and welcome to Radian's First Quarter 2024 Conference Call. Our press release, which contains Radian's financial results for the quarter, was issued yesterday evening and is posted to the Investors section of our website at www.radian.com. 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 may be found in press release Exhibit F, and reconciliations of these measures to the most comparable GAAP measures may be found in press release Exhibit G. These exhibits are on the Investors section of our website. Today, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Sumita Pandit, 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 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, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2023 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now I'd like to turn the call over to Rick.

Richard Thornberry, CEO

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. 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%. We grew revenues by 3% year-over-year to $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 at $271 billion. We continue to leverage our proprietary analytics and radar rates platform to identify and capture economic value in the market, which resulted in $11.5 billion of high-quality new insurance written in the first quarter. We continue to see very positive credit performance in our mortgage insurance portfolio with a 2.1% default rate at March 31, a decline from a default rate of 2.2% in the prior quarter. Radian Guaranty, our primary operating subsidiary, paid its fifth consecutive quarterly ordinary dividend of $100 million to Radian Group, our holding company during the first quarter. Our overall capital and liquidity positions remained strong with our available holding company liquidity increasing to approximately $1.1 billion, and our PMIERs cushion for rating guarantee was $2.3 billion. 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% by year-end. Sumita will walk through this in a few minutes. I also want to highlight that our mortgage conduit business is building momentum in the market with a growing list of customers selling these loans. 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 and evaluating the opportunity to develop a mortgage-backed securitization program in the near future. Sumita 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 and reported as our Homegenius segment. 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 the expenses to reflect the market opportunity we see for each business. As I've mentioned on previous calls, we do think about and assess these three businesses separately. Our real estate services business, including a single-family rental due diligence, REO management, and valuations has remained profitable and maintains a leading market position. Our title business, which has undergone meaningful expense reductions to align to the current environment, 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. Our real estate technology business, branded Homegenius, is a real estate platform as a service model. The platform utilizes our proprietary Homegenius IQ, which combines data and analytics with computer vision and AI-powered tools to help consumers make smarter home buying, owning, and selling decisions. This technology business has been most impacted by the mortgage and real estate market conditions. And as such, we're taking actions in the second quarter to significantly restructure our expense run rate related to this business. We expect to provide an update on the actions we are taking and the impact on our expenses during our second quarter call. Turning now to the housing market. Recent industry forecasts project a total mortgage origination market for 2024 of approximately $1.8 trillion, which would represent an increase of 15% compared to 2023. This is lower than the outlook at the start of the 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. Based on the origination forecast, we estimate that the private mortgage insurance market will be approximately $300 billion in 2024, consistent with the prior year. 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, the housing market remains supply constrained, which we expect will keep overall home value stable to slightly positive from an HPA perspective. It is also important to note here that most borrowers in our insured portfolio have significant embedded equity in their homes, which helps to mitigate the risk of loss by decreasing both the frequency and severity of paid claims, which positively impact our default and cure trends. In fact, we estimate that as of the first quarter, 89% of our insurance in force policies had at least 10% embedded equity and 80% of our defaulted loans had at least 20% embedded equity. Overall, our outlook for the mortgage insurance business remains positive. 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 PMIERs capital framework, dynamic risk-based pricing, and the distribution of risk into the capital and reinsurance markets. We believe this is recognized on Capitol Hill on both sides of the aisle and that we are well-positioned to fulfill our important role in the housing finance system.

Sumita Pandit, CFO

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 of $152 million or $0.98 per diluted share compared to $0.91 per diluted share in the fourth quarter of '23. Adjusted diluted net operating income per share was slightly higher than the GAAP metric at $1.03 for the first quarter compared to $0.96 for the previous quarter. 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 $29.30. 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 $0.245 per share. 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. Turning now to the detailed drivers of our results. Our revenues continue to be strong in the first quarter of '24. 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 premiums earned. 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 in net premiums earned in the quarter. Contributing to the growth of our insurance in force was $11.5 billion of new insurance written in the first quarter of '24 compared to $10.6 billion written during the fourth quarter of '23. 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. We provide more detail on our persistency trends on Slide 10. We expect our persistency rate to remain strong given current mortgage rates and the overall economic outlook. As of the end of the first quarter, 85% of our insurance in force had a mortgage rate of 6.5% or less. 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. As shown on Slide 12, the in-force premium yield for our mortgage insurance portfolio remained stable in the quarter as expected at 38.2 basis points. With strong persistency rates and the current positive industry pricing environment, we expect our in-force portfolio premium yield to remain stable for the remainder of the year as well. The benefits we are experiencing in this higher interest rate environment from high persistency rates and investment income, which I'll discuss next, help demonstrate the durability of our mortgage insurance business model in varied interest rate environments. Our net investment income grew 18% year-over-year to $69 million in the first quarter. The rise in our net investment income has been driven by increases over the past year in both the size and the average yield of our investment portfolio. As 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, further illustrating the benefits of a higher rate environment to our financial results. Our unrealized net loss on investments reflected in stockholders' equity was $362 million at quarter end. 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 over time. I will now move on to our provision for losses. Credit trends continue to be extremely positive. Once again in the first quarter of '24, 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. Our 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. On Slide 16, we provide trends for our primary default inventory. Our primary default inventory declined by approximately 1,000 loans during the first quarter to approximately 21,000 loans at quarter end, as cures outpaced new defaults, representing a portfolio default rate of 2.1% at March 31, 2024, a decline from 2.2% in the prior quarter. I would like to highlight a new disclosure that we have included on Slide 17, which details the progression of cumulative cures for each quarterly new default cohort over the past several years. As shown on that slide, our cure trends have been very consistent and positive in recent periods, with approximately 90% of defaults curing within 4 quarters and 97% curing within 8 quarters, meaningfully exceeding our initial expectations. 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 cures in the quarter compared to the beginning default inventory. The number of new defaults reported to us by services was approximately 11,800 in the first quarter of '24, a decline of 6% from the previous quarter. 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. Positive 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. As a result, we recognized a net benefit of $7 million in our mortgage insurance provision for losses in the first quarter. I will now discuss a segment reporting change related to Homegenius. Whereas previously we had aggregated our title, real estate services, and real estate technology businesses as a separate reportable segment named Homegenius, effective this quarter we are including the results of these businesses in our all other category. This change reflects the way we manage and evaluate these businesses individually and incorporates materiality considerations consistent with current accounting guidance. It also aligns with the presentation of our mortgage conduit business, which we also report in all other, along with holding company investment income. As a result of our ongoing expense savings efforts, our combined consolidated cost of services and other operating expenses were $92 million in the first quarter of 2024, a year-over-year decrease of $2 million or 2% compared to the first quarter of '23. 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 '24 due primarily to the timing of our annual share-based incentive trends. Moving to our capital available liquidity and related strategic actions. 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. That PMIERs cushion 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. As we have noted previously, Radian Guaranty's ordinary dividend capacity is driven by its statutory unassigned funds balance each period. We have added a new schedule to Slide 21 to show the drivers of unassigned funds in more detail. This schedule highlights the role of contingency reserve releases in supporting our quarterly dividends as they help offset new reserves we established each quarter. Now that Radian Guaranty is releasing these reserves in material amounts, we expect the size of the quarterly ordinary dividend payments to increase beginning in the second quarter. This is consistent with our previously provided expectation for Radian Guaranty to pay $400 million to $500 million of ordinary dividends to Radian Group during 2024. 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. With our 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. We issued $625 million of unsecured senior notes at an attractive coupon of 6.2% in 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 6.625% senior notes that had been scheduled to mature in March '25. We intend to use the balance of the funds raised along with available holding company liquidity to pay off our $450 million of senior notes that mature in October of 2024. We expect to reduce our holding company debt-to-capital ratio to below 20% following the retirement of the senior notes later this year. Additionally, we repurchased 1.8 million shares during the first quarter at a total cost of $50 million. As of the end of the first quarter, our current share repurchase authorization had $117 million remaining and expires in January 2025. 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. 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. We also have an undrawn credit facility with borrowing capacity of $275 million, providing us with significant financial flexibility.

Richard Thornberry, CEO

Thank you, Sumita. 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 in varying interest rate environments, as well as the strength and flexibility of our capital and liquidity positions. We expect the consistent earnings and cash flows generated from our large in-force mortgage insurance and investment portfolios to allow us to continue operating from a position of strength and delivering value to our customers, policyholders, and stockholders. I would like to recognize and thank our dedicated and experienced team for the outstanding work they do every day. And now, operator, we would be happy to take questions.

Operator, Operator

And our first question comes from Bose George of KBW.

Bose George, Analyst

I first wanted to ask about capital return. You noted, obviously, your leverage is going to be below 20% by the end of the year. Could we see a ramp-up in buybacks in 2025, just given the leverage, capital levels, etc.

Sumita Pandit, CFO

Thanks, Bose, for the question. As I mentioned in my prepared remarks, in the first quarter, you saw us buy back $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, which you asked about, we do intend to continue buying back our shares. We do believe that our shares continue to trade below their intrinsic value. I also mentioned that our current purchase authority is $117 million as of March 31. 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 George, Analyst

Okay, that makes sense. I suppose the question was also about the timing because it appears your flexibility and capital levels are set to improve significantly, allowing you to increase that. When I consider your dividend along with the current buybacks, it amounts to approximately $350 million a year compared to year-over-year earnings, which are obviously much higher. So, I believe you have the capacity to increase that as a result.

Sumita Pandit, CFO

I think there is room for it to ramp up. We've not given specific guidance on a number yet, Bose. I think as we go forward during the rest of the quarters in the year and we have even more visibility into Radian Guaranty and Radian Guaranty's performance, we may 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, if you look at our historic track record, we are repurchasing about $50 million each quarter and we are paying dividends. As you know, we pay the highest dividends in the sector, and our dividend yield is the highest amongst all the MI peers.

Richard Thornberry, CEO

I would like to add to Sumita's comments. Thank you, Bose, for your questions. I want to emphasize that our track record clearly demonstrates our commitment to returning capital to shareholders through both dividends and share buybacks. While we often focus on historical performance rather than future predictions, we believe the capital strength of our business is a crucial aspect of our return profile moving forward. We will keep you updated, Bose.

Operator, Operator

And our next question comes from Terry Ma of Barclays.

Terry Ma, Analyst

So your default rate remains pretty low. I'm just curious, as your book seasons, is there a range we should expect that default rate to migrate to? And then secondly, do you expect your cure trends that you show on Slide 17 of your deck to change materially as that default rate migrates up?

Derek Brummer, President of Radian Mortgage Insurance

Terry, it's Derek. In terms of the default rate, 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, kind of the range we're in, I could see it ticking up a bit, remaining sub-3%. So we continue with the current macroeconomic conditions, I would see it kind of being below where it was pre-pandemic levels. In terms of cure 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 look at it on a year-over-year basis, has been pretty consistent. So in the first quarter, 34%, I think the previous year was 33%. So again, assuming similar macroeconomic conditions, I would expect that cure rate to continue to be pretty strong, the trend we've seen over the last several years.

Sumita Pandit, CFO

Yes. And I think the slide that Derek was referencing is Slide 17. And the numbers, if you look at the first column with the 0 quarter column, if you just track that from top to bottom, it gives you a good sense of how consistent that trend has been. So to what Derek just mentioned, it was 35% in Q1, 34% in Q1 of '23, 33% in Q1 of '22, and 28% in Q1 of '21. So really good trend with increasing cure rates if you look at it on a seasonal basis.

Terry Ma, Analyst

Got it. That's helpful. So then on your reserve policy, so the claims frequency and severity has obviously come in better than what you reserved for. I'm just curious, what's it going to take for you to maybe get a little less conservative in your reserve assumptions going forward?

Sumita Pandit, CFO

Yes. I think, Terry, 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, I would say, prudence as we think about projections and how we think about reserving. I think the way we do it today, we've been pretty consistent over the last few quarters. So we take our new defaults, we apply a default. We apply a default to claim roll rate, which we have kept at 8% for the last few quarters. In terms of our average severity, I think the assumption we make, it comes to about $63,000. That's our assumption for the first quarter. And then we apply a haircut of about 5% related to rescissions and denials. So again, I think we are trying to take a through-the-cycle view as we think about how to reserve, and that's how our reserving policy is set. And so there is, I would say, an element of prudence there as we think about performance through the cycle.

Operator, Operator

And our next question comes from Doug Harter of UBS.

Douglas Harter, Analyst

As you guys think about kind of your excess capital position, how are you thinking about other ways to potentially deploy it into the business, whether that's repurchasing some other reinsurance or are there other uses that you would be considering?

Richard Thornberry, CEO

Maybe Sumita and I can work together on this. Doug, this is Rick. I'll reiterate our commitment to being diligent and responsible in managing capital and seizing opportunities that arise, whether it's by freeing up trapped capital in our operating businesses or looking for ways to restructure to liberate capital. This past year, we've taken steps regarding our ILNs and repurchased shares while maintaining the highest dividend rate. As we look ahead, we have a variety of options to consider and strive to be excellent stewards of capital while maintaining a long-term perspective. Additionally, as mentioned earlier, we plan to use some of our holdco liquidity to pay down the amount due in 2024 on October 1. Our approach is thoughtful as we move forward. A positive aspect we face is the significant excess capital being released from Radian Guaranty to holdco, which will continue to create opportunities for us to enhance value for our shareholders. I want to emphasize our track record. We don’t often discuss future actions for many good reasons, but our plans and strategies have been carefully considered, and we will keep seeking ways to optimize returns for our shareholders.

Sumita Pandit, CFO

Yes. I want to address your question about insurance and reinsurance. As of the first quarter, our PMIERs excess available assets stood at $2.28 billion. This increase primarily occurred in the fourth quarter of last year when we executed several reinsurance transactions. We believed we were getting favorable deals at that time and proceeded with those transactions. However, the PMIERs excess is not the limitation that determines how much capital we can transfer from Radian Guaranty to Radian Group. For further clarity, we added a footnote on Slide 21. Our actual constraint in terms of capital movement from Radian Guaranty is our unassigned funds, which depend on Radian Guaranty's performance in terms of statutory net income and the contingency reserve releases we are currently observing. Therefore, from a capital perspective, our limitation is based on unassigned funds rather than the excess PMIERs assets, which are influenced significantly by our reinsurance activities.

Douglas Harter, Analyst

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 back to an earlier question about using most of your net income, just to think about that.

Sumita Pandit, CFO

Yes. I mean we could sweep all of it. So it's really zero million. So as long as it's positive, we can sweep all of it from Radian Guaranty to Radian Group. 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 see the $108 million this quarter versus about $5 million for the previous four quarters. So I think as long as it is positive, we are able to sweep that up to Radian Group.

Richard Thornberry, CEO

Yes. The key point is that it rebuilds every quarter through earnings and contingency reserve releases. It's not a fixed number we're limited to. As shown in the chart Sumita mentioned, that represents the build for one quarter, but it accumulates each quarter due to earnings and contingency reserve releases. We're experiencing a lengthy positive cycle concerning free cash flow and capital flow from Radian Guaranty to Radian Group.

Operator, Operator

Our next question comes from Mihir Bhatia of Bank of America.

Unknown Analyst, Analyst

This is Nate Richmond for Mihir. My first question was on Homegenius. I know it's being emphasized from the accounting perspective. But just curious, if I think about it like an operational perspective, and I know the current environment isn't that supportive, but will it still be like a focus of growth? And is it something you think you'll reinvest in as the rate environment gets a little better?

Richard Thornberry, CEO

Thank you for the question. I’d like to provide some insight into our plans for the three businesses. The group previously known as the Homegenius segment consists of three businesses: our real estate services, which includes the SFR due diligence, REO, and valuations, and our Homegenius technology platform business. Each of these is at different stages of development. The decision regarding the segment was about presentation and context for assessing those businesses. The title business has undergone significant expense reductions during a challenging cycle but continues to hold a strong market position and has been adding customers while receiving positive feedback, suggesting it's well-positioned for growth as the market improves. Our real estate services business has remained profitable, though not as much as before. We maintain a leading market position in those products and see opportunities for growth as the market changes. Both of these businesses will continue to operate under the Radian brand moving forward. The third business, focused on real estate technology under the Homegenius brand, has been the most affected by current market conditions, given the challenges faced by startups in gaining market traction, especially with mortgage lenders and real estate brokers amid ongoing litigation and market changes. We believe our team has done exceptional work, and based on feedback from market experts, we recognize the uniqueness of our offerings. We've decided to significantly reduce expenses in this area and refocus our market strategy. We aim to continue investing in the platform, albeit at a lower level, with a highly qualified and focused team. Additionally, we are shifting our focus toward identifying partners for this business. In the future, we will provide updates on our progress in exploring partnership opportunities and the impact of our expense savings. Each business has a distinct path forward, and we are concentrating on the opportunities we see, aligned with the appropriate expense levels.

Unknown Analyst, Analyst

Awesome. That's super helpful. And then switching gears a little bit. You guys pointed out earlier that cure activity has been like pretty strong. I'm just curious if anything that's like structurally changed in terms of borrower behavior or how services are dealing with these defaults and just trying to get a better understanding of like how the use of like modifications or remuneration programs are being used to lead to either more cures or a longer term to foreclosure?

Derek Brummer, President of Radian Mortgage Insurance

Yes, this is Derek. It's been pretty consistent with the trend. So I think it's a few things that's driving it. One, the employment market remains strong, so reemployment rates are high. Importantly embedded equity, so if you look at the default inventory, the new defaults that are coming into the portfolio, continue to have a lot of embedded equity. And then a change really that happened post-financial crisis and even post-COVID pandemic are all the programs put in place to help servicers to make sure that their ability to pay if they have embedded equity to make sure they have sufficient time to recover, which is very important for us, since we don't pay claims until there's kind of that transfer of title. So I don't think there's been any shift in terms of what we've seen, very consistent in terms of I think the nature of the defaults, the transition of the defaults through the inventory, and that's what we're looking at. So as you kind of think about cure rates, what you're really looking for in terms of trends are the complexion, 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.

Operator, Operator

One moment for our next question. And our next question comes from Soham Bhonsle of BTIG.

Soham Bhonsle, Analyst

Soham Bhonsle here from BTIG. I hope you're all doing well. Maybe first one on ROE. It looks like the last few quarters, you've been putting up, call it, 14% to 16%. 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 ranges going forward?

Sumita Pandit, CFO

Yes. Thanks for the question, Soham. So I think, if you look at our current quarter, as we mentioned, I think our adjusted net operating ROE was 14.5% for the quarter. Last year, we posted a 15% ROE. So 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 our loss ratios currently 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 or expect that the loss ratios will continue to remain where they are today. And we do expect loss ratios to begin to return to more normalized levels. Now obviously, when that happens, that would flow through into ROE. But as of now, I think over the last few quarters, we have continued to generate the 14% to 16% ROEs that you're seeing in our business.

Richard Thornberry, CEO

One additional point to emphasize is the excess capital we have, both within Radian Group and Radian Guaranty. As previously mentioned, we hold $1.1 billion of liquidity at the holding company along with $2.3 billion of excess PMIERs. It's important to consider how capital flows from Radian Guaranty to Radian Group. Currently, a significant portion of our return on equity is affected by the excess capital within the business. We will keep exploring this aspect further. There are various factors to consider right now, but while we typically refrain from providing forward guidance on ROE, analyzing both components will give you an understanding of the normalized ROE for this business over time.

Soham Bhonsle, Analyst

Yes, that's a good point. Regarding services, the gross margin has stabilized in the mid-20s over the past quarter or two. Two questions arise: do you see this as a sustainable run rate as we progress through the year? Also, could you discuss where the margin will normalize once you restructure the segment?

Richard Thornberry, CEO

Actually, I'm trying to reference the numbers that you're speaking to. When you say margins, can you just kind of...

Soham Bhonsle, Analyst

Gross margins on the business. So services revenue minus direct cost of services.

Richard Thornberry, CEO

Yes. I think it's important to mention that we are not providing any forward guidance regarding these businesses at this time. However, by the end of the second quarter, we will share more details about the changes we are implementing in those areas. Our aim for the upcoming quarters is to enhance the growth and contribution of these businesses, and the adjustments we are making now, along with previous changes, will help us seize the opportunities ahead. We anticipate having a clearer update by the second quarter to offer more precise information.

Sumita Pandit, CFO

Yes. Our operating expenses in the first quarter decreased by about 13% compared to the previous quarter. Last year, we reduced our expenses by approximately $77 million across cost of services and other operating expenses. At this point, we have not provided specific guidance on additional expense reductions. Regarding the 2023 figures, I suggest using our current expense base for modeling. However, as Rick mentioned, we will provide more guidance on this metric as we implement further actions and have specific updates to share.

Operator, Operator

I'm showing no further questions at this time. I'd like to turn it back to Rick Thornberry for closing remarks.

Richard Thornberry, CEO

Well, thank you for joining us today for the call. And hopefully, we were able to answer the questions that were most important to you, and we appreciate your interest in Radian. We look forward to talking to many of you all in the coming days, weeks, months, and we'll be back together here on our after our second quarter is completed. But thank you again for joining us today, and have a great day. Appreciate it.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.