Radian Group Inc. (RDN) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning. Thank you for standing by. Welcome to Radian’s First Quarter 2015 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, they will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host Senior Vice President Investor Relation, Ms. Emily Riley. Please go ahead.

Thank you and welcome to Radian’s first quarter 2015 conference call. Our press release, which contains Radian’s financial results for the quarter was issued earlier this morning and is posted to the Investors section of our website at www.radian.biz. This press release includes certain non-GAAP financial measure including a new non-GAAP measure introduced this quarter, which will be discussed during today’s call. A complete description of these measures and the reconciliation to GAAP, may be found in press release Exhibit F and on the Investors section of our website. During today's call, you will hear from S.A. Ibrahim, Radian’s, Chief Executive Officer; and Franklin Hall, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce Bazemore, President of Radian Guaranty; Joe D’Urso, President of Clayton; and Derek Brummer, Executive Vice President and Chief Risk Officer of Radian Group. 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 2014 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now, I would like to turn the call over to S.A.

Thank you, Emily. Thank you all for joining us and for your interest in Radian. I'm pleased to report on our first quarter as a simplified company with a clear strategic focus on our core strengths. By let's begin by taking a look at what the last year has meant for Radian. First, we achieved our first full year profitability in 2014 since 2006 laying the groundwork for our first quarter and for future growth and profitability. Second, we acquired Clayton and successfully introduced our mortgage and real estate services segment. Third, we eliminated all of our exposure to a financial guarantee credit risk with the sale of asset, and finally, just two weeks ago, we gained the clarity that the MI industry has been waiting for with the release of the final private mortgage insurer eligibility requirements of PMIERs and importantly announced our ability to immediately comply. In addition to clarity, these rules also brought capital belief when compared to the draft rules issued in July. All-in-all, the last 12 months have created a turning point for Radian. With a clear focused on our core strength, we are better positioned to leave our legacy exposure behind and drive long term value both from a larger and successful mortgage insurance business, as well as by leveraging our strong relationships and our increased capabilities in broadening our future sources of revenue. Turning to the quarter's results, earlier today, we reported net income from continuing operations for the first quarter of 2015 of $92 million or $0.39 per diluted share. This compares to net income from continuing operations for the first quarter of 2014 of $146 million or $0.68 per diluted share. You will find the key driver of GAAP EPS from last quarter on Slide 8 of our webcast presentation. Book value per share at March 31, 2015 was $11.53. Adjusted pre-tax operating income was $124 million for the first quarter of 2015 compared to the first quarter of last year of $84 million. Adjusted diluted net operating income per share for the first quarter of 2015 was $0.35. Turning to the Mortgage Insurance segment, we continued to grow and improve our Mortgage Insurance in force book, which is the primary driver of future earnings for Radian. We wrote $9.4 billion of new MI business in the first quarter, an increase of 38% over the first quarter of last year. While our insurance in force book grow only slightly in the quarter due primarily to high refi volume, we expect to grow our insured book this year and over time. The composition of our mortgage insurance portfolio continues to improve as the high quality and profitable new business we wrote since 2008 now represents 80% of our total mortgage, primary mortgage insurance risk in force or 70% excluding HARP volume. You may find these details on Slide 11. While it remains difficult to project future NIW, we are on track to write more new business in 2015 than we did in 2014, building on the higher first quarter 2015 NIW. We continue successfully to add new customers with 33 new lenders delivering business to Radian in the first quarter. We focus our product development initiatives on the growing purchase market of new homebuyers and earlier this month, we launched Mortgage Assure, a job lost protection product that is designed to encourage qualified, but low down payment borrowers to make the lead to home ownership. Concerned regarding job security is an important factor for borrowers in deciding whether to purchase a home and this product is intended to lessen this barrier-to-entry, which clearly will benefit borrowers and Radian, as well as addressing the significant industry challenge of getting more qualified first time buyers to participate in home ownership. We purchase insurance from a third-party to provide this protection, therefore there is no added credit risk to Radian. Credit trends were outstanding in the first quarter due to a strong economy and the impact of seasonality. The total number of primary delinquent loans declined by 11% from the fourth quarter of 2014 and by 24% from the same period last year. On Slide 20, you can see that our primary default count decreased to 40,440 loans and our primary default rates fell to 4.6% as noted on Slide 21. Slide 12 shows that for the first three months ended March 31, 2015, the earned premiums less incurred losses from our 2009 and later MI vintages of $150 million, creates a strong start to the year, with an expected run rate for the year that would exceed performance of these books. Even last year, the earned premium from the large and profitable books of business written after 2008 is expected to serve as the foundation for our profitable growth over the next several years. Turning to our Mortgage and Real Estate Services segment. First quarter total service revenues were $30.7 million and gross profits on services was $12.3 million. Slide 26, provides a two-year trend for this business where you can see the quarterly fluctuation in revenue. Overall, we are pleased with the performance of this new segment, which adds a diversified source of fee-based income revenue for Radian. The products and services in our Mortgage and Real Estate Services segment broaden our participation in the residential mortgage market value chain with services that complement our MI business and deepen our relationships. While we are in the early stage, we are encouraged by customer response, as we begin to gain traction in cross selling these services to our large and growing MI customer base. In March, Clayton acquired Red Bell Real Estate, a real estate brokerage that provides products and services including AVM, broker price opinions and advanced technology solutions for monitoring loan portfolio performance, and valuing residential real estate through a secure platform. The feedback from industry sources indicate that Red Bell is highly regarded and provides us with access to a wealth of data on real estate listings and sales that enhances the value of our Mortgage and Real Estate Services solutions. Turning to several topics important to our Mortgage Insurance business, the PMIERs were finalized and published nearly two weeks ago. What's most important is that Radian would be able to immediately comply with the PMIER using only a portion of the existing holding company cash. The PMIERs become effective on December 31, 2015, which is good news for our industry that has been long waiting for the certainty that these rules help to provide. We are pleased that many of the comments made by our industry were heard and answered including capital relief for the legacy loans that remained current through the worse economic downturn of our time. Under the PMIERs, a private mortgage insurers available assets must meet or exceeds its minimum required assets, and we estimate that if we were to comply today, we would need to contribute $330 million or less than half of our holding company cash. By year-end, this amount is expected to decrease modestly. We are pleased to put this issue behind us. Importantly, we estimate that the PMIERs capital requirement for the business we are writing today would translate into a 14 to 1 risk to capital ratio for which we expect to generate an after-tax return in the low to mid-teens. Another topic for our industry have been expected changes to LLPAs and G fees, which were released in tandem with the PMIERs. We continue to expect that private mortgage insurance will play a significant role in increasing low income and first time homeownership, and that our product is priced competitively for the vast majority of business we write today and that business is typically above a 700 FICO and at LTVs to 90% to 95%. The slight positive change made to the LLPAs with the removal of the adverse market fee was due very little to close the gap in pricing between conventional loans with MI and FSCS loans for higher LTV and lower FICO borrowers. However, we did see the credit box open slightly in the first quarter and we continue to capture business, where we either don't have a pricing advantage or the advantage is very small. From a home buyer's perspective, private mortgage insurance has the added benefit of being automatically cancelled when the mortgage balance rate is 78% of the home's original value versus FHA insurance that is paid over the entire life of the loan. In addition, the FHAs upfront premium increases the borrowers’ loan amount, which is another fixed life of loan cost adding to the home purchase amount. Before I turn the call over to Frank, let me emphasize. We had a strong first quarter as a simplified company with a clear strategic focus on our core strengths, with adjusted diluted net operating income of $0.35 per share and a book value of $11.53. We received clarity in the regulatory environment with the release of the final PMIERs. Radian is able to immediately comply using only a portion of our current holding company cash. We acquired Red Bell, a relatively small, but data rich company that increases the breadth and depth of offerings from our Mortgage and Real Estate Services segment. And now, I'd like to turn the call over to Frank.

Thank you, S.A, and good morning. As S.A. has mentioned our message, strategy and financial performance are far simpler than in previous periods and will begin to illustrate our position of strength and excellence. But before I share the results of the quarter, I would like to address a few points of clarification to aid in the analysis of our results. First, we have introduced a new non-GAAP operating measure this quarter, adjusted diluted net operating income per share, which was $0.35 for the first quarter and represents our adjusted pre-tax operating income from Exhibit E, tax affected using the quarter's effective tax rate of 33% for continuing operations. This compares to our GAAP earnings-per-share of $0.39. Our discontinued operations continued in the first quarter as the sale of our financial guarantee subsidiary closed on the first day of the second quarter April 1. We reported approximately $500,000 in income from discontinued operations this quarter, primarily as a result of adjustments to true up our estimated closing adjustments and transaction expenses. Our segment income statements in Exhibit E have been enhanced and present additional detail by segregating the allocated corporate expenses and interest expense in the separate line items. The presentation is intended to provide more transparency into the direct costs and contributions of the segments. Our effective tax rate on income from continuing operations is close to the 35% statutory rate. Our blended tax rate on income from discontinued operations is close to 100%, as we currently receive no benefit from our loss on sale for the quarter of $14 million due to our election to limit the amount of capital loss generated from a tax perspective. And lastly, the impact of our share count due to our convertible bonds is 48.6 million shares as shown on the Exhibit B. Moving now to the drivers of our revenue. New insurance written was $9.4 billion during the quarter compared to $10 billion last quarter and $6.8 billion in the first of 2014. NIW levels were higher than expected this quarter, even after taking into account typical seasonal reduction in volume, but were improved primarily due to an increase in refinancing. Refinancing represented 33% of volume this quarter compared to 22% in the fourth quarter of 2014. This elevated level of refinancing also muted our insurance in force growth for the quarter. We expect this level of refinances to come down and continue to expect our full year 2015 NIW and insurance in force to be higher than the full year 2014. The elevated level of refinancing also contributed to an increase in our mix of singles this quarter, which were 37% of our total NIW. The mix of singles production is expected to vary over time as the market conditions that favor singles versus monthlies also varies. As we consider the impact of this mix shift, we are mindful of this production in the context of the total portfolio impact on returns and its risk characteristics. Generally we have found that singles production levels of approximately one-third or less of our NIW volume are well absorbed into the portfolio and fit within the ranges of our target return and risk metrics. If the market should demand a higher mix of singles over an extended period of time, we may evaluate potential risk mitigation techniques to deal with the extension risk associated with single premium production. With refinancing volume expected to decrease, we also expect the level of singles to decrease to a level below one-third of our total new volume. Primary insurance in force increased slightly to $172 billion during the quarter, as new insurance written was mainly offset with runoff largely due to refinancing. Likewise, our 12 month persistency decreased from 84.2% in the fourth of 2014 to 82.6% in the first quarter of 2015 as noted on Exhibit N. Annualized persistency for the quarter alone was approximately 80%, and we expect persistency levels to increase for this quarterly low for the remainder of the year. Earned premiums benefited significantly from refinancing activity as acceleration of single premiums earned, primarily from cancellations increased approximately $8 million this quarter. This acceleration of premiums enhanced the expected returns on our book of single premium business and is an illustration of why we prefer a mix of singles and monthlies in our portfolio. Adjusting for the nonrecurring nature of this acceleration and the $9 million profit commission recognized on our fourth-quarter reinsurance agreement amendment, earned premiums were flat relative to fourth quarter 2014. Total services revenue for our Mortgage and Real Estate Services segment was $31 million for the fourth quarter as compared to $34 million in the fourth quarter, and as illustrated on Slide 26 we're up approximately 10% from the same quarter a year ago. The linked quarter decrease was partly driven by seasonality related to lower volumes in the first quarter and generally expected given fluctuations in revenues experienced in this business as presented in a broad historical context on Slide 26. The transactional nature of these businesses contribute to greater volatility in revenue. Moving now to our loss provision and credit quality; the loss ratio was 20% this quarter, as compared to 37% in the fourth quarter of last year and 25% in the first quarter of last year. We observed typical first-quarter seasonality improvement in new default, which decreased 15% over new defaults in the first quarter of last year, as well as positive development of approximately $20 million as a result of a decrease in our default to claim rate on new defaults from 16% to 15%. This decrease was driven by an observed decline in recent trends and as a reminder, assumption adjustments to our reserve model are made after sufficient experience has been observed to support the change. This results in either positive or negative development in our reserves, which would also impact our loss provision in the quarter of the change. Cumulative incurred loss ratios of business written after 2008 remain extremely low and are presented on new webcast Slide 14. 2009 is less than 20% and the years 2010 and 2011 after significant development are still below 10%. Our newer books of business in 2012 and subsequent years still remain below 5%. And as noted in the table on Slide 14 this trend continues into our most recent quarter. Primary mortgage insurance delinquency ratio is 4.6% in the first quarter compared to 5.2% in the fourth quarter of 2014. After receiving GSE approval of our BofA Settlement Agreement, we began the implementation of the settlement on February 1. Approximately $99 million of claims paid were related to this settlement and are footnoted on Slide 20. We expect the total of approximately $250 million to be paid out in the first half of the year related to this settlement. Our expected paid claims for the full year remain at $600 million to $700 million. Moving now to expenses. Other operating expenses for the quarter were $55 million as compared $86 million last quarter and $55 million in the first quarter of 2014. The fourth quarter included several items related to compensation accruals including an increase on the stock price that affected our cash settled stock based awards and an $11 million settlement of remedies related to services provided on legacy business. We are continually evaluating opportunities for ongoing efficiency and improvements in our expenses. And finally, I will turn to the discussion on capital. Final PMIERs financial requirements were released by FHFA on April 17, and given the significant revisions from the proposed requirements, we expect to be able to immediately comply by utilizing approximately $330 million of our existing holding company liquidity of approximately $700 million. The improvement in the PMEIRs financial requirements was primarily related to legacy loans originated in 2005 through 2008 and not on requirements for new business. We continue to expect our after tax returns to be in the low to mid-teens on new business. Our return estimates are based on among other factors the use of reinsurance, investment returns, our capital structure, loss estimates, expected mix of business and the level of delinquencies. While the utilization of reinsurance can enhance the percentage returns on our insurance business, it is detrimental to both topline revenue and overall earnings-per-share for our shareholders. Therefore, we will be selective on when and how to utilize reinsurance as an enhancement to returns versus as a risk mitigation strategy to address concentrations in our portfolio. The clarity provided by PMIERs has an impact on our ongoing capital planning, and will provide valuable insights when optimizing our plans. Reinsurance will focus on optimizing risk exposure in the overall portfolio, our capital structure will focus on lowering the overall cost of capital and enhancements that may facilitate rating agency improvements. We expect to maintain sufficient holding company liquidity to address strategic priorities, and additionally we expect to receive modest dividends from our services segment after funding of the interest expense on our 2019 senior debt. But as these are growth businesses by nature, they may require some further support to the extent they pursue additional growth initiatives either organically or through acquisition. As a reminder, our fee based businesses are an important part of our strategy and represented diversification of our revenues and are more capital efficient than our legacy insurance businesses. We have been very pleased with the performance of our services segment on a standalone basis, and additionally by the way in which we are able to leverage our relationships with our institutional clients both with mortgage insurance and other services. And now, we will open up the call for questions.

Thank you. [Operator Instructions] Our first question today comes from the line of Mark DeVries with Barclays. Please go ahead.

Could you talk about, what if any buffer you don't want to hold on day one, kind of over your minimum required assets?

This is Frank, that's a great question. And I would tell you that, that question among others are going to be addressed in the context of the overall capital planning exercise that I spoke up, so that is certainly something that we'll keep in mind and something that is important as we look at the final PMIERs rules and the expected timing on which they may adjust some of their requirement. So it will all be included in that overall capital planning exercise, but great question.

Okay. Fair enough. Given how firm the reinsurance market are here, are you thinking at all about potentially -- comments aside about how your reinsurance is kind of dilutive to the topline? About potentially adding a little more reinsurance as opposed to having to push cash down at the Holdco that you could use for other purposes?

Sure. This is Frank again. I would again put that in the context of the overall capital planning, but as we do have significant relief from the final PMIERs rules, really the way we're looking at reinsurance is really a risk optimization process in our portfolio, but it's certainly something that we will evaluate and not take off the table.

Okay. And then finally for S.A. are the thing you're hearing about to the cancel of the FHFA will be launching a pilot program for deeper MI.

Yes, and we've been hearing that and Teresa will answer that more fully.

Yeah. This is Teresa. Certainly there have been continued discussions with the FHFA and the GSEs, and one of the important pieces for having that further discussion is been getting the PMIERs behind us, so that there would be no question about the ability of MI to support deeper cover. The MBA has continued to really advance this and they said they're going to continue to do that particularly now, that the final PMIERs are out. So that dialogue is continuing. I don't know at this point, you know what the next step will be yet, but we're certainly continuing to have those discussions.

And Mark as you know, we've been advancing the argument for MIs to play a bigger role in terms of deeper coverage and broader role in the industry. Now with the counterparty strength issues for MI being -- having being addressed with the PMIERs, we are in a stronger position to keep advancing their argument and hopefully we'll see progress in Washington, hardest it is to predict.

Okay, but no sense that everything is eminent here?

I wouldn't say that there's anything eminent at this point.

Okay. Thank you.

Our next question today comes from the line of Bose George representing KBW. Please go ahead.

Hey, good morning. First just on operating expenses, can you talk about the run rate for the expense ratio? Also just the number this quarter was -- was there any reallocation, the comment you mentioned earlier that from different segment side impact of the expense ratio?

The first question as far as effective run rate, absence the unusual items that we called out on quarter-over-quarter comparison that this is about where we will be operating with some, I would say slight fluctuation, perhaps up or down depending on the results of our efficiency evaluation initiatives, but it is a fairly normalized quarter that we expect. And then your question on segments again please.

Yeah. I was just wondering whether there was any corporate reallocation of expenses that drove the low expense ratio at all or was it just the same as last quarter.

No the present, I mean, the allocation methodologies remained unchanged this quarter relative to the prior quarter.

Great, thanks. Then actually just going over to Slide 14, if I just look at that, it looks like some of the years pretty seasoned stuff like 2010 seems to be peaking at very low loss ratios, can be sort of extrapolate from that at least for the 2010 to 2014 books in terms of those loss ratios, presumably remaining very low?

Derek, can answer that Bose, we're very encouraged by that. Derek?

Yes, I agree. I mean, looking at those trends, obviously there has been a benefit there in terms of ratably appreciating home prices and interest rates being low, which actually impacts prepaid, but looking at that and kind of assuming this current economic environment when I look at 2010 to 2012, I'm seeing those trend into probably the upper single digit, certainly the single digit, 2013 to 2014, it's still early in its development, but looking at that, I think that's trending below 15% and those could be also as well, I would say in the upper single digits. Again, that's going to be dependent upon economic development, obviously to see a downturn that's going to put some stress on those.

And Bose, we added this slide because we were hearing from our investors, from people like you that you needed more information to see how this -- these trends were developing.

Yeah, absolutely, that's extremely useful. Thanks. And actually just last one just on the FHA. When the price reduction happened earlier in the year, I think you guys had said, something like 20% of your volume was kind of on the cost, where FHA might have an advantage. Now its several months of competition, you have the new prices, do you have a feel for what the real impact has been over the last couple of months?

Teresa?

Yeah. We haven't seen much of an impact, in fact at this point. And based on sort of the market intelligence we've been able to get, it seems as if the focus has been on refinancing existing FHA loan. I think the fact that as S.A. mentioned in his remarks, the fact that there is still cancellation with respect to the MI, which gives consumer an advantage later in the loan cycle, and the fact that it was especially with MI, conventional MI you can move forward with not having additional MIPs factored into your loan amount, which you're going to pay over the life of the loan. I think those things are helping us, but so far it doesn't appear that there has been any major impact at all from that change.

Okay great. Thanks a lot.

Our next question today comes from line of Eric Beardsley with Goldman Sachs. Please go ahead.

Thank you. Just one follow-up on some of the commentary about the premium this quarter, I think you mentioned that there was a $8 million benefit from single premium cancellation and perhaps $9 million profit commission that you had in this quarter. So I was just curious what the, I guess run rate for the premium rate would be going forward if I adjust for those, I get somewhere closer to 48 basis points?

So keep in mind the $9 million was a fourth quarter last year event, so that was the fourth quarter. Now, the $8 million is the adjustment you would make to the current quarter.

Got it, okay. So in terms of the quarter to quarter fluctuation going forward, is this been just the -- if you were to adjust for the $8 million in this quarter that's a pretty good run?

I think so yes.

Okay, great. And then I guess, as you think about the profitability of Clayton moving forward, how can we see the margins of that business develop either, the non-agency market comes back or as you work through some of these efficiency processes?

Joe, why don't you answer that?

Yeah. Thanks, Eric. I think that certainly the non-agency market coming back would significantly impact both growth and revenue, as well as kind of the overall efficiencies. We think that that's not coming this year, maybe not anytime soon, but certainly that will be a significant impact. We also have a number of internal processes around technology and process improvement that we think will increase our margins and make us more efficient and certainly the acquisition of Red Bell, and some of the great technology that they have will certainly help Clayton processes around some of our REO management, as well as some of our valuation management, and that'll also make us more efficient and increase our margins.

This is Frank. I would just also add to that. Keep in mind that, that particular segment has more of a variable cost structure associated with it, so as revenues grow, you'll see the margin expand in that business a bit as the incremental expenses are associated with incremental revenue as well.

Okay, great. And then just lastly. Is there anything you can share on the competitive environment you're seeing on the single premium business and what the discount might have been versus your rate card this quarter?

Teresa?

Yeah, I mean, I think that we've continued to see some competitiveness in this regard, and it'll be interesting to see what happens as the FHFA and the GSE's have indicated that they're going to make some adjustment to the PMIERs, for business going forward in respect to single premium business. So -- but we don't comment on sort of the amount at a discount.

Great. Thank you.

Our next question today comes from the line of Mackenzie Kelley representing Zelman & Associates. Please go ahead.

Thanks, good morning. I kind of wanted to talk about Radian's market share overall in the industry. It looks like although the growth was strong, it was maybe not as robust as some of the other companies that have reported thus far have shown, so just kind of wanted to get your perspective on how you think Radian's market share develops during the quarter? And more importantly, going forward coming off of last year's share loss, is it a priority to grow market share at this point and how do you think about that going forward?

It's hard to estimate market share because I don't believe everybody has reported yet. But from what we can tell we should be stable to better than we were, and we'll find out when the market share numbers come out. Our philosophy in terms of market share is really, it's one of the things we look at, but our philosophy is more to act in what we believe is in the best interest of our shareholders and that goes towards finding the right balance between the business we write in terms of short-term profitability, as well as the long term profitability of the relationships we have. We want to continue to deliver long-term value in our relationships and we might pull up short-term profitability. And as you saw in the last quarter, we actually did a pretty good job of balance that. We have competitively very decent short-term profitability and we have very strong relationship, which can continue to benefit us in the future.

Okay, great. And just a follow-up on that, on the 33 new lenders that you noted where new to delivering business this quarter. What type of lenders are those, are those kind of smaller regional, can you give any color there?

Teresa, do you want to answer that?

I think, we continue to focus on everything from large to small lenders though that is kind of a combination of different sizes. And as we continue that we see a mix of what we're adding on a quarter-to-quarter basis it might change, but we continue to focus on their large prospects, as well as smaller prospects.

Okay. Thank you.

Our next question is from the line of Geoffrey Dunn with Dowling and Partners. Please go ahead.

Good morning. First question, do you have any relationships where your singles business is more than 50% of the business you're getting from a customer?

Maybe a very small number, but that's it.

Geoff, we don't generally comment on anything relationship specific there. So the color we've given is probably the best we can do for you.

I just wonder because you talk about it being a balanced portfolio business, but its low ROE business, so I just want to make sure that if you had a sizable amount of customers if that was the case, I'd want to understand more how you approach that portfolio of balancing. The other question, in the pool business I think you saw some more positive development this quarter and you saw a pretty material development last year, what continues to drive that positive development?

In terms of the pool, some of them is just natural run off. We also had a reduction in just the pool exposure. Again, looking at pool exposure, it's predominantly pre-2005. So again, that's experienced a lot of credit burnout and we continue to reduce the size of it over time as it runs off.

Okay. And then last question, as we think about the pace of potential incidents, such assumption improvement on the new notices. What do you think is a reasonable assumption given the trends you've seen, you lowered I think by a point this quarter. On an annual basis, what's a reasonable shift in that as we continue to see credit improvement?

So looking at past history, I think that you could see potential assuming you see the trend developing as we've seen in the past, I would say on an annual basis 1, maybe 2 percentage points you could see on kind of the high-end.

Okay, great. Thank you very much.

Thanks, Geoff.

Our next question is from the line of Chris Gamaitoni with Autonomous Research. Please go ahead.

Thanks for taking my call. On the return commentary, mid to low teens, is that of the insurance company and does it take into account any potential Holdco leverage?

So generally what we've, the list of considerations that we've mentioned certainly does consider the capital structure of the organization and potential reinsurance, which is why we're comfortable with that range the low to mid-teens really varies widely based on your assumption there.

But it's not factoring in leverage at all, Holdco.

That's correct.

It's not?

It is not at this point.

Okay, and on reserving -- reserve per, you know, net new development increased again this quarter, I believe to 11.8000 [ph] and if we look at the reserving per -- in the early stage it said, I believe 13,000, which is the highest since you began reporting. Is there anything going on, on that, and that is really the Bank of America settlement, it's just -- at this point of cycle, you would think the reserve per initial default would be declining not increasing?

This is Derek. So in terms of looking at new defaults, overall reserve per default has been increasing. What that have to do with is the distribution of the default. So over time, the distribution of the defaults you have relatively more of them, that has been delinquent for a longer period of time or they're in for closure stage, which means they have a higher defaults and claim rate, so that's driving the average up. In terms of new defaults, I'd point out that 15% that we disclosed that applies to brand new default, so in this case essentially March default, and then what you do is, that's an ultimate rate and then you adjust the conditional rate each month. So as the distribution of default become more aged, it just increases over time the per default research.

Great. But if I look at reserves per delinquency on three month or less, that increased interestingly about 13.9000, which is the highest since…

That's right, and what's driving that, again, that has a blended rate. So what we're seeing with respect to that is, you have a pretty high cure rate on the brand new defaults, particularly in the first quarter, which you'll kind of see in our chart in terms of kind of two to three month payment bucket. So then what you have to do, we're still applying a new conditional rate for those that have been in default maybe for a month or two and that increases. So again, it's going even in that bucket, the new defaults you have a distribution. You have some that have been in default for one month, two month and three months, so it's that distribution that could change and also you have to some extent just the size of the loans that are coming into basically the default stage, there can be some variability with respect to that.

Okay. That makes sense. Thanks for taking my questions.

And our next question comes from the line of Sean Dargan with Macquarie. Please go ahead.

Thanks. I have a question about your severely aged primary loans and defaults, the 12 payment or more bucket. I am just wondering if you could qualitatively describe what's going on there because it seems that, that number has stayed elevated for a long time and just wondering what you're seeing in terms of claims. Do you think these are going to be paid at a slower rate than historically our lenders is not presenting claims. I am just wondering what's going on there?

We have a combination again with respect to that. We have new loans moving in there. Generally, I think the foreclosure process has been elongated, so I would expect over time looking at it, at least historically you are going to probably have more of your default distribution probably in that 12 month bucket. I would say in terms of trend it's been pretty stable, I would say over the last two year, so when we look at kind of the incremental defaults and incremental cures, and again you see cures coming out of that bucket, I mean this quarter in terms of the 12 flat, it was 4.5% and that's been a pretty steady trend and really our reserve is based upon that. So what we're seeing in terms of defaults and cures coming into that bucket. So that's like I said have been pretty stable.

Okay. And just if I could come back to singles one more time, so I could summarize your thinking. In the first quarter singles made up a larger percentage than you would want to have over a longer term, it's a little more than a third, but because you expect the pace of refis to decline, you expect the relative contribution of singles to decline?

That's correct.

Our next question comes from the line of Doug Harter representing Credit Suisse. Please go ahead.

Thanks. My questions have been asked and answered.

[Operator Instructions] And we will go the line of Jack Micenko's line with SIG. Please go ahead.

Frank, wondering if you could talk about the assumption on the loss ratio underlying that low-to mid-teens or the comment you made, I mean looking at Slide 14, which like you for including by the way, pretty wide disparity of outcomes there. So wondering what the sort of rule of thumb number you guys are using in that commentary?

In terms of our loss ratio, the back end of that return, essentially in terms of new business, it's roughly 15% to 20%. Again, these trends on recent vintages are developing below that, and when we're looking at our loss ratio, we're looking at a little more like through the cycle basis. So again, these newer vintages have benefitted from I think a very strong economic environment. But kind of a run rate on new business, I would say roughly 15% to 20% range.

Okay, thank you. And then, now that PMIERs is behind us and assuming capital buffer all that other stuff. Can you remind us of the converts if there's anything you can do there with cash and would you be willing to do something, you know, prospectively around those issues to maybe decrease some of the dilution impact?

We're looking at all options, and Frank…

Right. No, that's exactly right. And looking at all the options associated with the converts -- the premium settlement, there is the option to settle in shares or cash, but all of those variables are being considered in the overall planning exercise.

Okay, great. Thank you guys.

Our next question today comes from the line of Steve Stimac with FBR. Your line is open.

Hi good morning. Maybe last question on the singles, but to the extent that the FHFA or -- and the GSEs come out with a rule in June that just makes that product uneconomic for the industry or uneconomically attractive for the industry. How much of your single premium will toggle over to monthlies. And how much of that production percentage terms would toggle over to FHA or some other form of credit enhancement, any ideas on that?

The specifics of that are hard to project. There is a likely scenario where the FHFA comes out with thoughtful guidelines, we could see a reduction in the availability of singles in the industry and the likelihood that some of that business would turn into monthlies because the lenders would then not have the same access to singles from the insurers.

The assumption that the majority of those singles would convert to monthlies or would they sort of convert to FHA or similar form of credit enhancement, what's the view?

It is hard to act to that specifically, but there is a scenario under which there could be a meaningful conversion, which we are hopeful for.

Great, thank you guys.

And next, we'll go to the line of Darren Marcus with MKM Partners. Please go ahead.

I was just curious, first on the effective tax rate of about 33.3%, is that a good rate to use going forward or is there anything that you guys just thinking about to potentially lower that?

I think generally that's a good rate certainly for the foreseeable future.

Okay. And then with respect to holding company cash, you guys have a lot more now than you might have thought you would have had, you know, several months ago before PMIERs. So just wondering on what your thoughts are there and how to deploy that or anything?

Sure. So as I mentioned in the comments, it's something that they were considering in the overall capital planning exercise. Want to be mindful of maintaining enough holding company liquidity to take advantage of strategic opportunities, but sensitive to the impact it has on the returns of the business overall.

Okay. And then one final one. I think, Frank you mentioned in the prepared remarks that there were potential risk mitigating techniques on the singles risk extension. Can you elaborate on that, I'm just wondering what that entails?

Sure. So we're looking at a couple of different things, but I would say the most obvious one is reinsurance. And so we would evaluate that with some other things, but in a general way that would be it.

Okay. Thank you.

There are no further questions in queue. I'll turn the call back over to the speakers for closing remarks.

Thank you all for joining us today. The last 12 months have been a turning point for Radian as I mentioned earlier. Our strong results in the quarter are an excellent start as we pursue -- as a simplified company with a clear strategic focus on our core strength and relationships. We look forward to reporting our progress in the quarters ahead. Thank you for joining us today.