Washington, D.C. 20549
RADIAN GROUP INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
The number of shares of common stock, $.001 par value per share, of the registrant outstanding on February 23, 201725, 2019 was 215,084,611213,657,506 shares.
All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act and the U.S. Private Securities Litigation Reform Act of 1995. In most cases, forward-looking statements may be identified by words such as “anticipate,” “may,” “will,” “could,” “should,” “would,” “expect,” “intend,” “plan,” “goal,” “contemplate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “seek,” “strategy,” “future,” “likely” or the negative or other variations on these words and other similar expressions. These statements, which may include, without limitation, projections regarding our future performance and financial condition, are made on the basis of management’s current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. These statements speak only as of the date they were made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We operate in a changing environment where new risks emerge from time to time and it is not possible for us to predict all risks that may affect us. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. These risks and uncertainties include, without limitation:
Radian Guaranty’s ability to remain eligible under the PMIERs and other applicable requirements imposed by the FHFA and by the GSEs to insure loans purchased by the GSEs;GSEs, including PMIERs 2.0 and potential future changes to the PMIERs which, among other things, may be impacted by the general economic environment and housing market, as well as the proposed CCF that would establish capital requirements for the GSEs, if the CCF is finalized;
our ability to successfully execute and implement our business plans and strategies, including plans and strategies to reposition and grow our Services segment as well as plans and strategies that require GSE and/or regulatory approvals;approvals and licenses;
our ability to maintain an adequate level of capital in our insurance subsidiaries to satisfy existing and future state regulatory requirements;
changes in the charters or business practices of, or rules or regulations imposed by or applicable to, the GSEs, includingwhich may include changes in the requirements to remain an approved insurer to the GSEs, the GSEs’ interpretation and application of the PMIERs, to ouras well as changes impacting loans purchased by the GSEs, such as the GSEs’ requirements regarding mortgage insurance business;credit and loan size and the GSEs’ pricing;
changes in the current housing finance system in the U.S., including the role of the FHA, the GSEs and private mortgage insurers in this system;
any disruption in the servicing of mortgages covered by our insurance policies, as well as poor servicer performance;
competition in our mortgage insurance business, including price competition and competition from the FHA and VA andas well as from other forms of credit enhancement;
the effect of the Dodd-Frank Act on the financial services industry in general, and on our businesses in particular;particular, including future changes to the QM Rule;
the possibility that we may fail to estimate accurately the likelihood, magnitude and timing of losses in connection with establishing loss reserves for our mortgage insurance business;business or to accurately calculate and/or project our Available Assets and Minimum Required Assets under the PMIERs, including PMIERs 2.0, which will be impacted by, among other things, the size and mix of our IIF, the level of defaults in our portfolio, the level of cash flow generated by our insurance operations and our risk distribution strategies;
volatility in our results of operations caused by changes in the fair value of our assets and liabilities, including a significant portion of our investment portfolio;
legal and other limitations on dividends and other amounts we may receive from our subsidiaries; and
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in Item 1A, of this Annual Report on Form 10-K.and to subsequent reports filed from time to time with the SEC. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we issued this report. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements to reflect new information or future events or for any other reason.
Radian Group serves as the holding company for our insurance and other subsidiaries and does not have any operations of its own.
• Improved composition of mortgage insurance portfolio
» Our Post-legacy Portfolio represents 88% | | | – | 94% of our primary RIF (2)» Experienced 18% decline in total primary defaults in 2016 compared to 2015
consists of business written after 2008, including HARP loans |
| | • Completed a series–
| Increased risk-based pricing granularity and our volume of capital transactions to strengthen our capital and liquidity positions
» Improved debt maturity profile
» Reduced diluted shares outstanding by 9% (3)higher value products |
Took steps to optimize our capital and liquidity position | | • Entered into– | Repurchased over 3 million shares of Radian Group’s common stock |
| | | – | Added $450 million to Radian Group liquidity as a result of Radian Guaranty’s return of $450 million in capital to Radian Group in December 2018 |
| | | – | See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs” |
Expanded our risk distribution strategy to optimize the amounts and types of capital and risk distribution deployed against insured risk in order to: (i) support our overall capital plans; (ii) lower our cost of capital; and (iii) reduce portfolio risk and financial volatility through economic cycles | | | – | Executed the Single Premium QSR program, improving our return on capital, increasing our financial flexibilitymortgage insurance industry’s first simultaneous insurance-linked note and managing our MI business mixexcess-of-loss reinsurance placement totaling $455 million |
| | | – | See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Other 2018 Developments—Reinsurance” |
Increased excess of Available Assets over Minimum Required Assets under PMIERs to $567 million, or 19% of Minimum Required Assets Finalized a settlement with the IRS regarding the IRS Matter Launched our new branding to reflect One Radian, beginning the process to unite all of our businesses under one brand Aligned our sales team to provide integrated enterprise solutions to our customers ______________________ | | | (1) | Adjusted pretax operating income is a non-GAAP financial measure. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Consolidated—Use of Non-GAAP Financial MeasureMeasures” for athe definition and reconciliation of adjusted pretax operating incomethis measure to the most comparable GAAP measure, pretax income from continuing operations.income. |
| | (3) | Represents the net decrease in diluted shares resulting from our 2016 capital transactions, in each case as of the date of the completion of the respective transactions. |
For additional information regarding these items as well as other factors impacting our business and financial results in 2016,2018, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Business Strategy. Consistent with our long-term strategic objectives highlighted below, our business strategy is focused on growing our businesses, diversifying our revenue sources and increasing our fee-based revenues, while at the same time integrating our product offerings and processes more effectively and enhancing our operations.
| | RADIAN’S LONG-TERM STRATEGIC OBJECTIVES | • Grow and diversify earnings per share while maintaining attractive returns on equity
» Write high-quality and profitable NIW
» Grow Services fee-based revenue
» Diversify earnings by expanding our mortgage credit-risk products beyond traditional mortgage
insurance, while balancing the appropriate risk and return profile
| • Coordinate innovative product offerings and delivery to the marketplace, including integrated Mortgage Insurance and Services solutions | • Implement operational excellence initiatives to enhance our culture of continuous improvement |
Business Strategy. Radian’s objectives include driving strong growth, increasing value creation and providing attractive stockholder returns. Consistent with these objectives, our business strategy, as highlighted below, is focused on growing our businesses and diversifying our revenue sources, while at the same time enhancing our operations and developing a one-company market view by integrating our product and services offerings more effectively. Write high-quality and profitable NIW to drive future earnings, in a manner that enhances the long-term economic value of our insured mortgage portfolio Leverage our core competencies and increase our competitive differentiation in order to: | | | – | Grow our traditional mortgage insurance business in innovative ways |
| | | – | Expand our presence in the mortgage and real estate value chain beyond traditional mortgage insurance |
| | | – | Enhance our value to customers with increased diversification of services delivered by our integrated team |
| | | – | Maintain strong comprehensive enterprise risk management based on sound data and analytics |
| | | – | Enhance the quality, efficiency and performance of our operations and delivery of products and services |
Manage our capital and financial flexibility to optimize stockholder value Drive positive operating leverage by maintaining accretive revenue growth and effective expense management
We utilize various tools to assess the long-term economic value of our portfolio in order to identify opportunities to optimize stockholder value. For our Mortgage Insurance business, we evaluate the long-term economic value of our existing and future insured portfolio by using a measure that incorporates expected lifetime returns for our insurance policies, taking into consideration projected premiums, credit losses, investment income, operating expenses and taxes. These lifetime cash flows are then offset by the estimated cost of required capital, derived from our average cost of capital, to arrive at an estimated long-term economic value of our portfolio. We use this economic value to assist us in evaluating various portfolio strategies. A key element of our business strategy is to use our Services segment to broadendiversify our business and revenue streams by increasing our participation in multiple facets of the residential real estate and mortgage market value chain byfinance markets. In 2017, we undertook a strategic review of our Services business and made several decisions with respect to the business strategy that are designed to reposition this business to drive future growth and profitability. Following this strategic review, we committed to a restructuring plan and are focusing our efforts on offering a range of mortgage, real estate and real estate-related products andtitle services that complement our mortgage insurance business. This strategy is designed towe believe will satisfy an increasing demand in the market, growdiversify our fee-based revenues,revenue sources, strengthen our existing mortgage insurance customer relationships, attract new customers and differentiate us from our mortgage insurance peers. Our strategy for future growth includes expanding our capabilities to increase the depth and breadthSee “Services—Services Business Overview.”
Through the combination of our Mortgage Insurance and Services business segments, our broad array of capabilities within the primary stages of the mortgage value chain are illustrated below. Corporate Background.Radian Group has been incorporated as a business corporation under the laws of the State of Delaware since 1991. Our principal executive offices are located at 16011500 Market Street, Philadelphia, Pennsylvania 19103,19102, and our telephone number is (215) 231-1000. Additional Information. Our website address is www.radian.biz.www.radian.biz. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. In addition, our guidelines of corporate governance, code of business conduct and ethics (which includes the code of ethics applicable to our chief executive officer, principal financial officer and principal accounting officer) and the governing charters for each standing committee of our BoardRadian Group’s board of directors are available free of charge on our website, as well as in print, to any stockholder upon request. The public may read and copy any materials we file with the SEC, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that containsincluding reports, proxy and information statements, and other information, regarding issuers that file electronically withon the SEC andInternet site maintained by the SEC. The address of that site is www.sec.gov. The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on the websites and such information should not be considered part of this document.
Operating Environment
As a seller of mortgage credit protection and other credit risk management solutions, as well as a provider of mortgage, real estate and title services, the demand for our products and services is largely driven by the macroeconomic environment generally, and more specifically by the health of the housing, mortgage finance and related real estate markets.
Mortgage Insurance. Our mortgage insurance business is impacted by specific macroeconomic conditions and events that impact the mortgage origination environment and the credit performance of our portfolio of insured loans. The improvement in macroeconomic conditions since the financial crisis of 2007-2008, together with tighter credit requirements on new loans and an improvement in loan servicing, has contributed to the positive credit trends in our mortgage insurance portfolio, including a
lower level of new defaults and higher cure rates. Although this more restrictive credit environment has improved overall credit quality, it also has made it more challenging for many first-time home buyers to finance a home. In response, lenders and the GSEs recently have expanded their mortgage lending products, including to accommodate higher LTVs and debt-to-income ratios to address first-time home buyer demand and affordability considerations. Among other factors, private mortgage insurance industry volumes are impacted by total mortgage origination volumes and the mix between mortgage originations that are for purchased homes versus refinancings of existing mortgages. Generally, mortgage insurance penetration in the overall insurable mortgage market has been three to five times higher for purchase originations than for refinancings. As a result, despite an overall reduction in mortgage origination volume in 2018 compared to 2017 due to reduced refinancings, the private mortgage insurance market was larger in 2018 compared to 2017. Industry forecasts for 2019 project a mortgage origination market comparable to the market in 2018; however, purchase loan volume is expected to continue to increase, which is a favorable trend for private mortgage insurance. Given our expected mortgage insurance penetration rates, we expect the private mortgage insurance market in 2019 to be comparable to 2018. Based on industry forecasts and our projections, we currently expect our NIW for 2019 to be in the range of $50 billion. The environment for private mortgage insurers is highly competitive. We compete with other private mortgage insurers primarily on the basis of price, underwriting guidelines, overall service, customer relationships, perceived financial strength and reputation. In addition to other private mortgage insurers, we compete with governmental agencies, principally the FHA and the VA. See “Mortgage Insurance—Competition.” Services. The macroeconomic conditions and other events that impact the housing, mortgage finance and related real estate markets also affect the demand for our mortgage, real estate and title services offered through our Services business segment. Sales volume in our Services business varies based on the overall activity in the housing and mortgage finance markets and the health of related industries. While non-GSE or “private label” securitization remains limited compared to the pre-financial crisis market, this market continued to expand in 2018 due to larger institutions re-entering the market, suggesting increased potential growth in 2019. Similarly, the single-family rental market continued to experience strong demand in 2018, driven in part by early refinance activity in the rising interest rate environment, as well as a GSE program that drove volume, but was later suspended at the end of 2018. While regulatory demands on mortgage market participants continue to be significant following the financial crisis, regulatory enforcement actions on mortgage industry participants have been less frequent, reducing the demand for our servicing quality control services as target customers form alternative strategies on how best to manage risk in the current and projected environment. Post-financial crisis, REO inventory levels also continue to decline due to lower delinquencies and foreclosure activity, reducing demand for our REO asset management services. Further, as the mortgage market continues to develop post-financial crisis, alternatives for managing costs have become more critical to the overall value proposition for market participants. As a result, we have observed increasing market trends towards use of non-appraisal valuation alternatives, which we expect will continue to grow. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview—Business Strategy.” We believe that the combination of our mortgage insurance business with our unique set of diversified mortgage, real estate and title services provides us with an opportunity to become increasingly more relevant to our customers and that this combination serves as a competitive differentiator for us compared to other private mortgage insurance companies. Regulatory Environment Our subsidiaries are subject to comprehensive regulations and other requirements. State insurance regulators impose various capital requirements on our mortgage insurance subsidiaries, including Risk-to-capital, other risk-based capital measures and surplus requirements. In addition, the GSEs, as the largest purchasers of conventional mortgage loans and therefore the primary beneficiaries of most of our mortgage insurance, impose eligibility requirements, or PMIERs, that private mortgage insurers must satisfy to be approved to insure loans purchased by the GSEs. The PMIERs aim to ensure that approved insurers will possess the financial and operational capacity to serve as strong counterparties to the GSEs throughout various market conditions. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer. The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements. See “Regulation.” Changes in the charters or business practices of the GSEs, including the GSEs’ interpretation and application of the PMIERs, can have a significant impact on our business. On September 27, 2018, the GSEs updated their eligibility requirements by issuing PMIERs 2.0, which will become effective on March 31, 2019. Radian expects to comply with PMIERs 2.0 and to maintain a significant excess of Available Assets over Minimum Required Assets (PMIERs “cushion”) as of the effective date. If applied as of December 31, 2018, the changes under PMIERs 2.0 would not have resulted in a material change in Radian Guaranty’s Minimum Required Assets, but would have reduced Radian Guaranty’s Available Assets and therefore
would have reduced Radian Guaranty’s PMIERs cushion. The reduction in Radian Guaranty’s Available Assets is primarily due to the elimination in PMIERS 2.0 of any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. We expect the GSEs to continue to update the PMIERs periodically in the future, including potentially if and when the CCF is finalized. See “Regulation” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries.” Mortgage Insurance
Mortgage Insurance Business Overview Overview Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, as well as other credit risk management solutions, to mortgage lending institutions and investors nationwide.mortgage credit investors. Private mortgage insurance plays an important role in the U.S. housing finance system because it protectspromotes affordable home ownership and helps protect mortgage lenders, investors and investorsother beneficiaries by mitigating default-related losses on residential mortgage loans. Generally, these loans are made to home buyers who make down payments of less than 20% of the home’s purchase price for their home or, in the case of refinancings, have less than 20% equity in thetheir home. Private mortgage insurance promotes affordable home ownership by facilitatingalso facilitates the sale of these loans in the secondary mortgage market, most of which are currently sold to the GSEs. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance.” Operating Environment
We are a seller of mortgage credit protection and therefore, the demand for our products and services is largely driven by the health of the housing and mortgage finance market. Private mortgage insurance industry volumes are impacted by, among other factors, total mortgage origination volumes and the mix between mortgage originations that are for purchased homes versus refinancings. Although it is difficult to project future volumes, the overall mortgage origination market for 2017 is expected to be smaller than it was in 2016, largely due to an expected decrease in refinancings as a result of higher anticipated interest rates, partially offset by an increase in mortgage origination volume from home purchases in 2017. Historically, mortgage insurance penetration in the overall insurable mortgage market is three to four times higher for purchase originations than for refinancings. As a result of this meaningfully higher penetration for purchase originations, we expect the overall private mortgage insurance market to be only modestly smaller in 2017 compared to 2016 and we expect our NIW for 2017 to be comparable to our $50.5 billion of NIW written in 2016.
Our mortgage insurance business is also impacted by macroeconomic conditions and specific events that impact the mortgage origination environment and the credit performance of our underlying insured assets. The macroeconomic environment has contributed to the positive credit trends in our mortgage insurance portfolio, including a low level of new defaults as well as improved cure rates. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance.” At the same time, new lending laws and regulations enacted in response to the financial crisis have resulted in increased regulation and regulatory scrutiny and a more restrictive credit environment that has limited the growth of the mortgage industry.
The positive macroeconomic and credit trends, while contributing to the improved financial strength of existing private mortgage insurers, have resulted in new insurers joining the private mortgage insurance industry, and, more recently, in consolidation among industry participants. As a result, the environment for private mortgage insurers continues to be highly competitive. We compete with other private mortgage insurers primarily on the basis of price, underwriting guidelines, customer relationships, reputation, perceived financial strength and overall service. Pricing has always been competitive in the mortgage insurance industry and, with newer entrants joining the industry, price competition has continued as these newer entrants have sought to gain a greater presence in the market. In addition to other private mortgage insurers, we compete with governmental agencies, principally the FHA and the VA. See “—Competition.”
Regulatory Environment
Our insurance subsidiaries are subject to comprehensive regulations and other requirements. State insurance regulators impose various capital requirements on our insurance subsidiaries. For our insurance subsidiaries, these include Risk-to-capital, other risk-based capital measures and surplus requirements. In addition, the GSEs, as the largest purchasers of conventional mortgage loans and therefore the primary beneficiaries of most of our mortgage insurance, impose eligibility requirements that private mortgage insurers must satisfy to be approved to insure loans purchased by the GSEs. As a result, changes in the charters or business practices of the GSEs can have a significant impact on our business. In 2015, the FHFA issued the final PMIERs, which became effective on December 31, 2015 and established revised requirements for private mortgage insurers, including Radian Guaranty, to remain eligible insurers of loans purchased by the GSEs. The PMIERs Financial Requirements require private mortgage insurers to hold significantly more capital than under the previous eligibility requirements. In addition, the PMIERs requirements are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer. See “Regulation.” Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs Financial Requirements.
Mortgage Insurance Products Traditional types of private mortgage insurance include “primary mortgage insurance” and “Pool Insurance.”
Traditional Risk - Primary Mortgage Insurance. Primary mortgage insurance provides protection against mortgage defaults at a specified coverage percentage. When there is a valid claim under primary mortgage insurance, the maximum liability is determined by multiplying the claim amount, which consists of the unpaid loan principal, plus past due interest and certain expenses associated with the default, by the coverage percentage. Claims may be settled for the maximum liability or for other amounts. See “—Claims Management” below.
We mainly provide primary mortgage insurance on an individual loan basis as each mortgage is originated, but we also can provide primary mortgage insurance on individual loans in an aggregate group of mortgages after they have been originated. We primarily write insurance in a “first loss” position, where we are responsible for the first losses incurred on an insured loan subject to a policy limit. See “—Mortgage Insurance Portfolio—Mortgage Loan Characteristics.” The terms of our primary mortgage insurance coverage are set forth in a master insurance policy that we enter into with each of our customers. Our Master Policies are filed in each of the jurisdictions in which we conduct business. Among other things, our Master Policies set forth the terms and conditions of our mortgage insurance coverage, including: loan eligibility requirements; premium payment requirements; coverage term; provisions for policy administration;administration, servicing standards and requirements; exclusions or reductions in coverage; claims payment and settlement procedures; and dispute resolution procedures. Following Although the financial crisis,mortgage insurance we write protects the FHFA and the GSEs identified specific requirements to be included by all private mortgage insurers in theirlenders from a portion of losses resulting from loan defaults, it does not provide protection against property loss or physical damage. Among other exclusions, our Master Policies for new mortgage insurance applications received oncontain an exclusion against physical damage, including damage caused by hurricanes or after October 1, 2014. Among others, these included specific requirements related to loss mitigationother natural disasters. See “Item 7. Management’s Discussion and claims processing activities. Radian Guaranty incorporated these principles into its 2014 Master Policy. Loans that were already insured prior to the October 1, 2014 effective dateAnalysis of the 2014 Master Policy continue to be subject to the termsFinancial Condition and conditionsResults of Radian Guaranty’s Prior Master Policy. Any material changes to the 2014 Master Policy are subject to approval by the GSEs and state regulators.
One of the significant changes under the 2014 Master Policy is the inclusion of new rescission relief programs. Subject to certain limited exceptions, including fraud and misrepresentation, the 2014 Master Policy provides that we will not rescind coverage on a loan after 36 months if it meets the following criteria: no loan payment has been 60-days or more delinquent and not more than two loan payments were 30-days delinquent or more in the first 36 months; the 36th loan payment is not 30-days or more delinquent; all loan payments are made from a borrower’s own funds; and the loan is not subject to a workout. In addition, Radian Guaranty’s Confident CoverageSM program allows lenders to opt in for earlier rescission relief at 12 months if certain additional conditions are satisfied, including that the lender submits specific origination and closing loan file documents for Radian Guaranty’s review and the first 12 months of payments were timely and from the borrower’s own funds.
We generally provide primary mortgage insurance on an individual loan basis as each mortgage is originated. We also provide primary mortgage insurance on each individual loan in an aggregate group of mortgages after they have been originated. We primarily write insurance in a “first loss” position, where we are responsible for the first losses incurred on an insured loan subject to a policy limit. See “—Mortgage Insurance Portfolio—Mortgage Loan Characteristics.Operations—Overview—Operating Environment—Hurricanes.”
We wrote $50.5$56.5 billion and $41.4$53.9 billion of first-lien primary mortgage insurance in 20162018 and 2015,2017, respectively. Substantially all of our primary mortgage insurance written during 20162018 and 20152017 was written on a Flow Basis. Primary insurance on first-lien mortgage loans made up $46.7 billion or 98.0%The combination of our total direct first-lien insurance RIFNIW and a higher Persistency Rate resulted in an increase in IIF, from $200.7 billion at December 31, 2016, compared2017 to $44.6$221.4 billion or 97.5% at December 31, 2015. Traditional Risk - Pool Insurance. Prior to 2008, we wrote Pool Insurance on a limited basis. With respect to our Pool Insurance, an aggregate exposure limit, or “stop loss” (usually between 1% and 10%), is generally applied to the initial aggregate loan balance on a group or “pool” of mortgages. In addition, an insured pool of mortgages may contain mortgages that are already covered by primary mortgage insurance. In these transactions, Pool Insurance is secondary to any2018. Our total direct primary mortgage insurance that exists on mortgages within the pool. Stop loss and second loss features reduce our ultimate liability on individual pool transactions. The terms of our Pool Insurance policies are privately negotiated and are separate from the Master Policies that we use for our primary mortgage insurance.
Pool Insurance made up $1.0RIF was $56.7 billion or 2.0% of our total direct first-lien insurance RIF at December 31, 2016, as2018, compared to $1.1$51.3 billion or 2.5% at December 31, 2015.2017.
Non-Traditional Risk. In addition to traditionalOther Mortgage Insurance Products. We also have other mortgage insurance in the past, we provided other formsproducts that had RIF of credit enhancement on residential mortgage assets. Our non-traditional products included mortgage insurance on Second-liens and we also provided mortgage insurance on an international basis. We have terminated substantially all of our international mortgage insurance except for an immaterial amount remaining from our insured portfolio in Hong Kong.$0.5 billion at December 31, 2018, as described below:
| | | • | GSE Credit Risk Transfer. Part of our business strategy includes leveraging our core expertise in credit risk management and expanding our presence in the mortgage finance industry. We are currently participating in Front-end and Back-end credit risk transfer programs developed by Fannie Mae and Freddie Mac as part of their |
As part of our strategyinitiative to leverage our core expertise indistribute mortgage credit risk management and expand our presenceincrease the role of private capital in the mortgage finance industry, during 2016 we participated in new front-endmarket. As of December 31, 2018, the total RIF under the Front-end and Back-end credit risk transfer pilot programs developed by Fannie Maetransactions was $196.8 million. We will only experience claims under these Front-end and Freddie Mac. These pilot programs involve participation as part of a panel of mortgage insurance company affiliates in writing credit insurance policies on loans that are to be purchased by the GSEs in the future (i.e., front-end), subject to certain pre-established credit parameters. The policies provide excess of loss coverage for losses above a retention amount, as specified by the applicable GSE, subject to an aggregate limit of liability. In addition, this coverage, while limited with respect to the Loss Mitigation Activities available to us, is in a third loss position behind standard mortgage insurance and the applicable GSE retention amount. Our current commitment level for both of these pilot programs will result in premiums and required capital that are immaterial. We may participate in other GSEBack-end credit risk transfer programstransactions if the borrower’s equity, any existing primary mortgage insurance (if applicable) and the GSEs’ retained risk are depleted. In participating in these GSE transactions, we assume incremental risk (beyond that which we typically cover in our traditional mortgage insurance business) associated with the future.
Our total amountrisk of non-traditional RIFdefaults caused by physical damage, including natural disasters such as described above was $40 million at December 31, 2016, as compared to $49 million at December 31, 2015.hurricanes and wildfires, which is not covered by the underlying primary mortgage insurance. We regularly evaluate this risk, including the geographic diversity of the loans included in these transactions and our remote risk position, in assessing our participation in these transactions. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Business Strategy.”
| | | • | Pool Insurance. Prior to 2008, we wrote Pool Insurance on a limited basis. At December 31, 2018, Pool Insurance made up only $324.6 million of our total direct first-lien insurance RIF, as compared to $339.0 million at December 31, 2017. With respect to our Pool Insurance, an aggregate exposure limit, or “stop loss” (usually between 1% and 10%), is generally applied to the initial aggregate loan balance on a group or “pool” of mortgages. In addition, an insured pool of mortgages may contain mortgages that are already covered by primary mortgage insurance. In these transactions, Pool Insurance is secondary to any primary mortgage insurance that exists on mortgages within the pool. Our Pool Insurance policies are privately negotiated and are separate from the Master Policies that we use for our primary mortgage insurance. |
| | | • | Non-Traditional Risk. In the past, we provided other forms of credit enhancement on residential mortgage assets. Our non-traditional products included mortgage insurance on second-lien mortgage loans and we also provided mortgage insurance on an international basis. As of December 31, 2018, we have terminated all of our international mortgage insurance. Our total amount of non-traditional risk was $15.2 million at December 31, 2018, which consisted entirely of second-lien RIF, as compared to $24.4 million at December 31, 2017. |
Premium Rates We set ourPrimary Mortgage Insurance. A premium ratesrate is determined when insurance coverage is established,requested on a mortgage, which is generally atnear the time of loan origination. Premiums for our mortgage insurance products are established based on performance models that consider a broad range of borrower, loan and property characteristics.characteristics as well as current and projected market and economic conditions. Our premium rates are generally subject to regulation, and in most states where our insurance subsidiaries are licensed, our premiums must be filed, and in some cases approved, before their use. See “Regulation—State Regulation.Regulation—State Insurance Regulation.”
We setestablish our premium levels to be competitive within the mortgage insurance industry and to achieve an overall risk-adjusted rate of return on capital given our modeled performance expectations. Our actual returns may differ from our expectations based on changing market conditions and other factors. In addition, the impact of market conditions on our returns will vary based on, among other factors, whether the insurance is borrower-paid or lender-paid, and whether the payments are made monthly or in a single premium payment at the time of origination. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—Premiums.” Among other factors, we set our premium rates based on assumptions about policy performance, including, without limitation, our expectations and assumptions about the following factors:about: (i) the likelihood of default; (ii) how long the policy will remain in place; (iii) the costs of acquiring and maintaining the insurance; (iv) taxes; and (v) the capital that is required to support the insurance. Our performance assumptions for claim frequency and policy life are developed based on data regarding our own historical experience, as well as data generated from independent, third-party sources. Premiums on our mortgage insurance products are generally paid either on a monthly installment basis (“Monthly Premiums”) or in a single payment (“Single Premiums”). In addition, generally paid at the time of loan origination. There are also alternative products (“Other Premiums”) where premiums may be paid on our Monthly and Other policies may include premiums that are paidan annual installment basis or as a combination of up-front premium at origination plus a monthly renewal (split premium), as an annual or other periodic premiuminstallment. In addition, Other Premiums may be paid over multiple years or as premiums paid on mortgage loans after their origination. For Single Premium insurance, we receive a single premium payment that is generally paid at the time of loan origination and,or may include a refundable component. Some programs, subject to certain conditions, providesprovide coverage for the life of the loan.loan while others terminate when certain criteria are met. There are many factors that influence the formtypes of premiums we receive, including: (i) the percentage of mortgage originations derived from refinancing transactions versus new home purchases (refinancing transactions often are conducted with Single Premiums);purchases; (ii) the customers with whom we do business (e.g.(e.g., mix of Single Premium Policies and policies with Monthly and Other policies and Single Premium policiesPremiums varies by customer); and (iii) the relative premium levels we and our competitors set for the various forms of premiums offered. In 2016, 73% of our NIW was written with Monthly and Other premiums and 27% was written with Single Premiums, compared to 69% and 31%, respectively, in 2015. Mortgage insurance premiums can be financedfunded through a number of methods, and while the coverage remains for the benefit of the insured or third-party beneficiary, the premiums may be paid by the borrower or by the lender. Borrower-paid mortgage insurance premiums are generally paid either through separate escrowed amounts or financed as a component of the mortgage loan amount. Lender paidLender-paid mortgage insurance premiums are paid by the lender and are typically passed through to
the borrower in the form of additional origination fees or a higher interest rate on the mortgage note. Our Monthly and Other premiumsPremiums are generally established as either: (i) a fixed percentage of the loan’s amortizing balance over the life of the policy or (ii) as a fixed percentage of the initial loan balance for a set period of time (typically 10 years), after which itthe premium declines to a lower fixed percentage for the remaining life of the policy. The impact of market conditions on our returns will vary based on, among other factors, whether the insurance is borrower-paid or lender-paid, and whether the payments are made monthly or in a single premium payment at the time of origination. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—Premiums.” A change in capital requirements on insured loans can also affect our returns. See “Regulation—GSE Requirements—PMIERs—Private Mortgage Insurer Eligibility Requirements.” As the mortgage insurance industry migrates away from a predominantly rate-card-based pricing model, various pricing methodologies are being deployed with differing degrees of risk-based granularity, which may also lead to an increased frequency of pricing changes. We currently use proprietary risk and customer analytics, as well as a digital pricing delivery platform, to deliver loan level pricing electronically to our customers, including Radian’s RADAR Rates as further discussed below. Our pricing options vary in the level of granularity and we deliver them to our customers based on their business needs and loan origination process. In January 2019, we broadly introduced RADAR Rates as our newest pricing option that is powered by Radian’s proprietary RADAR risk model and analyzes credit risk inputs to customize a rate quote to a borrower’s individual risk profile, loan attributes and property characteristics. Our strategy is to consistently apply an approach to pricing that is customer-centric, flexible and customizable based on a lender’s loan origination process, as well as balanced with our own objectives for managing the risk and return profile of our insured portfolio. GSE Credit Risk Transfer Transactions. Credit risk transfer premium rates are established through a sealed-bid auction process in which potential insurers/reinsurers provide their desired allocation of the offering(s) at a specified premium rate. Radian evaluates each transaction and determines its bid based on performance models that consider a broad range of borrower, loan and property characteristics as well as market and forecasted future economic conditions. The GSEs set a uniform premium based on an assessment of the bids received and, based on their desired counterparty exposure, assign allocations to insurers/reinsurers. Underwriting Mortgage loan applications are underwritten to determine whether they are eligible for our mortgage insurance. We perform this function directly or, alternatively, we delegate to our insured lenders the ability to underwrite the mortgage loans based on compliance with our underwriting guidelines.
Delegated Underwriting. Through our delegated underwriting program we approve insured lenders to underwrite mortgage loan applications based on our mortgage insurance underwriting guidelines. Each lender participating in the delegated underwriting program must be approved by our risk management group. Utilization of our delegated underwriting program enables us to meet lenders’ demands for immediate insurance coverage and increases the efficiency of the underwriting process. We use quality control sampling and performance monitoring to manage the risks associated with delegated underwriting. Under the terms of the program, we have certain rights to rescind coverage if there has been a deviation from our underwriting guidelines. For a discussion of these limited rescissionRescission rights, see “—Claims Management—Rescissions.” As of December 31, 2016, 68%2018, 63% of our total first-lien IIF had been originated on a delegated basis, compared to 70%66% as of December 31, 2015.2017. Non-Delegated Underwriting.In addition to our delegated underwriting program, insured lenders may also submit mortgage loan applications to us and we will perform the mortgage insurance underwriting. In general, we are less likely to exercise our rescissionRescission rights with respect to underwriting errors related to loans that we underwrite for mortgage insurance. As a result, following a period of high Rescissions after the financial crisis, many lenders have chosen to have us perform the mortgage insurance underwriting on a non-delegated basis. Given the professional resources we need to maintain to underwrite mortgage loans, an increase in non-delegated underwriting demand generally increases our operating costs to support this program. Contract Underwriting. We also provide third party contract underwriting services to our mortgage insurance customers through our Services segment. See “Services—Services Business Overview—Services Offered—Loan Review, Underwriting and Due Diligence.Mortgage Services.” During 2016,2018, mortgage loans underwritten through contract underwriting accounted for 7.1%3.8% of insurance certificates issued on a Flow Basis, as compared to 5.7%5.4% in 2015.2017.
Mortgage Insurance Portfolio Direct Risk in Force Our business traditionally has involved taking credit risk in various forms across a range of asset classes, products and geographies. Exposure in our mortgage insurance business is measured by RIF, which for primary insurance is equal to the underlying loan unpaid principal balance multiplied by theour insurance coverage percentage.
The following discussion mainly focuses on ourOur total direct primary RIF, which represents 98.0% of our total mortgage insurance RIF of $47.7was $56.7 billion at December 31, 2016.2018. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF”for additional information about the composition of our primary RIF. See “—Mortgage Insurance Business Overview—Mortgage Insurance Products” for additional information regarding our Pool Insurance and non-traditionalother mortgage insurance RIF.
We analyze our mortgage insurance portfolio in a number of ways to identify any concentrations or imbalances in risk dispersion. We believe that, among other factors, the credit performance of our mortgage insurance portfolio is affected significantly by: general economic conditions (in particular, interest rates, home prices and unemployment); the age and performance history of the loans insured; the geographic dispersion and other characteristics of the properties securing the insured loans and the condition of local housing markets; the quality of underwriting at loan origination; and the credit characteristics of the borrower and the characteristics of the loans insured (including LTV, FICO, purpose of the loan, type of loan instrument, source of down payment, and type of underlying property securing the loan).
insured.
Direct Primary RIF by Year of Policy Origination and Persistency The following table shows our direct primary mortgage insurance RIF by year of origination and selected information related to that risk as of December 31, 2016:2018: | | | | December 31, 2016 | December 31, 2018 | | ($ in millions) | RIF | | Number of Defaults | | Delinquency Rate | | Percentage of Reserve for Losses | | Average FICO (1) at Origination (2) | | Original Average LTV(2) | RIF | | Number of Defaults | | Delinquency Rate | | Percentage of Reserve for Losses | | Average FICO (1) at Origination (2) | | Original Average LTV (2) | | 2005 and prior | $ | 2,236 |
| | 9,838 |
| | 12.7 | % | | 31.8 | % | | 676 |
| | 87.8 | % | | | 2006 | 1,369 |
| | 4,272 |
| | 11.9 |
| | 15.6 |
| | 687 |
| | 89.5 |
| | | 2007 | 3,279 |
| | 7,123 |
| | 9.8 |
| | 31.2 |
| | 701 |
| | 91.7 |
| | | 2008 | 2,259 |
| | 2,951 |
| | 6.1 |
| | 10.7 |
| | 726 |
| | 89.8 |
| | | 2008 and prior | | $ | 5,749 |
| | 13,095 |
| | 8.8 | % | | 70.3 | % | | 698 |
| | 89.9 | % | | 2009 | 468 |
| | 341 |
| | 3.0 |
| | 1.0 |
| | 753 |
| | 89.0 |
| 199 |
| | 156 |
| | 3.1 |
| | 0.7 |
| | 752 |
| | 88.5 |
| | 2010 | 417 |
| | 143 |
| | 1.6 |
| | 0.4 |
| | 763 |
| | 91.3 |
| 170 |
| | 67 |
| | 1.7 |
| | 0.3 |
| | 765 |
| | 91.7 |
| | 2011 | 917 |
| | 235 |
| | 1.3 |
| | 0.6 |
| | 762 |
| | 91.5 |
| 465 |
| | 141 |
| | 1.4 |
| | 0.6 |
| | 763 |
| | 91.9 |
| | 2012 | 3,734 |
| | 595 |
| | 0.9 |
| | 1.4 |
| | 762 |
| | 91.5 |
| 2,094 |
| | 457 |
| | 1.1 |
| | 1.8 |
| | 763 |
| | 91.8 |
| | 2013 | 5,902 |
| | 1,116 |
| | 1.0 |
| | 2.5 |
| | 757 |
| | 91.7 |
| 3,504 |
| | 892 |
| | 1.4 |
| | 3.7 |
| | 758 |
| | 92.2 |
| | 2014 | 5,607 |
| | 1,268 |
| | 1.2 |
| | 2.5 |
| | 746 |
| | 92.0 |
| 3,464 |
| | 1,174 |
| | 1.8 |
| | 4.7 |
| | 747 |
| | 92.3 |
| | 2015 | 8,469 |
| | 936 |
| | 0.6 |
| | 1.9 |
| | 748 |
| | 91.7 |
| 5,806 |
| | 1,366 |
| | 1.3 |
| | 5.9 |
| | 749 |
| | 92.0 |
| | 2016 | 12,084 |
| | 287 |
| | 0.1 |
| | 0.4 |
| | 749 |
| | 91.5 |
| 9,544 |
| | 1,649 |
| | 1.0 |
| | 6.1 |
| | 750 |
| | 91.8 |
| | 2017 | | 11,958 |
| | 1,586 |
| | 0.8 |
| | 4.9 |
| | 748 |
| | 92.3 |
| | 2018 | | 13,775 |
| | 510 |
| | 0.2 |
| | 1.0 |
| | 746 |
| | 92.5 |
| | Total | $ | 46,741 |
| | 29,105 |
| |
|
| | 100.0 | % | | | | | $ | 56,728 |
| | 21,093 |
| (3) |
|
| | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
______________________ | | | (1) | Represents the borrower’s credit score at origination. In circumstances where there is more than one borrower, the FICO score for the primary borrower is utilized. |
| | | (2) | Average FICO at origination and original average LTV are weighted averages based on the unpaid principal balances of the underlying mortgage loans.loans in our portfolio at December 31, 2018. |
| | | (3) | Includes 2,627 defaults at December 31, 2018 in the FEMA Designated Areas associated with Hurricanes Harvey and Irma, both of which occurred during the third quarter of 2017. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Provision for Losses.” |
The amount of time that our insurance certificates remain in force, which is affected by loan repayments and terminations of our insurance, can havehas a significant impact on our revenues and our results of operations. Our Persistency Rate is one key measure for assessing the impact that insurance terminations resulting in certificate cancellations have on our IIF. Because our insurance premiums are earned over time, higher Persistency Rates on Monthly Premium Policies increase the premiums we receive and generally result in increased profitability and returns. Conversely, assuming all other factors remain constant, higher Persistency Rates on Single Premium business lowerslower the overall returns from our insured portfolio, as the premium revenue for our Single Premium Policies is the same regardless of the actual life of the insurance policy and we are required to maintain regulatory capital and Available Assets supporting the insurance for the life of the policy. The Persistency Rate of our primary mortgage insurance was 76.7%83.1% at December 31, 2016,2018, compared to 78.8%81.1% at December 31, 2015.2017. Historically, there is a close correlation between interest rates and Persistency Rates, primarily as a result of increasedRates. Lower interest rate environments generally increase refinancings (which oftenthat result in the cancellation of our insurance) in lower interest rate environments.insurance. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for the details regarding theour Persistency Rates.
A higher Persistency Rate results in our IIF remaining in place for a longer period of time. Our IIF is one of the primary drivers of future premiums that we expect to earn over time. We expect our IIF to generate substantial income in future periods, due to the high credit quality of our current mortgage insurance portfolio and our expected Persistency Rate over multiple years. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” for more information.
Geographic Dispersion The following table shows, as of December 31, 20162018 and 2015,2017, the percentage of our direct primary mortgage insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 10 states in the U.S. (as measured by our direct primary mortgage insurance RIF as of December 31, 2016)2018): | | | | December 31, | December 31, | | | 2016 | | 2015 | 2018 | | 2017 | | Top Ten States | RIF | | Reserve for Losses | | RIF | | Reserve for Losses | RIF | | Reserve for Losses | | RIF | | Reserve for Losses | | California | 12.4 | % | | 6.4 | % | | 12.8 | % | | 6.5 | % | 12.3 | % | | 7.1 | % | | 12.4 | % | | 6.7 | % | | Texas | 7.8 |
| | 4.4 |
| | 7.5 |
| | 3.6 |
| 8.9 |
| | 6.6 |
| | 8.3 |
| | 5.5 |
| | Florida | 6.6 |
| | 11.8 |
| | 6.2 |
| | 13.1 |
| 7.0 |
| | 11.8 |
| | 6.8 |
| | 12.2 |
| | Illinois | 5.6 |
| | 4.8 |
| | 5.7 |
| | 5.3 |
| 5.2 |
| | 4.9 |
| | 5.4 |
| | 4.7 |
| | Georgia | 4.1 |
| | 3.5 |
| | 4.2 |
| | 3.5 |
| 4.0 |
| | 3.9 |
| | 4.0 |
| | 3.3 |
| | Virginia | | 3.5 |
| | 1.6 |
| | 3.5 |
| | 1.7 |
| | Arizona | | 3.2 |
| | 1.6 |
| | 3.1 |
| | 1.4 |
| | Colorado | | 3.1 |
| | 1.0 |
| | 3.0 |
| | 0.9 |
| | Maryland | | 3.0 |
| | 3.6 |
| | 2.9 |
| | 3.4 |
| | New Jersey | 3.6 |
| | 11.9 |
| | 3.8 |
| | 12.2 |
| 3.0 |
| | 7.7 |
| | 3.3 |
| | 10.8 |
| | Virginia | 3.4 |
| | 1.7 |
| | 3.5 |
| | 1.6 |
| | | Pennsylvania | 3.2 |
| | 3.7 |
| | 3.2 |
| | 3.7 |
| | | New York | 3.1 |
| | 12.7 |
| | 3.1 |
| | 12.1 |
| | | Arizona | 3.1 |
| | 1.3 |
| | 3.1 |
| | 1.3 |
| | | Total | 52.9 | % | | 62.2 | % | | 53.1 | % | | 62.9 | % | 53.2 | % | | 49.8 | % | | 52.7 | % | | 50.6 | % | | | | | | | | | | | | | | | | |
The following table shows, as of December 31, 20162018 and 2015,2017, the percentage of our direct primary mortgage insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 15 Core Based Statistical Areas, referred to as “CBSAs,” in the U.S. (as measured by our direct primary mortgage insurance RIF as of December 31, 2016)2018): | | | | December 31, | December 31, | | | 2016 | | 2015 | 2018 | | 2017 | Top Fifteen CBSAs (1) | RIF | | Reserve for Losses | | RIF | | Reserve for Losses | RIF | | Reserve for Losses | | RIF | | Reserve for Losses | | Chicago, IL-IN-WI | 5.3 | % | | 4.6 | % | | 5.4 | % | | 5.0 | % | 4.9 | % | | 4.7 | % | | 5.2 | % | | 4.5 | % | | New York, NY-NJ-PA | 4.7 |
| | 19.5 |
| | 4.9 |
| | 18.8 |
| 4.0 |
| | 16.6 |
| | 4.2 |
| | 18.9 |
| | Washington, DC-MD-VA | 3.5 |
| | 2.8 |
| | 3.6 |
| | 2.8 |
| 3.7 |
| | 2.7 |
| | 3.6 |
| | 2.9 |
| | Dallas, TX | | 3.4 |
| | 2.1 |
| | 3.1 |
| | 1.6 |
| | Los Angeles - Long Beach, CA | 3.5 |
| | 1.8 |
| | 3.7 |
| | 1.9 |
| 3.4 |
| | 1.8 |
| | 3.5 |
| | 1.8 |
| | Atlanta, GA | 3.3 |
| | 2.6 |
| | 3.4 |
| | 2.6 |
| 3.2 |
| | 2.9 |
| | 3.2 |
| | 2.5 |
| | Dallas, TX | 3.0 |
| | 1.4 |
| | 2.9 |
| | 1.2 |
| | | Phoenix/Mesa, AZ | | 2.4 |
| | 1.1 |
| | 2.3 |
| | 1.0 |
| | Philadelphia, PA-NJ-DE-MD | 2.6 |
| | 3.9 |
| | 2.6 |
| | 3.9 |
| 2.3 |
| | 3.0 |
| | 2.4 |
| | 3.5 |
| | Phoenix/Mesa, AZ | 2.3 |
| | 0.7 |
| | 2.3 |
| | 0.9 |
| | | Miami, FL | | 2.2 |
| | 4.4 |
| | 2.1 |
| | 4.6 |
| | Houston, TX | 2.1 |
| | 1.5 |
| | 2.0 |
| | 1.2 |
| 2.2 |
| | 2.5 |
| | 2.1 |
| | 2.1 |
| | Minneapolis-St. Paul, MN-WI | 2.0 |
| | 0.8 |
| | 1.9 |
| | 0.8 |
| 2.0 |
| | 0.7 |
| | 2.0 |
| | 0.7 |
| | Miami, FL | 2.0 |
| | 4.4 |
| | 1.8 |
| | 4.9 |
| | | Boston, MA-NH | 1.9 |
| | 1.7 |
| | 2.0 |
| | 1.6 |
| | | Denver, CO | 1.8 |
| | 0.4 |
| | 2.0 |
| | 0.4 |
| 1.8 |
| | 0.5 |
| | 1.8 |
| | 0.4 |
| | Riverside-San Bernardino, CA | 1.7 |
| | 1.3 |
| | 1.7 |
| | 1.2 |
| 1.8 |
| | 1.4 |
| | 1.8 |
| | 1.3 |
| | Boston, MA-NH | | 1.7 |
| | 1.5 |
| | 1.8 |
| | 1.6 |
| | Seattle, WA | 1.5 |
| | 1.2 |
| | 1.6 |
| | 1.3 |
| 1.6 |
| | 0.7 |
| | 1.5 |
| | 1.0 |
| | Total | 41.2 | % | | 48.6 | % | | 41.8 | % | | 48.5 | % | 40.6 | % | | 46.6 | % | | 40.6 | % | | 48.4 | % | | | | | | | | | | | | | | | | |
______________________ (1) CBSAs are metropolitan areas and include a portion of adjoining states as noted above.
| | | (1) | CBSAs are metropolitan areas and include a portion of adjoining states as noted above. |
Mortgage Loan Characteristics In addition to geographic dispersion, other factors also contribute significantly to our overall risk diversification and the credit quality of our RIF, including product distribution, underwriting and our risk management practices. We consider a number of borrower, loan and loanproperty characteristics in evaluating the credit quality of our portfolio and developing our pricing and risk management strategies. LTV.An important indicator of claim incidence in our mortgage insurance business is the relative amount of a borrower’s equity that exists in a home. Generally, absent other mitigating factors such as high FICO scores and other credit factors, loans with higher LTVs at inception (i.e., smaller down payments) are more likely to result in a claim than lower LTV loans. The average original LTV of our primary NIW in 20162018 was 91.4%92.5%, compared to 91.5%92.2% and 91.6%91.4% in 20152017 and 2014,2016, respectively. See the “Percentage of primary NIW” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for a breakdown of the composition of our NIW by LTV. Loan Grade/FICO Score.The risk of claim on non-prime loans is significantly higher than that on prime loans. We use our proprietary models to classify a loan as either prime or non-prime on the basis of a borrower’s FICO score, the level of loan file documentation and other factors. In general we consider a loan to be a prime loan if the borrower’s FICO score is 620 or higher and the loan file meets “fully documented” standards of our credit guidelines and/or the GSE guidelines for fully documented loans. Substantially all of our Post-legacy NIW after 2008 has been on prime loans. See the “Improved Characteristics of MI Portfolio” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for a breakdown of the composition of our RIF by FICO Score and origination vintage ranges. Loans that we categorize as Alt-A and A minus loans or B/C loansand below are considered non-prime loans due to lower FICO scores, reduced loan file documentation, and/or the presence of other risk characteristics. See the “Primary RIF by Risk Grade” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for a breakdown of the composition of our RIF by risk grade. Loan Purpose. Loan purpose may also impact our risk of loss. For example, cash-out refinance loans, where a borrower receives cash in connection with refinancing a loan, have been more likely to result in a claim than new purchase loans or loans that are refinanced only to adjust rate and term. See the “Percentage of primary RIF” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for the percentage of our RIF comprised of refinances.
Loan Size.Higher-priced Relatively higher-priced properties with larger mortgage loan amounts generally have experienced wider fluctuations in value than more moderately priced residences and have been more likely to result in a claim. The average loan size of our direct primary mortgage IIF as of December 31, 2018, 2017 and 2016 2015was $216.5 thousand, $210.0 thousand and 2014 was $203.2 thousand, $199.3 thousandrespectively.
Loan Purpose, Property Type and $196.8 thousand, respectively. Occupancy. We consider other factors, including property type, and occupancy type and loan purpose in assessing our risk of loss. In general, it has been our experience that our risk of claim is lower on loans secured by single family detached housing than loans on other types of properties, and is higher on non-owner occupied homes purchased for investment purposes than on either primary or second homes. Loan purpose may also impact our risk of loss. For example, cash-out refinance loans, where a borrower receives cash in connection with refinancing a loan, have been more likely to result in a claim than new purchase loans or loans that are refinanced only to adjust rate and term. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information about the credit quality and characteristics of our direct primary mortgage insurance.
Defaults and Claims Defaults. In our Mortgage Insurance segment, the default and claim cycle begins with the receipt of a default notice from the loan servicer. We consider a loan to be in default for financial statement and internal tracking purposes upon receipt of notification by servicers that a borrower has missed two monthly payments. Defaults also can occur due to a variety of specific events affecting borrowers, including death or illness, divorce or other family problems, unemployment, increases in the interest rates of adjustable rate mortgages, changes infactors impacting regional economic conditions a borrower choosing not to pay due to housing value changes that cause the outstanding mortgage amount to exceed the value of a home,(e.g., hurricanes, floods, wildfires or other natural disasters), or other events. The default rate in our mortgage insurance business iscan be subject to seasonality. Historically, our mortgage insurance business experiences a fourth quarter seasonal increase in the number of defaults and a first quarter seasonal decline in the number of defaults and increase in the number of Cures. While historically this historically has been the case, macroeconomic factors in any given period may influence the default rate in our mortgage insurance business more than seasonality. Since 2009, virtually all of our new mortgage insurance business production has been prime business. The loans from our 2009 and later origination years after 2008 possess significantly improved credit characteristics compared to our Legacy Portfolio. For example,portfolio originated in the years prior to and including 2008, including higher average FICO scores for the borrowers of these insured mortgages are higher compared to mortgages in our Legacy Portfolio.mortgages. In addition, refinancings under the HARP programs have had a positive impact onpositively impacted the overall credit quality and composition of our mortgage insurance portfolio because the refinancing generally results in terms under which a borrower has a greater ability to pay and more financial flexibility to cover the loan obligations. Our portfolio of business written sinceafter 2008 is now the beginningpredominant portion of 2009 has been steadily increasing in proportion to our total primary RIF. The sum of our 2009policies written after 2008 through 2016 portfolios2018 and our HARP refinancings accounted for approximately 88%94% of our total primary RIF at December 31, 2016,2018, compared to 84%92% at December 31, 2015. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance” for additional information about refinancings under the HARP programs.2017.
The following table shows the states that have generated the highest number of primary insurance defaults (measured as of December 31, 2016)2018) in our insured portfolio and the corresponding percentage of total defaults as of the dates indicated: | | | | December 31, | December 31, | | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | States with highest number of defaults: | | | | | | | | | | | | | | | | | | | | | | Florida | 2,666 |
| | 9.2 | % | | 3,571 |
| | 10.1 | % | | 6,122 |
| | 13.5 | % | | Florida (1) | | 2,023 |
| | 9.6 | % | | 5,337 |
| | 19.1 | % | | 2,666 |
| | 9.2 | % | Texas (1) | | 1,779 |
| | 8.4 |
| | 2,885 |
| | 10.3 |
| | 1,897 |
| | 6.5 |
| | New York | 2,211 |
| | 7.6 |
| | 2,682 |
| | 7.6 |
| | 3,161 |
| | 7.0 |
| 1,241 |
| | 5.9 |
| | 1,588 |
| | 5.7 |
| | 2,211 |
| | 7.6 |
| | New Jersey | 2,146 |
| | 7.4 |
| | 2,686 |
| | 7.6 |
| | 3,103 |
| | 6.8 |
| | | Texas | 1,897 |
| | 6.5 |
| | 2,019 |
| | 5.7 |
| | 2,215 |
| | 4.9 |
| | | Illinois | 1,534 |
| | 5.3 |
| | 1,894 |
| | 5.4 |
| | 2,600 |
| | 5.7 |
| 1,230 |
| | 5.8 |
| | 1,283 |
| | 4.6 |
| | 1,534 |
| | 5.3 |
| | California | | 1,214 |
| | 5.8 |
| | 1,264 |
| | 4.5 |
| | 1,426 |
| | 4.9 |
|
______________________ | | | (1) | Certain areas within these states are FEMA Designated Areas associated with Hurricanes Harvey and Irma and, as a result, defaults in these states are elevated at December 31, 2017. |
Claims. Defaulted loans that fail to become current, or “cure,” may result in a claim under our mortgage insurance policies. Mortgage insurance claim volume is influenced by the circumstances surrounding the default. The rate at which defaults cure, or do not go to claim, depends in large part on a borrower’s financial resources and circumstances (including whether the borrower is eligible for a loan modification), local housing prices and housing supply (i.e., whether borrowers are able to cure defaults by selling the property in full satisfaction of all amounts due under the mortgage), interest rates and regional economic conditions. In our first-lien primary insurance business, the insured lender must acquire title to the property (typically through a foreclosure proceeding) before submitting a claim. The time for a lender to acquire title to a property through foreclosure varies depending on the state, and in particular whether a state requires a lender to proceed through the judicial system in order to complete the foreclosure. Following the financial crisis, the time between a default and a request for
claim payment increased, largely as a result of foreclosure delays due to, among other factors, increased scrutiny within the mortgage servicing industry and foreclosure process. While delays in foreclosures have continued to extend the timing of claim submissions, as compared to historical experience, theseThese delays have been modestly improving as the economy recovers from the financial crisis. For our Pool Insurance, which represents less than 1% of our RIF at December 31, 2018, our policies typically require the insured to not only acquire title but also to actively market and ultimately liquidate the real estate asset before filing a claim, which generally lengthens the time between a default and a claim submission. Claim activity is not spread evenly throughout the coverage period of a book of business. Historically, for prime business relatively few claims are received during the first two years following issuance of a policy.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Provision for Losses” for various claims paid tables, including Direct Claims Paid by Origination Year. The following table shows the states with the highest direct claims paid (measured as of December 31, 2016)2018) for the periods indicated: | | | | Year Ended December 31, | Year Ended December 31, | | (In millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | States with highest direct claims paid (first-lien): | | | | | | | | | | | | New Jersey | | $ | 37.2 |
| | $ | 54.7 |
| | $ | 46.1 |
| | Florida | $ | 59.4 |
| | $ | 183.4 |
| | $ | 166.3 |
| 22.5 |
| | 45.7 |
| | 59.4 |
| | New Jersey | 46.1 |
| | 38.5 |
| | 31.4 |
| | | New York | | 20.4 |
| | 34.2 |
| | 26.6 |
| | Illinois | 32.3 |
| | 64.2 |
| | 73.5 |
| 13.8 |
| | 23.4 |
| | 32.3 |
| | New York | 26.6 |
| | 26.2 |
| | 17.8 |
| | | California | 23.1 |
| | 52.2 |
| | 80.8 |
| 8.9 |
| | 16.3 |
| | 23.1 |
|
In addition to claim volume, Claim Severity is another significant factor affecting losses. We calculate the Claim Severity by dividing the claim paid amount by the original coverage amount. Factors that impact the severity of a claim include, but are not limited to, the size of the loan, the amount of mortgage insurance coverage placed on the loan, the amount of time between default and claim during which we are expected to cover certain interest (capped at two years under our Prior Master Policy and capped at three years under our 2014 Master Policy) and expenses, and the impact of our Loss Mitigation and other loss management activities with respect to the loan. Pre-foreclosure sales, acquisitions and other early workout efforts help to reduce overall Claim Severity, as do actions we may take to reduce a claim payment due to servicer negligence, as discussed below in “Claims Management.” The average Claim SeveritySee “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Provision for loans covered by our primary insurance was 104.1% for 2016, compared to 105.8% in 2015 and 100.2% in 2014. Claim Severity remained elevated in 2016 due primarily to the continuing increased length of time between default and claim. The increase in the average Claim Severity in 2015 compared to 2014 was primarily impacted by claims paid related to the implementation of the BofA Settlement Agreement.
Losses.”
Claims Management Our claims management process is focused on promptly analyzing and processing claims to ensure that valid claims are paid in a timely and accurate manner. In addition, our mortgage insurance claims management department pursues opportunities to mitigate losses both before and after claims are received. We dedicate significant resources to mortgage insurance claims management. Claims. In our traditional mortgage insurance business, upon receipt of a valid claim, we generally have the following three settlement options: | | | (1) | payPercentage Option: Pay the maximum liability and allow the insured lender to keep title to the property. The maximum liability is determined by multiplying (x) the claim amount (which consists of the unpaid loan principal, plus past due interest for a period of time specified in our Master Policies and certain expenses associated with the default) by (y) the applicable coverage percentage;
|
| | | (2) | payApproved Sale Option: Pay the amount of the claim required to make the lender whole (not to exceed our maximum liability), following an approved sale; or |
| | | (3) | payAcquisition Option: Pay the full claim amount and acquire title to the property. |
Approved sales in which the underlying property has been sold for less than the outstanding loan amount are commonly referred to as “short sales.” Although short sales may have the effect of reducing our ultimate claim obligation, in many cases, a short sale will result in the payment of a claim in an amount that is equal to the maximum liability amount. Under our Master Policies, we retain the right to consent prior to the consummation of any short sales. Historically, we have consented to a short sale only after reviewing various factors, including among other items, the sale price relative to market and the ability of the borrower to contribute to any shortfall in the sale proceeds as compared to the outstanding loan amount. We have entered into agreements with each of the GSEs, pursuant to which we delegated to the GSEs our prior consent rights with respect to short sales on loans owned by
the GSEs, as long as the short sales meet the GSE guidelines and processes for short sales and subject to certain other factors set forth in these agreements. As a result, instead of reviewing each individual transaction prior to short sale with respect to GSE loans, we instead perform a post-claim quality review of these short sales to ensure that they met the specified requirements. We have the ability to terminate our delegated short sale agreements with the GSEs upon 60 days notice. We also provide for limited delegation authority to certain loan servicers for short sales under specific circumstances. For loans that are not owned by the GSEs and for which we have not granted specific delegation authority to the loan servicer, we perform an individual analysis of each proposed short sale and provide our consent to these sales when appropriate. Historically, we have consented to a short sale only after reviewing various factors, including among other items, the sale price relative to market and the ability of the borrower to contribute to any shortfall in the sale proceeds as compared to the outstanding loan amount. After a claim is received, our loss management specialists may focus on: a review to determine compliance with applicable loan origination programs and our mortgage insurance policy requirements, including: (i) whether the loan qualified for insurance at the time the certificate of coverage was issued, and (ii) whether the insured has satisfied its obligation in meeting all necessary conditions in order for us to pay a claim, including submitting all necessary documentation in connection with the claim (commonly referred to as “claim perfection”); and (iii) whether the loan was appropriately serviced in accordance with the standards set forth in our Master Policies; analysis and prompt processing to ensure that valid claims are paid in an accurate and timely manner; responses to loss mitigation opportunities presented by the insured; and management and disposal of acquired real estate. Radian Guaranty has entered into a Factored Claim Administration Agreement with Fannie Mae that applies to certain loans owned by Fannie Mae that were insured under the 2014 Master Policy for which a claim is submitted on or after October 1, 2018. Pursuant to the agreement, Radian Guaranty will determine the amount of covered expenses forming part of a loss (other than unpaid principal balance and delinquent interest) using pre-negotiated expense factors based on certain characteristics of the applicable loan and property. Claim Denials.We have the legal right under our Master Policies to deny a claim ifunder certain conditions, such as when the loan servicer does not produce documents necessary to perfect a claim, including evidence that the insured has acquired title to the property, within the time period specified in our Master Policies. Most often, a Claim Denial is the result of a servicer’s inabilityfailure to provide the loan origination file or other critical servicing documents for review. If, after requests by us, the loan origination file or other servicing documents are not provided to us, we generally deny the claim. If we deny a claim, we continue to allow the insured the ability to perfect the claim for a period of time specified in our Master Policies. If the insured successfully perfects the claim within our specified timelines,on a timely basis, we will process the claim, including a review of the loan to ensure appropriate underwriting and loan servicing. If, after completion of this process, we determine that the claim was not perfected, the insurance claim is denied and we consider the Claim Denial to be final and resolved. Although we may make a final determination internally with respect to a Claim Denial, it is possible that after we have a denied coverage a legal challenge to our decision to deny coverage may be brought within a period of time specified under the terms of our Master Policies. Rescissions.Under the terms of our Master Policies we have the legal right, under certain conditions, to unilaterally rescind coverage on our mortgage insurance policies. If we rescind coverage based on a determination that a loan did not qualify for insurance, we provide the insured with a period of time to challenge, or rebut, our decision. Typical events that may give rise to our right to rescind coverage include: (i) we insure a loan under one of our Master Policies in reliance upon an application for insurance that contains a material misstatement, misrepresentation or omission, whether intentional or otherwise, or that was issued as a result of an act of fraud or (ii) we find that there was negligence in the origination of a loan that we insured. We also have rights of rescissionRescission arising from a breach of the insured’s representations and warranties contained in an endorsement to our Master Policies that is required with our delegated underwriting program. If a rebuttal to our rescissionRescission is received and the insured provides additional information supporting the continuation (i.e., non-rescission) of coverage, we have the claim re-examined internally by a separate, independent investigator. If the additional information supports the continuation of coverage, the insurance is reinstated and the claim is paid. After completion of this process, if we determine that the loan did not qualify for coverage, the insurance certificate is rescinded (and the total premiums paid are refunded) and we consider the rescissionRescission to be final and resolved. Although we may make a final determination internally with respect to a rescission,Rescission, it is possible that a legal challenge to our decision to rescind coverage may be brought after we have rescinded coverage during a period of time that is specified under the terms of our Master Policies.
In 2012, we began offering a limited rescission waiver program under our Prior Master Policy for our delegated underwriting customers, in which we agree not to rescind coverage due to non-compliance with our underwriting guidelines so
long as the borrower makes 36 consecutive payments (commencing with the initial required payment) from his or her own funds. This program does not restrict our rights to rescind coverage in the event of fraud or misrepresentation in the origination of the loans we insure. As part of our Following the financial crisis, the FHFA and the GSEs identified specific requirements to be included by all private mortgage insurers in their master policies for new mortgage insurance applications received on or after October 1, 2014. Among others, these included specific requirements related to loss mitigation and claims processing activities that limited the potential for Loss Mitigation Activity throughout the private mortgage insurance industry. Radian Guaranty incorporated these principles into its 2014 Master Policy for NIW, effective October 1, 2014, we offerPolicy. Radian Guaranty also offers 12-month and 36-month rescission relief programs in accordance with the specified terms and conditions set forth in the policy. For a discussion2014 Master Policy. Loans that were already insured prior to the October 1, 2014 effective date of the 2014 Master Policy see “—Mortgage Insurance Business Overview—Mortgage Insurance Products—Traditional Risk.”continue to be subject to the terms and conditions of Radian Guaranty’s Prior Master Policy. The FHFA and the GSEs have proposed revised GSE Rescission Relief Principles to, among other things, further limit the circumstances under which mortgage insurers may rescind coverage. We are in the process of incorporating these principles into a new master policy, which we expect will be effective during the second half of 2019. We currently are in discussions with the GSEs regarding the form of this new master policy, including as it relates to these proposed principles, which if adopted, are likely to further reduce our ability to rescind insurance coverage in the future, potentially resulting in higher losses than would be the case under our existing Master Policies. Claim Curtailments.We also have rights under our Master Policies to curtail, and in some circumstances, deny claims due to servicer negligence. Examples of servicer negligence may include, without limitation: a failure to report information to us on a timely basis as required under our Master Policies; a failure to pursue loss mitigation opportunities presented by borrowers, realtors and/or any other interested parties; a failure to pursue loan modifications and/or refinancings through programs available to borrowers or an undue delay in presenting claims to us (including as a result of improper handling of foreclosure proceedings), which increases the interest or other components of a claim we are required to pay; and a failure to initiate and diligently pursue foreclosure or other appropriate proceedings within the timeframe specified in our Master Policies. Although we could seek post-claim recoveries from the beneficiaries of our policies if we later determine that a claim was not valid, because our loss mitigation process is designed to ensure compliance with our policies prior to payment of a claim, historically we have not sought recoveries from the beneficiaries of our mortgage insurance policies once a claim payment has been made.
Customers The principal customers of our mortgage insurance business are mortgage originators such as mortgage bankers, commercial banks, savings institutions, credit unions and community banks. Sources of primary NIW by type of mortgage originator for the year ended December 31, 2018 are shown in the chart below. Our largest single mortgage insurance customer (including branches and affiliates) measured by primary NIW, accounted for 4.7% of NIW during 2018, compared to 6.8% and 5.7% in 2017 and 2016, respectively. No customer had earned premiums that accounted for more than 10% of our consolidated revenues in 2018, 2017 or 2016. Since 2009, we have taken steps to diversify our customer base. As a result of these efforts, the percentage of NIW generated by our top 10 customers has decreased from 62.3% in 2009 to 29.1% in 2018. Since 2010, we have added over 1,000 net new customers and significantly increased the amount of business derived from mid-sized mortgage banks. See “Item 1A. Risk Factors—Our NIW and franchise value could decline if we lose business from significant customers.” Competition We operate in the highly competitive U.S. mortgage insurance industry. Our competitors primarily include other private mortgage insurers and federal and state governmental agencies, principally the FHA and VA. In addition to Radian Guaranty, the private mortgage insurers that are currently approved and eligible to write business for the GSEs are: Arch U.S. MI; Essent Guaranty Inc.; Genworth Financial Inc.; Mortgage Guaranty Insurance Corporation; NMI Holdings, Inc.; and United Guaranty Corp. (acquired by Arch Capital Group LLC in December 2016). We compete directly with other private mortgage insurers primarily on the basis of price, underwriting guidelines, overall service, customer relationships, perceived financial strength (including comparative credit ratings) and reputation. Overall
service competition is based on, among other things, effective and timely delivery of products, timeliness of claims payments, customer service, timely and accurate servicing of policies, training, loss mitigation efforts and management and field service expertise. We also believe that service includes our ability to offer services to customers through our Services business that complement our mortgage insurance products. Pricing has always been and continues to be competitive in the mortgage insurance industry, as industry participants compete for market share and customer relationships. We monitor various competitive and economic factors while seeking to increase the long-term value of our portfolio by balancing both profitability and volume considerations in developing our pricing and origination strategies. We have taken a disciplined approach to establishing our premium rates and writing a mix of business that we expect to produce our targeted level of returns on a blended basis and an acceptable level of NIW. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Competition and Pricing—Radian's Pricing.”As demonstrated by our strong NIW generated in 2018, we believe we remain well positioned to compete for the high-quality business being originated today, while at the same time maintaining projected returns on NIW within our targeted ranges. Based on publicly available information, we estimate that our share of NIW within the private mortgage insurance market (excluding HARP refinancings) was approximately 19% for 2018. Certain of our private mortgage insurance competitors are subsidiaries of larger corporations, may have access to greater amounts of capital and financial resources than we do at a lower cost of capital (including off-shore reinsurance vehicles) and currently have better financial strength ratings than we have. As a result, they may be better positioned to compete outside of traditional mortgage insurance, including in the private label securitization market or if the GSEs expand their use of, or pursue alternative forms of, credit enhancement outside of private mortgage insurance in its traditional form. In addition, because of tax advantages associated with being off-shore, certain of our competitors have been able to reinsure to their offshore affiliates and achieve higher after-tax rates of return on the NIW they write compared to on-shore mortgage insurers such as Radian Guaranty, which could allow these off-shore competitors to leverage reduced pricing to gain market share, while continuing to achieve acceptable returns on NIW. We also compete with governmental agencies, principally the FHA and the VA. We compete with the FHA and VA on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its share of the mortgage insurance market which peaked at approximately 74% in 2009. Since then, the private mortgage insurance industry generally had been recapturing market share from the FHA, primarily due to: (i) improvements in the financial strength of private mortgage insurers; (ii) the development of new products and marketing efforts directed at competing with the FHA; (iii) increases in the FHA’s pricing; (iv) the U.S. government’s pursuit of legal remedies against FHA-approved lenders related to loans insured by the FHA; and (v) various policy changes at the FHA, including the general elimination of the premium cancellation provision. We believe that we are well-positioned to effectively compete with the FHA based on our current pricing strategies. In addition, we believe that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans are factors that continue to provide a competitive advantage for private mortgage insurers. The FHA’s share of the total insured mortgage market (which includes FHA, VA and private mortgage insurers) was 31% in 2018, compared to 35% in 2017. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—NIW; Origination Market; Penetration Rate.” If the FHA reduces its pricing in the future, it could have a negative effect on our ability to compete with the FHA. We also have faced increasing competition from the VA. Based on publicly available information, the VA’s share of the total insured mortgage market was 25% in 2018. We believe that the VA’s market share has generally been increasing because the VA offers 100% LTV loans and charges a one-time funding fee that can be included in the loan amount with no additional monthly expense, and because of an increase in the number of borrowers that are eligible for the VA’s program. In addition, as market conditions change, alternatives to traditional private mortgage insurance may become more prevalent, which could reduce the demand for private mortgage insurance in its traditional form, including structures commonly referred to as “investor paid mortgage insurance” in which affiliates of traditional mortgage insurers directly insure the GSEs against loss. For additional information about these structures, see “Regulation—Federal Regulation—Housing Finance Reform.” It is difficult to predict what other types of credit risk transfer transactions and other structures might be used by the GSEs in the future. If any of the credit risk transfer transactions and structures that are being developed were to displace primary loan level, standard levels of mortgage insurance, the amount of insurance we write may be reduced. See “Item 1A. Risk Factors—Our mortgage insurance business faces intense competition.”
Services Acquisition of Clayton and Other Acquisitions On June 30, 2014, we acquired Clayton, a leading provider of services and solutions to the mortgage and real estate industries. Since then, we have strategically acquired additional companies and businesses to enhance the mortgage, real estate and title services offered through our Services business. These acquisitions comprise: •Red Bell, a real estate brokerage, valuation and technology company, in March 2015; •ValuAmerica, a title insurance agency and appraisal management company, in October 2015; •EnTitle Direct, a national title insurance and settlement services company, in March 2018; Independent Settlement Services, a technology-driven national appraisal and title management services company, in November 2018; and The assets of Five Bridges, a provider of consumer and real estate analytics through a cloud-based portal that provides customers with valuation and risk management tools, in December 2018. Services Business Overview Overview Our Services segment offers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers. Our mortgage services help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and real estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive suite of title insurance products, title settlement services and both traditional and digital closing services. A key element of our overall business strategy is to use our Services segment to diversify our business and revenue streams by increasing our participation in multiple facets of the residential real estate and mortgage finance markets. In 2017, we undertook a strategic review of our Services business and made several decisions with respect to the business strategy to reposition this business to drive future growth and profitability. Following this strategic review, we committed to a restructuring plan and have refined our Services business strategy to focus on a more limited set of services. See “Item 7. Management’s Discussion and Analysis Financial Condition and Results of Operations-Overview-Business Strategy.” We believe that the combination of our mortgage insurance with our unique set of diversified mortgage, real estate and title services provides us with an opportunity to become increasingly more relevant to our customers and is a competitive differentiator for us compared to other private mortgage insurance companies. Services Offered Mortgage Services. Our mortgage services loan review and surveillance products help customers understand risk associated with originating, buying, selling and servicing pools of loans. In this business, we primarily provide loan-level due diligence for various asset classes (residential, single family rental and non-residential) and securitizations, including single family rental and other private label securitizations and securitizations of GSE loans, with offerings focused on credit underwriting, regulatory compliance, compliance with representation and warranties and collateral valuation. Our engagements may take place, among other contexts, prior to or after the sale of a pool of loans, in connection with securitizations, transactions involving warehouse lines of credit, GSE credit risk transfer transactions and transactions involving master servicing rights. We utilize skilled professionals and proprietary technology to deliver customized solutions that help our clients identify and understand areas of risk and opportunity across the residential home mortgage spectrum.
As part of our underwriting services, we offer contract underwriting services and compliance reviews to verify that loan file documentation conforms to specified guidelines and regulatory requirements. In our contract underwriting business we underwrite our customers’ mortgage loan application files for secondary market compliance (e.g., for sale to the GSEs), and may concurrently assess the file for mortgage insurance eligibility. Generally, we offer limited indemnification to our contract underwriting customers. We train our underwriters, require them to complete continuing education and routinely audit their performance to monitor the accuracy and consistency of underwriting practices. We offer a full range of services to support the single family rental asset class. Our comprehensive single family rental services provide a centralized, single point of contact for facilitating the valuation, diligence and underwriting services needed to support single family rental securitizations, multi-borrower transactions and warehouse facilities. Our surveillance services utilize data, technology and skilled professionals to provide ongoing, independent monitoring of mortgage servicer and loan performance. We offer risk management and servicing oversight solutions, including RMBS and single family rental securitization surveillance, regulatory and operational loan level oversight and asset representation review services in connection with securitizations. RMBS surveillance services monitor the servicers of mortgage loans underlying outstanding RMBS. Regulatory and operational loan level oversight provides regular monitoring of servicing operations to measure and assess compliance with applicable policies and regulations. Our asset representation review services provide targeted loan and receivable oversight for ABS issuers and their investors, including on asset classes other than mortgage loans, in the event of certain default triggers within the ABS. Real Estate Services. Our real estate services provide data, analytics, process technologies, REO asset management and residential property valuation services to financial institutions, the GSEs, and private investment funds to support the acquisition, sale and management of real estate properties. Our real estate services include: full appraisal products; property inspection/condition reports; appraisal review products; hybrid/ancillary appraisal products; automated valuation products; broker price opinions (BPOs); asset watch; and rental analysis. These valuation services primarily are provided to originators, owners, purchasers and servicers of, and to investors in, performing and non-performing mortgage loans and REO properties. We further provide asset management services that include turn-key and component solutions for REO asset management, single family rental services and transition financing services management. These services are designed to support the management of the entire REO disposition process, including management of the eviction and redemption process, as well as property preservation and repairs. Title Services. We also offer a comprehensive suite of title, closing and settlement services for residential mortgage loans. We offer title insurance as well as a full complement of title services that include tax and title data services; centralized recording services; document retrieval; default curative title services; deed reports; and property reports. Our closing and settlement services include electronic execution of some or all mortgage loan closing documents in a secure digital environment (eClosing), including full eClosing, hybrid eClosing and remote eClosing, as well as signing services, centralized closing and settlement services and local closing and settlement services. Services Revenue Drivers For the most significant revenue drivers for our Services business, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Services.” Fee-for-Service Contracts Our Services segment is primarily a fee-for-service business. Our services revenue is generated under three basic types of contracts: Fixed-Price Contracts. Under fixed-price contracts, we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price or day rate. We use fixed-price contracts in our real estate valuation and component services, our loan review, underwriting and due diligence services as well as our title and closing services. We also use fixed-price contracts in our surveillance business for our servicer oversight services and RMBS surveillance services, and in our asset management business activities. Time-and-Expense Contracts. Under a time-and-expense contract, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. These contracts are used in our loan review, underwriting and due diligence services.
Percentage-of-Sale Contracts. Under percentage-of-sale contracts, we are paid a contractual percentage of the sale proceeds upon the sale of each property. These contracts are only used for a portion of our REO management services and our real estate brokerage services. In addition, through the use of our proprietary technology, property leads are sent to select clients. Upon the client’s successful closing on the property, we recognize revenue for these transactions based on a percentage of the sale. In most cases, our contracts with our clients do not include minimum volume commitments and can be terminated at any time by our clients. Although some of our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a significant portion of our engagements are transactional in nature and may be performed in connection with securitizations, loan sales, loan purchases or other transactions. Due to the transactional nature of our business, our Services segment revenues may fluctuate from period to period as transactions are commenced or completed. In addition, our segment revenues are impacted by the origination volumes of our customers, which may fluctuate from period to period. Title Insurance Premiums In addition to the fees for services discussed above, we earn net premiums on title insurance written by EnTitle Insurance. Customers We have a broad range of customers for our Services segment due to the breadth of services we are able to offer across the mortgage value chain. Our principal third-party customers are: Banks, credit unions, independent mortgage banks and other originators of mortgage loans; RMBS/ABS issuers, securitization trusts, the GSEs, private equity, hedge funds, real estate investment trusts, investment banks and other investors in mortgage-related debt instruments, whole loans and other securities; Owners of single family rental homes; Mortgage servicers; Real estate brokers and agents; and Regulators and rating agencies involved in the mortgage, real estate and housing finance markets. Our customers include many of the largest financial institutions and participants in the mortgage sector and, as such, our services revenue is concentrated among our largest customers. For the year ended December 31, 2018, the top 10 Services customers generated approximately 42% of the Services segment’s services revenue. See “—Services Business Overview—Services Revenue Drivers.” Competition We believe our Services business is uniquely positioned as a single provider of an array of services to participants across the residential mortgage and real estate value chain. We are not aware of any other mortgage insurance company that provides a comparable range of services to the residential mortgage and real estate industries. However, our Services business has multiple competitors within each of its individual lines of business. Our competitors mainly include small privately-held companies and subsidiaries of large publicly-traded companies. Significant competitors include: | | | • | Mortgage Services - American Mortgage Consultants, Inc., Digital Risk, LLC, Opus Capital Markets Consultants, LLC, FTI Consulting, Inc., Pentalpha Surveillance LLC, TENA Companies, Inc., Adfitech Inc. and Navigant Consulting, Inc. |
| | | • | Real Estate Services - ClearCapital.com, Inc., CoreLogic, Inc., Pro Teck Valuation Services, First American Financial Corporation, Black Knight, Inc., VRM Mortgage Services, Fidelity National Financial, Inc. and ServiceLink |
| | | • | Title Services - First American Financial Corporation, Fidelity National Financial, Inc., Stewart Information Services Corporation, Old Republic Title Insurance Group, Inc., Westcor Land Title Insurance Company and WFG National Title Insurance Company |
Across all business lines, we compete on the basis of industry expertise, price, technology, service levels and relationships.
We believe that combining our mortgage insurance franchise with our diversified set of mortgage and real estate products and services provides us with an opportunity to become increasingly relevant to our customers and enhances our ability to compete in the insured market by differentiating us from other mortgage insurance competitors. Enterprise Sales and Marketing Our enterprise sales and marketing team is centralized to create a unified focus on selling all of our mortgage insurance and mortgage and real estate products and services across our customer base. Our Enterprise sales and marketing team offers a coordinated sales effort under single management and is supported by dedicated business unit and account management teams organized in various geographic regions across the U.S., as well as a telesales team located in our corporate headquarters in Philadelphia. At the enterprise level, we have a senior sales executive dedicated to each of the following areas: credit unions, banking institutions, investment bankers/private equity and fund managers, mortgage bankers, GSEs and servicers. We expect that our enterprise approach to selling the complementary products and services of our Mortgage Insurance and Services businesses will strengthen our relationships with our customers, attract new customers and enhance our ability to compete. Our Mortgage Insurance dedicated business unit sales team includes a business development group that is focused on developing new mortgage insurance relationships and an account management group that is responsible for supporting our existing mortgage insurance relationships. Our Services dedicated business unit sales team includes a title services sales team focused on developing new title services relationships and expanding and supporting existing customer relationships, and a mortgage and real estate services team responsible for selling other services offered by our Services business. All sales efforts are supported by our telesales teamthat serves customers using any and all of our products and services, and is responsible for managing and growing customer relationships and promoting increased customer adoption. All sales personnel are compensated by salary, and other incentive-based pay, which may be tied to the achievement of certain business objectives and sales goals or the promotion of certain products. Customer Support We have developed training programs for our customers to help their employees develop the knowledge and skills to respond to changing market demands. Our learning solutions are provided to customers to promote the role of private mortgage insurance in the marketplace as well as to promote Radian’s specific products and offerings. We offer training in three format options: instructor-led classroom sessions, instructor-led webinars and self-directed on-demand learning. Sale of Financial Guaranty Business Radian completed the sale of Radian Asset Assurance Inc. to Assured Guaranty Corp. on April 1, 2015 and exited the financial guaranty business. Radian Asset Assurance provided direct insurance and reinsurance on credit-based structured finance and public finance risks. Investment Policy and Portfolio Our investment portfolio is our primary source of claims paying resources. We have developed an investment strategy that uses an asset allocation methodology that considers our business environment and consolidated risks as well as current investment conditions. With respect to our fixed income investments, the following internal investment policy guidelines, among others, are applied at the time of investment: At least 75% of our fixed income portfolio, based on market value, must consist of investment securities that are assigned a quality designation of NAIC 1 by the NAIC or equivalent ratings by a nationally recognized statistical ratings organization (“NRSRO”) (i.e., “A-” or better by S&P and “A3” or better by Moody’s); A maximum of 25% of our fixed income portfolio, based on market value, may consist of investment securities that are assigned a quality designation of NAIC 2 by the NAIC or equivalent ratings by a NRSRO (i.e., “BBB+” to “BBB-” by S&P and “Baa1” to “Baa3” by Moody’s); and A maximum of 10% of our fixed income portfolio, based on market value, may consist of investment securities that are assigned quality designations NAIC 3 through 6 or equivalent ratings by a NRSRO (i.e., “BB+” and below by S&P and “Ba1” and below by Moody’s).
Our portfolio has been constructed to maximize long-term expected returns while maintaining an acceptable risk level. Our investment objectives are to utilize appropriate risk management oversight to optimize after-tax returns, while preserving capital. We target the level of our short-term investments to manage our expected short-term cash requirements. Our investment policies and strategies are subject to change, depending on regulatory, economic and market conditions and our then-existing or anticipated financial condition and operating requirements, including our current and future tax positions. The investments held at our insurance subsidiaries are also subject to insurance regulatory requirements applicable to such insurance subsidiaries. Oversight responsibility of our investment portfolio rests with management, and allocations are set by periodic asset allocation studies, calibrated by risk, return and after-tax considerations. The risks we consider include, among others, duration, liquidity, market, interest rate and credit risks. As of December 31, 2018, we internally manage 6.8% of the investment portfolio (the portion of the portfolio largely consisting of U.S. Treasury obligations, money market funds and certain exchange-traded funds), with the remainder primarily managed by three external managers. External managers are selected by management based primarily upon the selected allocations, as well as factors such as historical returns and stability of their management teams. Management’s selections are presented to and approved by the Finance and Investment Committee of Radian Group’s board of directors. At December 31, 2018, our investment portfolio had a cost basis of $5.3 billion and a carrying value of $5.2 billion, which includes $0.6 billion of investments maturing within one year or less. Our investment portfolio did not include any direct residential real estate or whole mortgage loans at December 31, 2018. At December 31, 2018, 97.1% of our investment portfolio was rated investment grade. For additional information about our investment portfolio, see the information that follows, as well as Notes 5 and 6 of Notes to Consolidated Financial Statements. Investment Portfolio Diversification The composition of our investment portfolio, presented as a percentage of overall fair value at December 31, 2018, was as follows: ______________________ | | | (1) | Primarily consists of taxable state and municipal investments. |
As of December 31, 2018, we did not have any investment in any person (including affiliates thereof) that exceeded 10% of our total stockholders’ equity. Investment Portfolio Scheduled Maturity The weighted-average duration of the assets in our investment portfolio as of December 31, 2018 was 4.0 years. We seek to manage our investment portfolio to maintain sufficient liquidity within our risk and return tolerances and to satisfy our operating and other financial needs based on our current liabilities and business outlook. The following table shows the scheduled maturities of the securities held in our investment portfolio at December 31, 2018: | | | | | | | | | | Fair Value | | Percent | | ($ in millions) | | | | | Short-term investments | $ | 538.8 |
| | 10.4 | % | Due in one year or less (1) | 87.3 |
| | 1.7 |
| Due after one year through five years (1) | 1,118.8 |
| | 21.6 |
| Due after five years through ten years (1) | 1,125.5 |
| | 21.7 |
| Due after ten years (1) | 517.3 |
| | 10.0 |
| RMBS (2) | 353.2 |
| | 6.8 |
| CMBS (2) | 591.4 |
| | 11.4 |
| Other ABS (2) | 704.7 |
| | 13.6 |
| Other investments (3) | 144.0 |
| | 2.8 |
| Total (4) | $ | 5,181.0 |
| | 100.0 | % | | | | | |
______________________ | | | (1) | Actual maturities may differ as a result of calls before scheduled maturity. |
| | | (2) | RMBS, CMBS and other ABS are shown separately, as they are not due at a single maturity date. |
| | | (3) | No stated maturity date. |
| | | (4) | Includes $27.9 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information. |
Investment Portfolio by Rating The following chart provides the ratings of our investment portfolio, presented as a percentage of overall fair value, as of December 31, 2018: Enterprise Risk Management Risk Philosophy, Vision and Appetite As a financial services organization, risk management is a critical part of our business. Our ERM vision is to remain one of the housing industry’s leading risk management organizations by providing solutions that effectively identify, assess and profitably manage risks across the entire mortgage life-cycle. The following goals guide our strategy and actions as a risk management organization: Embed and continually reinforce a disciplined, corporate-wide risk culture that utilizes an understanding of risk/return tradeoffs to drive quality decisions, utilizing a disciplined approach designed to achieve long-term, through-the-cycle profitability; Maintain credit, underwriting and risk/return disciplines based on sound data and analytics and continuous feedback throughout the organization; Proactively monitor origination, portfolio and market trends to identify and mitigate emerging risks; Continually refine analytical and technological capabilities, processes and systems to effectively identify, assess and manage risks; and Develop and leverage tools and capabilities to analyze the risk/return trade-offs of corporate strategy and business decisions in order to inform and optimize capital allocation.
Our risk appetite is driven by our business strategy, which is established by executive management and overseen by Radian’s board of directors. Risk appetite is defined as the amount of risk, on a broad level, that an organization is willing to take on in pursuit of value. Based on our risk appetite, management then determines our risk tolerances. Risk tolerances represent the typical measures of risk used to monitor exposure in a particular risk category or for a specific initiative, compared with the stated risk appetite. The illustration below depicts our framework for developing risk appetite and tolerance. We define our risk appetite qualitatively through the key risk categories where strategic execution can take place. We develop risk appetite statements that are designed to achieve the following: Define the risk Radian is willing to accept and manage in pursuit of long-term value on a risk-adjusted basis; Incorporate risk management into our strategic planning process; Enhance risk understanding and awareness at the board and executive management levels; Develop risk tolerances for business units within the context of the defined risk appetite; and Improve the quality of decision-making on significant business decisions. Risk Categories Our key risk categories are: | | | • | Credit: The risk of default or failure to fulfill a financial obligation in a timely manner; |
| | | • | Financial: The risk of market forces on the ability to meet financial obligations; |
| | | • | Strategic: The risk of failure to properly respond to changes in the business environment; |
| | | • | Operational: The risk that business practices, processes, policies and systems are not adequate to meet enterprise objectives; and |
| | | • | Regulatory and Compliance: The risk of non-compliance with laws, rules, regulations and prescribed practices in any jurisdiction in which the business operates. |
We do not identify reputational risk as a distinct category of risk. Rather, we view reputational risk as pervasive throughout our entire risk portfolio, as each risk on its own can impact our reputation if not mitigated or managed properly.
Risk Governance Our ERM program is subject to a comprehensive governance structure, as illustrated in the following chart and further described below. Board of Directors. The full board of directors is responsible for the general oversight of risks. Our board of directors seeks to understand and oversee the most critical risks relating to our business, allocates responsibilities for the oversight of risks among the full board and its committees, and reviews the systems and processes that management has in place to manage the current risks facing Radian, as well as those that could arise in the future. The full board of directors oversees our strategic risks, regulatory risks, risks related to our information technology activities and cyber security risks. As noted above, the board conducts certain aspects of its risk oversight function through the following board committees: Audit Committee; Credit Management Committee; Finance and Investment Committee; Governance Committee; and Compensation and Human Resources Committee. Each Committee Chair provides regular reports to the full board regarding the Committee’s specific risk oversight responsibilities. The board regularly meets with management to receive reports derived from (i) our ERM function regarding the most significant risks we are facing, and the steps being taken to assess, manage and mitigate those risks; and (ii) the Company’s information security function regarding cybersecurity risks and the Company’s efforts to mitigate such risks. The full board further considers current and potential future strategic risks facing the company as part of its annual strategic planning session with management.
Integrated ERM Framework. We have adopted an integrated approach to risk management, which includes: (i) a centralized ERM function that resides within the office of our Chief Financial Officer and is responsible for overseeing the process for risk identification, assessment, management and mitigation across the organization; (ii) various management committees that oversee specific risks; (iii) business units that manage specific risks associated with their business activities; and (iv) an internal audit function that performs periodic, independent reviews and tests compliance with risk management policies, procedures and standards across the company. The various management committees include, but are not limited to, a Pricing and Credit Committee, a Capital and Liquidity Review Committee and a Model Governance Committee (collectively “ALCO”), an Information Security and Resilience Committee, a Regulatory Compliance Council, a Mortgage Insurance Reserve Committee, a Title Insurance Underwriting Committee, a Title Insurance Claims Committee and an Enterprise Data Governance Committee. Our integrated ERM framework is designed to identify the risks we are facing, and to assess, manage and mitigate those risks. Our ERM process is designed to provide executive management with the ability to evaluate the most significant concerns we face and to calibrate the risk mitigation strategies to account for challenges in the current business environment, as well as external factors that may negatively impact our operations. The risks that fall under the program span the entire spectrum of organizational risks and include risks that may not be easily quantifiable or measurable. These include critical risks that fall into our credit, financial, operational, regulatory and compliance, and strategic risk categories. Enterprise level risk reviews are conducted for both our Mortgage Insurance and Services businesses. Our ERM process is illustrated in the following chart: Our ERM program takes a holistic approach to managing risks that we face in our businesses. A cross-functional team, guided by subject matter experts and experienced managers, follows a systematic method to identify, evaluate and monitor both known and emerging risks. Our ERM program is a dynamic process, which includes ongoing analysis and ranking of the most significant risks and the alignment of risk management activities with business strategies. Risk assessments and mitigation plans are developed to address these risks. These assessments and plans are subject to review and modification to account for changes in markets and the regulatory environment, as well as other internal or external factors. Risk scoring and validation of
the effectiveness of risk management plans through management reporting facilitate program sustainability and promote accountability for risk management activities throughout the company. An ERM Council, consisting of mid-senior level employees, meets at least quarterly to review the organization’s top risks, as well as any risks that may have been upgraded or downgraded during the review cycle. The output (reports, dashboards, etc.) from the ERM Council is consolidated and presented to an ERM Executive Steering Committee (consisting of executive management) at least quarterly. The ERM Executive Steering Committee, along with the ERM Council, is responsible for assisting the board of directors in the fulfillment of its risk oversight responsibilities. Radian currently employs more than 60 dedicated risk management professionals and has developed and established credit, portfolio, and counterparty risk policies, enterprise risk management policies, procedures for monitoring compliance with these policies and comprehensive capabilities and tools to identify, communicate, and mitigate credit and risk-related issues. Mortgage Insurance Risk ManagementServices Business Overview
Overview Our Services segment offers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers. Our mortgage insurance business employsservices help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and real estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive risk management function, which is responsible for establishing our creditsuite of title insurance products, title settlement services and counterparty risk policies, monitoring compliance with our policies, managing our insured portfolioboth traditional and communicating credit related issues to management and the Credit Committeedigital closing services. A key element of our Board. Risk Originationoverall business strategy is to use our Services segment to diversify our business and Servicing. revenue streams by increasing our participation in multiple facets of the residential real estate and mortgage finance markets. In 2017, we undertook a strategic review of our Services business and made several decisions with respect to the business strategy to reposition this business to drive future growth and profitability. Following this strategic review, we committed to a restructuring plan and have refined our Services business strategy to focus on a more limited set of services. See “Item 7. Management’s Discussion and Analysis Financial Condition and Results of Operations-Overview-Business Strategy.” We believe that understanding our business partners and customers is a key component of managing risk. Accordingly, we assign individual risk managers to specific customers so that they can more effectively perform ongoing business-level due diligence. This also allows us to address specific needs of individual customers. The risk managers are located across the country, and their direct interaction with our customers and their access to local markets improves our ability to observe business patterns and manage risk trends. This oversight provides us with the ability to review and study best practices throughout the industry and develop robust data management analysis.
Portfolio Management. We have developed risk and capital allocation models that support our mortgage insurance business. These models provide robust analysis to establish portfolio limits for product type, loan attributes, geographic concentrations and counterparties. We proactively monitor market concentrations across these and other attributes. We also identify, evaluate and negotiate potential transactions for terminating insurance risk and for distributing risk to others, including through reinsurance arrangements. See “Reinsurance—Reinsurance—Ceded” for more information about the use of reinsurance as a risk management tool in our mortgage insurance business.
As part of our portfolio management function, we monitor and analyze the performance of various risks in our mortgage portfolio. We use this information to develop our mortgage credit risk and counterparty risk policies, and as a component of our default and prepayment analytics.
We have a valuation group that analyzes the current compositioncombination of our mortgage insurance portfoliowith our unique set of diversified mortgage, real estate and assesses riskstitle services provides us with an opportunity to become increasingly more relevant to our customers and is a competitive differentiator for us compared to other private mortgage insurance companies.
Services Offered Mortgage Services. Our mortgage services loan review and surveillance products help customers understand risk associated with originating, buying, selling and servicing pools of loans. In this business, we primarily provide loan-level due diligence for various asset classes (residential, single family rental and non-residential) and securitizations, including single family rental and other private label securitizations and securitizations of GSE loans, with offerings focused on credit underwriting, regulatory compliance, compliance with representation and warranties and collateral valuation. Our engagements may take place, among other contexts, prior to or after the portfolio fromsale of a pool of loans, in connection with securitizations, transactions involving warehouse lines of credit, GSE credit risk transfer transactions and transactions involving master servicing rights. We utilize skilled professionals and proprietary technology to deliver customized solutions that help our clients identify and understand areas of risk and opportunity across the market (e.g., the effects of changes inresidential home prices and interest rates) and risks from particular lenders, products and geographic locales.mortgage spectrum.
Credit Policy. We have developedAs part of our underwriting services, we offer contract underwriting services and maintain mortgage-related credit risk policies. These policies reflectcompliance reviews to verify that loan file documentation conforms to specified guidelines and regulatory requirements. In our tolerance levels with respectcontract underwriting business we underwrite our customers’ mortgage loan application files for secondary market compliance (e.g., for sale to accepting risk regarding counterparty, portfolio, operational,the GSEs), and structured risks involving mortgage collateral. Our credit policy function develops and updates ourmay concurrently assess the file for mortgage insurance eligibilityeligibility. Generally, we offer limited indemnification to our contract underwriting customers. We train our underwriters, require them to complete continuing education and guidelines throughroutinely audit their performance to monitor the accuracy and consistency of underwriting practices.
We offer a full range of services to support the single family rental asset class. Our comprehensive single family rental services provide a centralized, single point of contact for facilitating the valuation, diligence and underwriting services needed to support single family rental securitizations, multi-borrower transactions and warehouse facilities. Our surveillance services utilize data, technology and skilled professionals to provide ongoing, independent monitoring of mortgage servicer and loan performance. We offer risk management and servicing oversight solutions, including RMBS and single family rental securitization surveillance, regulatory and operational loan level oversight and asset representation review services in connection with securitizations. RMBS surveillance services monitor the servicers of mortgage loans underlying outstanding RMBS. Regulatory and operational loan level oversight provides regular monitoring of competitor offerings, customer input regarding lending needs, analysis of historical performanceservicing operations to measure and portfolio trends, quality assurance results, underwriter experienceassess compliance with applicable policies and observations and risk tolerances. The credit policy function is also responsible forregulations. Our asset representation review services provide targeted loan and lender-level exceptionsreceivable oversight for ABS issuers and their investors, including on asset classes other than mortgage loans, in the event of certain default triggers within the ABS. Real Estate Services. Our real estate services provide data, analytics, process technologies, REO asset management and residential property valuation services to published guidelinesfinancial institutions, the GSEs, and private investment funds to support the acquisition, sale and management of real estate properties. Our real estate services include: full appraisal products; property inspection/condition reports; appraisal review products; hybrid/ancillary appraisal products; automated valuation products; broker price opinions (BPOs); asset watch; and rental analysis. These valuation services primarily are provided to originators, owners, purchasers and servicers of, and to investors in, performing and non-performing mortgage loans and REO properties. We further provide asset management services that include turn-key and component solutions for REO asset management, single family rental services and transition financing services management. These services are designed to support the management of the entire REO disposition process, including management of the eviction and redemption process, as well as lender corrective actionproperty preservation and repairs. Title Services. We also offer a comprehensive suite of title, closing and settlement services for residential mortgage loans. We offer title insurance as well as a full complement of title services that include tax and title data services; centralized recording services; document retrieval; default curative title services; deed reports; and property reports. Our closing and settlement services include electronic execution of some or all mortgage loan closing documents in a secure digital environment (eClosing), including full eClosing, hybrid eClosing and remote eClosing, as well as signing services, centralized closing and settlement services and local closing and settlement services. Services Revenue Drivers For the eventmost significant revenue drivers for our Services business, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Services.” Fee-for-Service Contracts Our Services segment is primarily a fee-for-service business. Our services revenue is generated under three basic types of contracts: Fixed-Price Contracts. Under fixed-price contracts, we discover credit performance issues, such as high early payment defaults. The credit policy function works closely with our mortgage insurance underwritersagree to ensure that underwriting decisions align with risk tolerancesperform the specified services and principles. Quality Assurance. Quality assurance isdeliverables for a key element of our credit analytics function, and as part of our quality control program, we audit individual loan files to examine underwriting decisions for compliance with agreed-upon underwriting guidelines. These audits are conducted across loans submitted through our delegated and non-delegated underwriting channels. Our quality assurance team audits both our customers and our underwriters to ensure qualitypre-determined per-unit or per-file price or day rate. We use fixed-price contracts in our NIW. Observationsreal estate valuation and trends derived fromcomponent services, our quality assurance process serveloan review, underwriting and due diligence services as critical inputs into portfolio monitoring, eligibilitywell as our title and guideline updates, and customer surveillance andclosing services. We also provide valuable feedback to our customers and our underwriters regarding the quality of their mortgage insurance underwriting decisions.
Loss Mitigation.We have a dedicated loss mitigation group that works with servicers to identify and pursue loss mitigation opportunities for loans in both our performing and non-performing (defaulted) portfolios. This includes regular surveillance and benchmarking of servicer performance with respect to default reporting, borrower retention efforts, foreclosure alternatives and foreclosure processing. Through this process, we seek to hold servicers accountable for their performance and communicate to servicers identified best practices for servicer performance.
Risk Modeling. We have expertise in the development and deployment of integrated credit and interest rate risk models. Using analytical techniques, we have developed loan level default and prepayment models that can be used for a wide range of risk management applications, including portfolio analysis, credit decision making, forecasting, and reserving, among others.
Reinsurance
We use reinsurance as a capital and risk management toolfixed-price contracts in our mortgage insurance business.
Reinsurance—Ceded. We have entered into third-party reinsurance transactions as part ofsurveillance business for our capitalservicer oversight services and risk management activities, including quota share transactions that are utilized to proactively manage Radian Guaranty’s Risk-to-capital, manage Radian Guaranty’s position under the PMIERs Financial Requirements,RMBS surveillance services, and manage the mix of business in our portfolio. For additional information regardingasset management business activities.
Time-and-Expense Contracts. Under a time-and-expense contract, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. These contracts are used in our third-party quota share transactions, see Note 8 of Notes to Consolidated Financial Statements.loan review, underwriting and due diligence services. Affiliate Reinsurance. Certain states limit the amount of risk a mortgage insurer may retain on a single loan to 25% of the total loan amount. Radian Guaranty currently uses reinsurance from an affiliated reinsurer to comply with these insurance regulations. See “Regulation—State Regulation—Reinsurance.” In addition, Radian Guaranty has previously used reinsurance with its subsidiaries to reduce its net RIF and manage its Risk-to-capital position.
Captive Reinsurance.In the past, we and other companies in the mortgage insurance industry participated in reinsurance arrangements with mortgage lenders commonly referred to as “captive reinsurance arrangements.” Under captive reinsurance arrangements, a mortgage lender typically established a reinsurance company that assumed part of the risk associated with the portfolio of that lender’s mortgages insured by us on a Flow Basis. In return for the reinsurance company’s assumption of a portion of the risk, we ceded to the reinsurance company a portion of the mortgage insurance premiums that otherwise would have been paid to us. Captive reinsurance typically was conducted on an “excess-of-loss” basis, with the captive reinsurer paying losses only after a certain level of losses had been incurred. In addition, on a limited basis, we participated in “quota share” captive reinsurance arrangements under which the captive reinsurance company assumed a pro rata share of all losses in return for a pro rata share of the premiums collected.
As a result of the housing and related credit market downturn that began in 2007, most captive reinsurance arrangements have “attached,” meaning that losses have exceeded the threshold so that our captive reinsurers are required to make payments to us. Ceded losses recoverable related to captives at December 31, 2016 were $0.4 million.
AllPercentage-of-Sale Contracts. Under percentage-of-sale contracts, we are paid a contractual percentage of the sale proceeds upon the sale of each property. These contracts are only used for a portion of our remaining captive reinsurance arrangementsREO management services and our real estate brokerage services. In addition, through the use of our proprietary technology, property leads are operatingsent to select clients. Upon the client’s successful closing on the property, we recognize revenue for these transactions based on a run-off basis. We havepercentage of the sale.
In most cases, our contracts with our clients do not entered intoinclude minimum volume commitments and can be terminated at any new captive reinsurance arrangements since 2007,time by our clients. Although some of our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a significant portion of our engagements are transactional in nature and may be performed in connection with securitizations, loan sales, loan purchases or other transactions. Due to the transactional nature of our business, our Services segment revenues may fluctuate from period to period as transactions are commenced or completed. In addition, our segment revenues are impacted by the origination volumes of our customers, which may fluctuate from period to period. Title Insurance Premiums In addition to the fees for services discussed above, we have agreements with the CFPB and the Minnesota Department of Commerce that we will not enter into any new captive reinsurance arrangements until April 2023 and June 2025, respectively. See Notes 8 and 13 of Notes to Consolidated Financial Statements.
earn net premiums on title insurance written by EnTitle Insurance.
Customers TheWe have a broad range of customers for our Services segment due to the breadth of services we are able to offer across the mortgage value chain. Our principal third-party customers of our mortgage insurance business are mortgage originators such as mortgage bankers, mortgage brokers, commercial banks, savings institutions,are:
Banks, credit unions, independent mortgage banks and community banks. Sources of primary NIW by typeother originators of mortgage originator forloans; RMBS/ABS issuers, securitization trusts, the GSEs, private equity, hedge funds, real estate investment trusts, investment banks and other investors in mortgage-related debt instruments, whole loans and other securities; Owners of single family rental homes; Mortgage servicers; Real estate brokers and agents; and Regulators and rating agencies involved in the mortgage, real estate and housing finance markets. Our customers include many of the largest financial institutions and participants in the mortgage sector and, as such, our services revenue is concentrated among our largest customers. For the year ended December 31, 20162018, the top 10 Services customers generated approximately 42% of the Services segment’s services revenue. See “—Services Business Overview—Services Revenue Drivers.” Competition We believe our Services business is uniquely positioned as a single provider of an array of services to participants across the residential mortgage and real estate value chain. We are shown in the chart below. Our largest singlenot aware of any other mortgage insurance customer (including branchescompany that provides a comparable range of services to the residential mortgage and affiliates), measured by primary NIW, accounted for 5.7%real estate industries. However, our Services business has multiple competitors within each of NIW during 2016, compared to 4.6%its individual lines of business. Our competitors mainly include small privately-held companies and 4.0% in 2015subsidiaries of large publicly-traded companies.
Significant competitors include: | | | • | Mortgage Services - American Mortgage Consultants, Inc., Digital Risk, LLC, Opus Capital Markets Consultants, LLC, FTI Consulting, Inc., Pentalpha Surveillance LLC, TENA Companies, Inc., Adfitech Inc. and Navigant Consulting, Inc. |
| | | • | Real Estate Services - ClearCapital.com, Inc., CoreLogic, Inc., Pro Teck Valuation Services, First American Financial Corporation, Black Knight, Inc., VRM Mortgage Services, Fidelity National Financial, Inc. and ServiceLink |
| | | • | Title Services - First American Financial Corporation, Fidelity National Financial, Inc., Stewart Information Services Corporation, Old Republic Title Insurance Group, Inc., Westcor Land Title Insurance Company and WFG National Title Insurance Company |
Across all business lines, we compete on the basis of industry expertise, price, technology, service levels and 2014, respectively. Earned premiums attributable to Wells Fargo accounted for more than 10% of our consolidated revenues in 2016, 2015 and 2014.relationships. In 2009, during the financial crisis, we launched an initiative to significantly diversify our customer base. As a result of this initiative, the percentage of NIW generated by our top 10 customers has decreased from 62.3% in 2009 to 31.7% in 2016. Since 2010, we have added approximately 1,000 net new customers and significantly increased the amount of business derived from mid-sized mortgage banks. We believe these efforts have helped to reduce the potential impact to our business from the loss of any one customer.
We believe that combining our mortgage insurance franchise with our diversified set of mortgage and real estate products and services provides us with an opportunity to become increasingly relevant to our customers and enhances our ability to compete in the insured market by differentiating us from other mortgage insurance competitors. Enterprise Sales Marketing and Customer SupportMarketing Our enterprise sales and marketing team is centralized to create a unified focus on selling all of our mortgage insurance and mortgage and real estate products and services across our customer base. Our Enterprise sales and marketing team offers a coordinated sales effort under single management and is supported by dedicated business unit and account management team isteams organized in various geographic regions across the U.S., as well as a telesales team located in our corporate headquarters in Philadelphia. At the enterprise level, we have a senior sales executive dedicated to each of the following areas: credit unions, banking institutions, investment bankers/private equity and fund managers, mortgage bankers, GSEs and servicers. We haveexpect that our enterprise approach to selling the complementary products and services of our Mortgage Insurance and Services businesses will strengthen our relationships with our customers, attract new customers and enhance our ability to compete. Our Mortgage Insurance dedicated business unit sales team includes a business development group that is focused on developing new mortgage insurance relationships and an account management group that is responsible for supporting our existing mortgage insurance relationships. Mortgage insurance Our Services dedicated business unit sales team includes a title services sales team focused on developing new title services relationships and account managementexpanding and supporting existing customer relationships, and a mortgage and real estate services team responsible for selling other services offered by our Services business. All sales efforts are supported by our telesales teamthat serves customers using any and all of our products and services, and is responsible for managing and growing customer relationships and promoting increased customer adoption. All sales personnel are compensated by salary, commissions for NIW and the creation or development of customer relationships and other incentive-based pay, which may be tied to the achievement of certain business objectives and sales goals or the promotion of certain products.Commissions vary based on product in order to incent a sales person to achieve an appropriate mix of products in accordance with our business objectives. A key element of our business strategy is to broaden our participation in the residential mortgage market value chain through our Services segment. We have a dedicated team that is focused on marketing our Services capabilities to our mortgage insurance customers. We expect that the continued sales of these complementary products and services to our mortgage insurance customers will strengthen our relationships with those customers and have the potential to attract new customers. We believe that offering these complementary services and products differentiates us from our mortgage insurance competitors and enhances our ability to compete in the insured market.Additionally, we have established exclusive affiliate partnerships with a number of organizations that are focused on supporting minority homeownership, including the National Association of Hispanic Real Estate Professionals (NAHREP), the National Association of Real Estate Brokers (NAREB) and the Asian Real Estate Association of America (AREAA). We believe that these partnerships will help us establish and deepen our relationship with the growing minority segments of the population that are expected to constitute a significant portion of new household formation in the U.S. in the future.Customer Support
We have developed training programs for our customers to help their employees develop the knowledge and skills to respond to changing market demands and regulatory requirements.demands. Our training islearning solutions are provided to customers to promote the role of private mortgage insurance in the marketplace as well as to promote Radian Guaranty’sRadian’s specific products and offerings. We offer training in three format options: instructor-led classroom sessions, instructor-led webinars and self-directed web-based training.
on-demand learning.
CompetitionSale of Financial Guaranty Business
Radian completed the sale of Radian Asset Assurance Inc. to Assured Guaranty Corp. on April 1, 2015 and exited the financial guaranty business. Radian Asset Assurance provided direct insurance and reinsurance on credit-based structured finance and public finance risks. Investment Policy and Portfolio Our investment portfolio is our primary source of claims paying resources. We operate inhave developed an investment strategy that uses an asset allocation methodology that considers our business environment and consolidated risks as well as current investment conditions. With respect to our fixed income investments, the highly competitive U.S. mortgage insurance industry. Our competitors include other private mortgage insurers and federal and state governmental and quasi-governmental agencies, principallyfollowing internal investment policy guidelines, among others, are applied at the FHA and VA.time of investment: The private mortgage insurersAt least 75% of our fixed income portfolio, based on market value, must consist of investment securities that are currently approvedassigned a quality designation of NAIC 1 by the NAIC or equivalent ratings by a nationally recognized statistical ratings organization (“NRSRO”) (i.e., “A-” or better by S&P and eligible“A3” or better by Moody’s);
A maximum of 25% of our fixed income portfolio, based on market value, may consist of investment securities that are assigned a quality designation of NAIC 2 by the NAIC or equivalent ratings by a NRSRO (i.e., “BBB+” to write business for the GSEs are: Arch U.S. MI;
Essent Guaranty Inc.;
Genworth Financial Inc.;
Mortgage Guaranty Insurance Corporation;
NMI Holdings, Inc.“BBB-” by S&P and “Baa1” to “Baa3” by Moody’s); and
United Guaranty Corp. (acquiredA maximum of 10% of our fixed income portfolio, based on market value, may consist of investment securities that are assigned quality designations NAIC 3 through 6 or equivalent ratings by Arch Capital Group LLC in December 2016)a NRSRO (i.e., “BB+” and below by S&P and “Ba1” and below by Moody’s).
We compete directly with other private mortgage insurers primarily on the basis of price, underwriting guidelines, customer relationships, reputation, perceived financial strength (including comparative credit ratings) and overall service, including services and products that complement our mortgage insurance products and that are offered through our Services business. Overall service competition is based on, among other things, effective and timely delivery of products, timeliness of claims payments, customer service, timely and accurate servicing of policies, training, loss mitigation efforts and management and field service expertise. PricingOur portfolio has always been competitive in the mortgage insurance industry and with newer entrants joining the industry, price competition has continued as these newer entrants have soughtconstructed to gain a greater presence in the market and more established industry participants seek to defend their market share and customer relationships. As a result of this competitive environment, recent pricing trends have included: (i) the use of a spectrum of filed rates to allow for formulaic, risk-based pricing (commonly referred to as “black-box” pricing); (ii) the use of customized (often discounted) rates on lender-paid, Single Premium Policies and to a limited extent, on borrower-paid Monthly Premium Policies; and (iii) overall reductions in standard filed rates on borrower-paid Monthly Premium Policies. In the recent past, the willingness of mortgage insurers to offer reduced pricing (whether through filed or customized rates) led to an increased demand from certain lenders for reduced rate products. This produced a marketplace where balancing both targetedmaximize long-term expected returns on new business andwhile maintaining an acceptable sharerisk level. Our investment objectives are to utilize appropriate risk management oversight to optimize after-tax returns, while preserving capital. We target the level of the insuredour short-term investments to manage our expected short-term cash requirements.
Our investment policies and strategies are subject to change, depending on regulatory, economic and market became more challenging for all participants. Although there can be no assurance that there will not be broad-based declines in mortgage insurance pricing in theconditions and our then-existing or anticipated financial condition and operating requirements, including our current and future following the widespread industry pricing changes for standard rates that occurred during the first half of 2016, pricing throughout the industry has been relatively stable with respect to borrower-paid Monthly Premium Policies. Further, in 2016 the California Department of Insurance issued guidance to the mortgage insurance industry stating that any approved discounting of a mortgage insurer’s rates must be provided to all similarly situated customers of the mortgage insurer. See “Item 1A. Risk Factors—Ourtax positions. The investments held at our insurance subsidiaries are also subject to comprehensive state insurance regulations and otherregulatory requirements which we may failapplicable to satisfy.” Although the impact of this guidance is uncertain, it is possible that this guidance will discourage the discounting of rates within the mortgagesuch insurance industry.subsidiaries. We monitor various competitive and economic factors while seeking to balance both profitability and market share considerations in developing our pricing and origination strategies. We have taken a disciplined approach to establishing our premium rates and writing a mix of business that we expect to produce our targeted level of returns on a blended basis and an acceptable level of NIW. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF.”As demonstrated by our strong NIW generated in 2016, we believe we remain well positioned to compete for the high-quality business being originated today, including the generally more profitable, borrower-paid business, while at the same time maintaining projected returns on NIW within our targeted ranges. Throughout 2016, we increased our share of NIW within the private mortgage insurance market and, based on publicly available information, we estimate that our share of NIW within the private mortgage insurance market (excluding HARP refinancings) was approximately 19% for 2016.
CertainOversight responsibility of our privateinvestment portfolio rests with management, and allocations are set by periodic asset allocation studies, calibrated by risk, return and after-tax considerations. The risks we consider include, among others, duration, liquidity, market, interest rate and credit risks. As of December 31, 2018, we internally manage 6.8% of the investment portfolio (the portion of the portfolio largely consisting of U.S. Treasury obligations, money market funds and certain exchange-traded funds), with the remainder primarily managed by three external managers. External managers are selected by management based primarily upon the selected allocations, as well as factors such as historical returns and stability of their management teams. Management’s selections are presented to and approved by the Finance and Investment Committee of Radian Group’s board of directors.
At December 31, 2018, our investment portfolio had a cost basis of $5.3 billion and a carrying value of $5.2 billion, which includes $0.6 billion of investments maturing within one year or less. Our investment portfolio did not include any direct residential real estate or whole mortgage insurance competitors are subsidiariesloans at December 31, 2018. At December 31, 2018, 97.1% of larger corporationsour investment portfolio was rated investment grade. For additional information about our investment portfolio, see the information that have accessfollows, as well as Notes 5 and 6 of Notes to greater amountsConsolidated Financial Statements. Investment Portfolio Diversification The composition of capital and financial resources than we do at a lower cost of capital (including,our investment portfolio, presented as a resultpercentage of tax-advantaged, off-shore reinsurance vehicles) and have better financial strength ratings than we have. As a result, they may be better positioned to compete outside of traditional mortgage insurance, including if the GSEs expand their use of or pursue alternative forms of credit enhancement. In addition, because of the current tax advantage of being off-shore, certain of our competitors are able to achieve higher after-tax rates of return on the NIW they write compared to on-shore mortgage insurers suchoverall fair value at December 31, 2018, was as Radian Guaranty, which could allow these off-shore competitors to leverage reduced pricing to gain market share, while continuing to achieve acceptable returns on NIW.follows: ______________________ | | | (1) | Primarily consists of taxable state and municipal investments. |
We also compete with governmental and quasi-governmental agencies, principally the FHA and the VA. We compete with the FHA and VA on the basisAs of loan limits, pricing, credit guidelines, termsDecember 31, 2018, we did not have any investment in any person (including affiliates thereof) that exceeded 10% of our insurance policies and loss mitigation practices. Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its market sharetotal stockholders’ equity.
Investment Portfolio Scheduled Maturity The weighted-average duration of the insured mortgage market which peaked at approximately 74%assets in 2009. Since then,our investment portfolio as of December 31, 2018 was 4.0 years. We seek to manage our investment portfolio to maintain sufficient liquidity within our risk and return tolerances and to satisfy our operating and other financial needs based on our current liabilities and business outlook. The following table shows the private mortgage insurance industry generally had been recapturing market share from the FHA, primarily due to: (i) improvements in the financial strength of private mortgage insurers; (ii) the development of new products and marketing efforts directed at competing with the FHA; (iii) increases in the FHA’s pricing; (iv) the U.S. government’s pursuit of legal remedies against FHA-approved lenders related to loans insured by the FHA; and (v) various policy changes at the FHA, including the general eliminationscheduled maturities of the premium cancellation provision. However,securities held in January 2015, the FHA reduced its annual mortgage insurance premium by 50 basis points. This reduction, combined with our premium changes in April 2016 to increase our pricing for borrowers with lower FICO scores, has negatively impacted our ability to compete with the FHA on certain high-LTV loans to borrowers with FICO scores below 720. However, we believe that our pricing changes made during the first half of 2016 enable us to more effectively compete with the FHA on certain high-LTV loans to borrowers with FICO scores above 720. In addition, we believe that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans are factors that continue to provide a competitive advantage for mortgage insurers. The FHA’s share of the total insured mortgage market (includes FHA, VA and private mortgage insurers) decreased from 39% in 2015 to 35% in 2016. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—NIW.” More recently, on January 9, 2017, the FHA announced another reduction of its annual mortgage insurance premium by 25 basis points. However, before this reduction went into effect, the FHA announced that it was suspending the premium reduction indefinitely. It is unclear whether the reduction will ultimately be canceled or the suspension will be removed. If the suspension is removed it could have a negative effect on our ability to compete with the FHA.investment portfolio at December 31, 2018: In addition, we have faced increasing competition from the VA. Based on publicly available information, the VA accounted for 28% of the insurable mortgage market in 2016. We believe that the VA’s market share has generally been increasing because the VA offers 100% LTV loans and charges a one-time funding fee that can be included in the loan amount with no additional monthly expense, and because of an increase in the number of borrowers that are eligible for the VA’s program. | | | | | | | | | | Fair Value | | Percent | | ($ in millions) | | | | | Short-term investments | $ | 538.8 |
| | 10.4 | % | Due in one year or less (1) | 87.3 |
| | 1.7 |
| Due after one year through five years (1) | 1,118.8 |
| | 21.6 |
| Due after five years through ten years (1) | 1,125.5 |
| | 21.7 |
| Due after ten years (1) | 517.3 |
| | 10.0 |
| RMBS (2) | 353.2 |
| | 6.8 |
| CMBS (2) | 591.4 |
| | 11.4 |
| Other ABS (2) | 704.7 |
| | 13.6 |
| Other investments (3) | 144.0 |
| | 2.8 |
| Total (4) | $ | 5,181.0 |
| | 100.0 | % | | | | | |
______________________
| | | (1) | Actual maturities may differ as a result of calls before scheduled maturity. |
| | | (2) | RMBS, CMBS and other ABS are shown separately, as they are not due at a single maturity date. |
| | | (3) | No stated maturity date. |
| | | (4) | Includes $27.9 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information. |
ServicesInvestment Portfolio by Rating
The following chart provides the ratings of our investment portfolio, presented as a percentage of overall fair value, as of December 31, 2018:
AcquisitionEnterprise Risk Management
Risk Philosophy, Vision and Appetite As a financial services organization, risk management is a critical part of Claytonour business. Our ERM vision is to remain one of the housing industry’s leading risk management organizations by providing solutions that effectively identify, assess and profitably manage risks across the entire mortgage life-cycle. The following goals guide our strategy and actions as a risk management organization: On June 30, 2014,Embed and continually reinforce a disciplined, corporate-wide risk culture that utilizes an understanding of risk/return tradeoffs to drive quality decisions, utilizing a disciplined approach designed to achieve long-term, through-the-cycle profitability;
Maintain credit, underwriting and risk/return disciplines based on sound data and analytics and continuous feedback throughout the organization; Proactively monitor origination, portfolio and market trends to identify and mitigate emerging risks; Continually refine analytical and technological capabilities, processes and systems to effectively identify, assess and manage risks; and Develop and leverage tools and capabilities to analyze the risk/return trade-offs of corporate strategy and business decisions in order to inform and optimize capital allocation.
Our risk appetite is driven by our business strategy, which is established by executive management and overseen by Radian’s board of directors. Risk appetite is defined as the amount of risk, on a broad level, that an organization is willing to take on in pursuit of value. Based on our risk appetite, management then determines our risk tolerances. Risk tolerances represent the typical measures of risk used to monitor exposure in a particular risk category or for a specific initiative, compared with the stated risk appetite. The illustration below depicts our framework for developing risk appetite and tolerance. We define our risk appetite qualitatively through the key risk categories where strategic execution can take place. We develop risk appetite statements that are designed to achieve the following: Define the risk Radian is willing to accept and manage in pursuit of long-term value on a risk-adjusted basis; Incorporate risk management into our strategic planning process; Enhance risk understanding and awareness at the board and executive management levels; Develop risk tolerances for business units within the context of the defined risk appetite; and Improve the quality of decision-making on significant business decisions. Risk Categories Our key risk categories are: | | | • | Credit: The risk of default or failure to fulfill a financial obligation in a timely manner; |
| | | • | Financial: The risk of market forces on the ability to meet financial obligations; |
| | | • | Strategic: The risk of failure to properly respond to changes in the business environment; |
| | | • | Operational: The risk that business practices, processes, policies and systems are not adequate to meet enterprise objectives; and |
| | | • | Regulatory and Compliance: The risk of non-compliance with laws, rules, regulations and prescribed practices in any jurisdiction in which the business operates. |
We do not identify reputational risk as a distinct category of risk. Rather, we acquired Clayton,view reputational risk as pervasive throughout our entire risk portfolio, as each risk on its own can impact our reputation if not mitigated or managed properly.
Risk Governance Our ERM program is subject to a leading providercomprehensive governance structure, as illustrated in the following chart and further described below. Board of servicesDirectors. The full board of directors is responsible for the general oversight of risks. Our board of directors seeks to understand and solutionsoversee the most critical risks relating to our business, allocates responsibilities for the oversight of risks among the full board and its committees, and reviews the systems and processes that management has in place to manage the current risks facing Radian, as well as those that could arise in the future. The full board of directors oversees our strategic risks, regulatory risks, risks related to our information technology activities and cyber security risks. As noted above, the board conducts certain aspects of its risk oversight function through the following board committees: Audit Committee; Credit Management Committee; Finance and Investment Committee; Governance Committee; and Compensation and Human Resources Committee. Each Committee Chair provides regular reports to the mortgagefull board regarding the Committee’s specific risk oversight responsibilities. The board regularly meets with management to receive reports derived from (i) our ERM function regarding the most significant risks we are facing, and real estate industries. In connectionthe steps being taken to assess, manage and mitigate those risks; and (ii) the Company’s information security function regarding cybersecurity risks and the Company’s efforts to mitigate such risks. The full board further considers current and potential future strategic risks facing the company as part of its annual strategic planning session with management.
Integrated ERM Framework. We have adopted an integrated approach to risk management, which includes: (i) a centralized ERM function that resides within the office of our Chief Financial Officer and is responsible for overseeing the process for risk identification, assessment, management and mitigation across the organization; (ii) various management committees that oversee specific risks; (iii) business units that manage specific risks associated with their business activities; and (iv) an internal audit function that performs periodic, independent reviews and tests compliance with risk management policies, procedures and standards across the company. The various management committees include, but are not limited to, a Pricing and Credit Committee, a Capital and Liquidity Review Committee and a Model Governance Committee (collectively “ALCO”), an Information Security and Resilience Committee, a Regulatory Compliance Council, a Mortgage Insurance Reserve Committee, a Title Insurance Underwriting Committee, a Title Insurance Claims Committee and an Enterprise Data Governance Committee. Our integrated ERM framework is designed to identify the risks we are facing, and to assess, manage and mitigate those risks. Our ERM process is designed to provide executive management with the acquisitionability to evaluate the most significant concerns we face and to calibrate the risk mitigation strategies to account for challenges in the current business environment, as well as external factors that may negatively impact our operations. The risks that fall under the program span the entire spectrum of Clayton,organizational risks and include risks that may not be easily quantifiable or measurable. These include critical risks that fall into our credit, financial, operational, regulatory and compliance, and strategic risk categories. Enterprise level risk reviews are conducted for both our Mortgage Insurance and Services businesses. Our ERM process is illustrated in the following chart: Our ERM program takes a holistic approach to managing risks that we introducedface in our businesses. A cross-functional team, guided by subject matter experts and experienced managers, follows a newsystematic method to identify, evaluate and monitor both known and emerging risks. Our ERM program is a dynamic process, which includes ongoing analysis and ranking of the most significant risks and the alignment of risk management activities with business strategies. Risk assessments and mitigation plans are developed to address these risks. These assessments and plans are subject to review and modification to account for changes in markets and the regulatory environment, as well as other internal or external factors. Risk scoring and validation of
the effectiveness of risk management plans through management reporting segment—Services. During the first quarter of 2015, Clayton acquired Red Bell, a real estate brokerage, valuationfacilitate program sustainability and technology company. In addition, in October 2015, Clayton acquired ValuAmerica, a national title agency and appraisalpromote accountability for risk management company. See Notes 1 and 7 of Notes to Consolidated Financial Statements for additional information regarding these acquisitions. These acquisitions have expanded Clayton’s scope of services and are consistent with our strategy to provide servicesactivities throughout the mortgagecompany. An ERM Council, consisting of mid-senior level employees, meets at least quarterly to review the organization’s top risks, as well as any risks that may have been upgraded or downgraded during the review cycle. The output (reports, dashboards, etc.) from the ERM Council is consolidated and real estate industries.presented to an ERM Executive Steering Committee (consisting of executive management) at least quarterly. The ERM Executive Steering Committee, along with the ERM Council, is responsible for assisting the board of directors in the fulfillment of its risk oversight responsibilities.
Radian currently employs more than 60 dedicated risk management professionals and has developed and established credit, portfolio, and counterparty risk policies, enterprise risk management policies, procedures for monitoring compliance with these policies and comprehensive capabilities and tools to identify, communicate, and mitigate credit and risk-related issues.
Services Business Overview Overview Our Services segment providesoffers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, to the real estate and mortgage finance industries, including outsourced services, information-based analytics, valuations and specialized consulting and surveillance services. Wethat provide these services and solutions for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities as well as other consumer ABS. Our Services segment provides information and services that financial institutions, investors and government entities, among others, useother resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estateestate. These services are primarily provided to mortgage lenders, financial institutions, investors and other consumer ABS. The primarygovernment entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers. Our mortgage services offered are described further belowhelp loan originators and include: (i)investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, underwritingRMBS securitization and due diligence; (ii)distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance including RMBS surveillance, loan servicer oversight, loan-level servicing compliance reviews and operational reviews of mortgage servicersunderwriting. Our real estate services help lenders, investors and originators; (iii)real estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and componentreal estate brokerage services. Our title services providing outsourcingprovide a comprehensive suite of title insurance products, title settlement services and technology solutions forboth traditional and digital closing services. A key element of our overall business strategy is to use our Services segment to diversify our business and revenue streams by increasing our participation in multiple facets of the SFR and residential real estate markets, as well as outsourced solutions for appraisal, title and closing services; (iv) REO management services; and (v) services for the United Kingdom and European mortgage markets through our EuroRisk operations. Operating Environment
Our Services business is impacted by macroeconomic conditions and specific events that impact the mortgage finance and related industries. Sales volume inmarkets. In 2017, we undertook a strategic review of our Services business varies based onand made several decisions with respect to the overall activity in the mortgage finance marketbusiness strategy to reposition this business to drive future growth and the health of related industries. Whileprofitability. Following this strategic review, we committed to a restructuring plan and have refined our Services business overall is most successful instrategy to focus on a healthymore limited set of services. See “Item 7. Management’s Discussion and robust housingAnalysis Financial Condition and economic environment, weResults of Operations-Overview-Business Strategy.” We believe that the diversity of the services offered by our Services segment, which are intended to cover all phases of the mortgage value chain, helps mitigate the reduced demand for certaincombination of our mortgage andinsurance with our unique set of diversified mortgage, real estate and title services provides us with an opportunity to become increasingly more relevant to our customers and solutions in varyingis a competitive differentiator for us compared to other private mortgage finance environments. For example, the demand for our due diligence services may decrease in unfavorable economic conditions due to lower mortgage origination and securitization volumes, whereas the demand for REO management services may tend to increase in such an environment. In addition, while the size of the mortgage finance market may be adversely impacted by increased regulatory requirements, these increased requirements may increase the demand for certain of our services, including services related to compliance with the CFPB mortgage servicing standards and the regulatory requirements for third-party review of loans in ABS.insurance companies.
Services Offered Loan Review, Underwriting and Due Diligence. Mortgage Services.Our mortgage services loan review underwriting and due diligence services includesurveillance products help customers understand risk associated with originating, buying, selling and servicing pools of loans. In this business, we primarily provide loan-level due diligence for various asset classes (residential, single family rental and non-residential) and securitizations, including single family rental and other private label securitizations and securitizations of GSE loans, with offerings focused on credit underwriting, regulatory compliance, compliance with representation and warranties and collateral valuation. Our engagements may take place, among other contexts, prior to or after the sale of a primary focus on the residential mortgagepool of loans, in connection with securitizations, transactions involving warehouse lines of credit, GSE credit risk transfer transactions and non-GSE RMBS markets.transactions involving master servicing rights. We utilize skilled professionals and proprietary technology to conduct these services, with product offerings focused on credit underwriting, regulatory compliance and collateral valuation. These servicesdeliver customized solutions that help our clients identify and understand areas of risk and opportunity across the risk contained in a loan file, and provide them with information to help them price, acquire, securitize or service the assets we review. We also leverage our underwriting expertise to offerresidential home mortgage fraud review and re-verification, including identifying breaches in representations and warranties made by sellers of the loans.spectrum.
As part of our underwriting services, we offer contract underwriting services and compliance reviews to verify that loan file documentation conforms to specified guidelines and regulatory requirements. In our contract underwriting business we underwrite our customers’ mortgage loan application files for secondary market compliance (e.g., for sale to the GSEs), and may concurrently assess the file for mortgage insurance eligibility. For a fee,Generally, we offer these services to our third-party Mortgage Insurance and Services customers. We offer limited indemnification to our contract underwriting customers with respect to those loans that we simultaneously underwrite for both secondary market compliance and for potential mortgage insurance eligibility. In addition, we may, in certain circumstances, offer limited indemnification when we underwrite a loan only for secondary market compliance. The legal entity and its employees that provide our contract underwriting services are compliant with the SAFE Act in all 50 states and the District of Columbia.customers. We train our underwriters, require them to complete continuing education and routinely audit their performance to monitor the accuracy and consistency of underwriting practices. Surveillance. We offer a full range of services to support the single family rental asset class. Our comprehensive single family rental services provide a centralized, single point of contact for facilitating the valuation, diligence and underwriting services needed to support single family rental securitizations, multi-borrower transactions and warehouse facilities.
Our surveillance services utilize proprietarydata, technology and skilled professionals to provide ongoing, independent monitoring of mortgage servicer and loan performance. We offer risk management and servicing oversight solutions, including RMBS and single family rental securitization surveillance, regulatory and operational loan level oversight ARRand asset representation review services in connection with securitizations, and consulting services.securitizations. RMBS surveillance services monitor the servicers of mortgage loans underlying outstanding RMBS. Regulatory and operational loan level oversight provides regular monitoring of servicing operations to measure and assess compliance with applicable policies and regulations. Our ARRasset representation review services provide targeted loan and receivable oversight for ABS issuers and their investors, including on asset classes other than mortgage loans, in the event of certain default triggers within the ABS. Our consulting services are focused on regulatory compliance and operational reviews of both mortgage servicers and loan originators. Real Estate ValuationServices. Our real estate services provide data, analytics, process technologies, REO asset management and Component Services. Ourresidential property valuation services consistto financial institutions, the GSEs, and private investment funds to support the acquisition, sale and management of residential real estate pricing and valuations, includingproperties. Our real estate services include: full appraisal products; property inspection/condition reports; appraisal review products; hybrid/ancillary appraisal products; automated valuation models,products; broker price opinions (BPOs); asset watch; and a variety of appraisal products, as well as real estate brokerage services and technology solutions.rental analysis. These valuation services primarily are provided through Clayton’s Red Bell and ValuAmerica subsidiaries to originators, owners, purchasers and servicers of, and to investors in, performing and non-performing mortgage loans and REO propertiesproperties. We further provide asset management services that include turn-key and SFR securitizations. ValuAmerica also provides title and closing services. Our component service offerings are primarily focused on the SFR market, and include valuations, property inspections, title reviews, lease reviews and tax lien reviews. We provide thesesolutions for REO asset management, single family rental services and due diligence reviewstransition financing services management. These services are designed to issuers of SFR securitizations as well as to lenders and investors insupport the SFR market.
REO Management. Our REO management services provide management of the entire REO disposition process, including management of the eviction and redemption process, management ofas well as property preservation and repairs, property valuation,repairs.
Title Services. We also offer a comprehensive suite of title, reviewsclosing and curative work, marketing,settlement services for residential mortgage loans. We offer negotiation and closing services. EuroRisk. Our EuroRisk operations provide outsourced mortgage services in the United Kingdom and Europe, with offerings that include due diligence services, quality control reviews, valuation reviews and consulting services. EuroRisk provides services to mortgage originators and servicers,title insurance as well as to investorsa full complement of title services that include tax and title data services; centralized recording services; document retrieval; default curative title services; deed reports; and property reports. Our closing and settlement services include electronic execution of some or all mortgage loan closing documents in performinga secure digital environment (eClosing), including full eClosing, hybrid eClosing and non-performing mortgage loans. Our EuroRiskremote eClosing, as well as signing services, revenue is generated in foreign countries throughout Europe.
centralized closing and settlement services and local closing and settlement services.
Services Revenue Drivers For each of the services we offer in our Services segment, the following chart summarizes the percentage of total Services revenue for each business line, the type of clients that it serves and the most significant revenue drivers: | | | | | | | | % of Services Revenue(1) 2016/2015/2014
| Clients | Current Revenue Drivers | | Loan Review, Underwriting and Due Diligence | 36%/30%/38% | Banks
REITs
Mortgage Originators
Investment Banks
Private Equity Firms
GSEs
Mortgage Servicers
| Whole Loan Trades (Performing & Non-performing)
GSE Risk-sharing Transactions
Quality Control and Compliance Reviews
Leverage Radian's Large Client Base to Expand Origination Services
Non-agency RMBS Securitization Due Diligence
| | | | | | Surveillance | 16%/19%/17% | Banks
Mortgage Servicers
Investment Banks
REITs
Asset Managers
Auto, Credit Card,
Equipment & Student Loan Issuers
| Oversight of Loan Servicing/Compliance for Large Banks and Servicers
Surveillance on Pre-2008 Non-Agency RMBS for Issuers
Surveillance on New Non-agency RMBS, and ARR Services for Other ABS Asset Classes
| | | | Real Estate Valuation and Component Services | 31%/30%/22% | Banks
Investment Banks
Issuers Mortgage Originators
SFR Owners
Private Equity Firms
REITs
Mortgage Servicers
| SFR Securitizations and Debt Facilities for Institutional Investors
SFR Acquisitions, Non-performing Loan Trades and Servicing, Mortgage Origination Support, Asset Monitoring, Offer Management
Title Policies, Title Curative and Appraisal and Valuation Services via Automated Valuation Estimators (AVEs) and Appraiser Reviewed Broker Price Opinions
| | | | | | |
| | | | | | | | % of Services Revenue(1) 2016/2015/2014
| Clients | Current Revenue Drivers | | REO Management | 14%/14%/16% | Banks
GSEs
Mortgage Servicers
Private Equity Firms
Property Managers
Hedge Funds
Originators
REITs
| REO Asset Management Services on Distressed Loans and Property Sales
Proprietary Technology Applications for Monitoring and Acquisition Analytics
| | | | EuroRisk | 3%/7%/7% | Banks
Investment Banks
Private Equity Firms
Mortgage Originators
| Non-performing Loan Trades, RMBS Securitization Due Diligence, Servicing and Lending Surveillance, Servicer Review, Title Review Services and Consulting | | |
______________________
| | (1) | Represents the percentage of total Services segment revenue for the each of the years ended December 31, 2016, 2015 and 2014, respectively. Percentages have been revised for all periods presented to reflect changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, revenue for loan review, underwriting and due diligence increased. See Note 4 of Notes to Consolidated Financial Statements. |
Seedrivers for our Services business, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Services.”
Fee-for-Service Contracts Our Services segment is primarily a fee-for-service business. Our services revenue is generated under three basic types of contracts: Fixed-Price Contracts. Under fixed-price contracts, we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price or day rate. We use fixed-price contracts in our real estate valuation and component services, our loan review, underwriting and due diligence services as well as our title and closing services. We also use fixed-price contracts in our surveillance business for our servicer oversight services and RMBS surveillance services, and in our REOasset management business.business activities. Time-and-Expense Contracts. Under a time-and-expense contract, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. These contracts are used in our loan review, underwriting and due diligence and EuroRisk services offerings, as well as in the consulting services that we offer as partservices.
Percentage-of-Sale Contracts. Under percentage-of-sale contracts, we are paid a contractual percentage of the sale proceeds upon the sale of each property. These contracts are only used for a portion of our REO management services and our real estate brokerage services. In addition, through the use of Services’our proprietary technology, property leads are sent to select clients. Services recognizesUpon the client’s successful closing on the property, we recognize revenue for these transactions based on a percentage of the sale, upon the client’s successful closing on the property.sale. In most cases, our contracts with our clients do not include minimum volume commitments and can be terminated at any time by our clients. Although some of our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a significant portion of our engagements are transactional in nature and may be performed in connection with securitizations, loan sales, loan purchases or other transactions. Due to the transactional nature of our business, our Services segment revenues may fluctuate from period to period as transactions are commenced or completed. In addition, our segment revenues are impacted by the origination volumes of our customers, which may fluctuate from period to period.
Title Insurance Premiums
In addition to the fees for services discussed above, we earn net premiums on title insurance written by EnTitle Insurance.
32
Customers We have a broad range of customers for our Services segment due to the breadth of services we are able to offer across the mortgage value chain. Our principal third-party customers are: Banks, credit unions, independent mortgage banks and other originators of mortgage loans; RMBS/ABS issuers, securitization trusts, the GSEs, private equity, hedge funds, REITs,real estate investment trusts, investment banks and other investors in mortgage-related debt instruments, whole loans and other securities; SFR owners;Owners of single family rental homes;
Mortgage servicers; Real estate brokers and agents; and Regulators and rating agencies involved in the mortgage, real estate and housing finance markets. Our customers include many of the largest financial institutions and participants in the mortgage sector and, as such, our services revenue is concentrated among our largest customers. For the year ended December 31, 2016,2018, the top 10 Services customers (which includes our affiliates) generated approximately 52%42% of the Services segment’s revenues.services revenue. See “—Services Business Overview—Services Revenue Drivers.”
Competition We believe our Services business is uniquely positioned as a single provider of an array of outsourced services and solutions to participants inacross the residential mortgage and real estate value chain and that this position differentiates us from our competitors.chain. We are not aware of any other mortgage insurance company that provides a comparable range of services to the residential mortgage and real estate industries. However, our Services business has multiple competitors within each of its individual lines of business. Our competitors mainly include small privately-held companies and subsidiaries of large publicly-traded companies. Significant competitors within each of our business lines include: | | ��• | Loan Review, Underwriting and Due Diligence –Mortgage Services - American Mortgage Consultants, Inc., Digital Risk, LLC, and Opus Capital Markets Consultants, LLC, FTI Consulting, Inc., Pentalpha Surveillance LLC, TENA Companies, Inc., Adfitech Inc. and Navigant Consulting, Inc.
|
Surveillance – Digital Risk, LLC, FTI Consulting, Inc., Pentalpha Surveillance LLC and TENA Companies, Inc.
Real Estate Valuation and Component Services – ClearCapital.com, Inc., CoreLogic, Inc., Pro Teck Valuation Services, First American and Black Knight Financial Services
REO Management – VRM Mortgage Services and Chronos Solutions LLC
EuroRisk – Deloitte LLP, PricewaterhouseCoopers LLP, Ernst & Young LLP, KPMG LLP and Situs Group, LLC
| | | • | Real Estate Services - ClearCapital.com, Inc., CoreLogic, Inc., Pro Teck Valuation Services, First American Financial Corporation, Black Knight, Inc., VRM Mortgage Services, Fidelity National Financial, Inc. and ServiceLink |
| | | • | Title Services - First American Financial Corporation, Fidelity National Financial, Inc., Stewart Information Services Corporation, Old Republic Title Insurance Group, Inc., Westcor Land Title Insurance Company and WFG National Title Insurance Company |
Across all business lines, we compete on the basis of industry expertise, price, technology, service levels and relationships.
We believe that combining our mortgage insurance franchise with our diversified set of mortgage and real estate products and services provides us with an opportunity to become increasingly relevant to our customers and enhances our ability to compete in the insured market by differentiating us from other mortgage insurance competitors. Discontinued Operations — Financial GuarantyEnterprise Sales and Marketing
Our enterprise sales and marketing team is centralized to create a unified focus on selling all of our mortgage insurance and mortgage and real estate products and services across our customer base. Our Enterprise sales and marketing team offers a coordinated sales effort under single management and is supported by dedicated business unit and account management teams organized in various geographic regions across the U.S., as well as a telesales team located in our corporate headquarters in Philadelphia. At the enterprise level, we have a senior sales executive dedicated to each of the following areas: credit unions, banking institutions, investment bankers/private equity and fund managers, mortgage bankers, GSEs and servicers. We expect that our enterprise approach to selling the complementary products and services of our Mortgage Insurance and Services businesses will strengthen our relationships with our customers, attract new customers and enhance our ability to compete.
Our Mortgage Insurance dedicated business unit sales team includes a business development group that is focused on developing new mortgage insurance relationships and an account management group that is responsible for supporting our existing mortgage insurance relationships. Our Services dedicated business unit sales team includes a title services sales team focused on developing new title services relationships and expanding and supporting existing customer relationships, and a mortgage and real estate services team responsible for selling other services offered by our Services business. All sales efforts are supported by our telesales teamthat serves customers using any and all of our products and services, and is responsible for managing and growing customer relationships and promoting increased customer adoption. All sales personnel are compensated by salary, and other incentive-based pay, which may be tied to the achievement of certain business objectives and sales goals or the promotion of certain products. Customer Support We have developed training programs for our customers to help their employees develop the knowledge and skills to respond to changing market demands. Our learning solutions are provided to customers to promote the role of private mortgage insurance in the marketplace as well as to promote Radian’s specific products and offerings. We offer training in three format options: instructor-led classroom sessions, instructor-led webinars and self-directed on-demand learning. Sale of Financial Guaranty Business Radian completed the sale of Radian Asset Assurance Inc. to Assured Guaranty Corp. on April 1, 2015. Until the April 1, 2015 sale date, the operating results of Radian Asset Assurance were classified as discontinued operations for all periods presented in our consolidated statements of operations. Previously, Radian Asset Assurance had represented substantially all ofand exited the financial guaranty segment; therefore, as a result of the sale, we no longer report a financial guaranty business segment. business. Radian Asset Assurance provided direct insurance and reinsurance on credit-based structured finance and public finance risks. For additional information related to discontinued operations, see Note 18 of Notes to Consolidated Financial Statements.
Investment Policy and Portfolio Our investment portfolio is our primary source of liquidity.claims paying resources. We have developed an investment strategy that uses an asset allocation methodology that incorporatesconsiders our business environment and consolidated risks andas well as current investment conditions. With respect to our fixed income investments, the following internal investment policy guidelines, among others, are applied at the time of investment: At least 75% of our investmentfixed income portfolio, based on market value, must consist of investment securities that are assigned a quality designation of NAIC 1 by the NAIC or equivalent ratings by a NRSROnationally recognized statistical ratings organization (“NRSRO”) (i.e., “A-” or better by S&P and “A3” or better by Moody’s); A maximum of 25% of our investmentfixed income portfolio, based on market value, may consist of investment securities that are assigned a quality designation of NAIC 2 by the NAIC or equivalent ratings by a NRSRO (i.e., “BBB+” to “BBB-” by S&P and “Baa1” to “Baa3” by Moody’s); and A maximum of 10% of our investmentfixed income portfolio, based on market value, may consist of investment securities that are assigned quality designations NAIC 3 through 6 or equivalent ratings by a NRSRO (i.e., “BB+” and below by S&P and “Ba1” and below by Moody’s).
Our portfolio has been constructed to maximize long-term expected returns while maintaining an acceptable risk level. Our investment objectives are to utilize appropriate risk management oversight to generate tax-efficient income,optimize after-tax returns, while preserving capital. We target the level of our short-term investments to manage our expected short-term cash requirements. Our investment policies and strategies are subject to change, depending on regulatory, economic and market conditions and our then-existing or anticipated financial condition and operating requirements, including our current and future tax positions. The investments held at our insurance subsidiaries are also subject to insurance regulatory requirements applicable to such insurance subsidiaries. Oversight responsibility of our investment portfolio rests with management, and allocations are set by periodic asset allocation studies, calibrated by risk, and return and after-tax considerations. The risks we consider include, among others, duration, liquidity, market, interest rate and credit risks. As of December 31, 2016,2018, we internally manage 11%6.8% of the investment portfolio (the portion of the portfolio largely consisting of U.S. Treasury obligations) internally,obligations, money market funds and certain exchange-traded funds), with the remainder primarily managed by three external managers. External managers are selected by management based primarily upon the selected allocations, as well as factors such as historical returns and stability of their management teams. Management’s selections are presented to and approved by the Finance and Investment Committee of our Board.Radian Group’s board of directors. At December 31, 2016,2018, our investment portfolio had a cost basis of $5.3 billion and a carrying value of $4.5$5.2 billion, including $0.8which includes $0.6 billion of investments maturing within one year or less. Our investment portfolio did not include any direct residential real estate or whole mortgage loans at December 31, 2016.2018. At December 31, 2016, 99.8%2018, 97.1% of our investment portfolio was rated investment grade. For additional information about our investment portfolio, see the information that follows, as well as Notes 5 and 6 inof Notes to Consolidated Financial Statements.
Investment Portfolio Diversification The composition of our investment portfolio, presented as a percentage of overall fair value at December 31, 2016,2018, was as follows: ______________________ | | | (1) | ConsistsPrimarily consists of taxable state and municipal investments. |
As of December 31, 2016,2018, we did not have any investment in any person and its(including affiliates thereof) that exceeded 10% of our total stockholders’ equity.
Investment Portfolio Scheduled Maturity The weighted averageweighted-average duration of the assets in our investment portfolio as of December 31, 20162018 was 5.14.0 years. We seek to manage our investment portfolio to maintain sufficient liquidity within our risk and return tolerances and to satisfy our operating and other financial needs based on our current liabilities and business outlook. The following table shows the scheduled maturities of the securities held in our investment portfolio at December 31, 2016:2018: | | | | Fair Value | | Percent | Fair Value | | Percent | | ($ in millions) | | | | | | | | Short-term investments | | $ | 538.8 |
| | 10.4 | % | Due in one year or less (1) | $ | 825.5 |
| | 18.5 | % | 87.3 |
| | 1.7 |
| Due after one year through five years (1) | 525.6 |
| | 11.8 |
| 1,118.8 |
| | 21.6 |
| Due after five years through ten years (1) | 1,085.4 |
| | 24.3 |
| 1,125.5 |
| | 21.7 |
| Due after ten years (1) | 677.2 |
| | 15.2 |
| 517.3 |
| | 10.0 |
| RMBS (2) | 388.8 |
| | 8.7 |
| 353.2 |
| | 6.8 |
| CMBS (2) | 507.3 |
| | 11.4 |
| 591.4 |
| | 11.4 |
| Other ABS (2) | 450.1 |
| | 10.1 |
| 704.7 |
| | 13.6 |
| Other investments (3) | 5.1 |
| | — |
| 144.0 |
| | 2.8 |
| | Total | $ | 4,465.0 |
| | 100.0 | % | | Total (4) | | $ | 5,181.0 |
| | 100.0 | % | | | | | | | | |
______________________ | | | (1) | Actual maturities may differ as a result of calls before scheduled maturity. |
| | | (2) | RMBS, CMBS and other ABS are shown separately, as they are not due at a single maturity date. |
| | | (3) | No stated maturity date. |
| | | (4) | Includes $27.9 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information. |
Investment Portfolio by Rating The following chart provides the ratings of our investment portfolio, presented as a percentage of overall fair value, as of December 31, 2016:2018: Enterprise Risk Management
Risk Philosophy, Vision and Appetite
As a financial services organization, risk management is a critical part of our business. Our ERM vision is to remain one of the housing industry’s leading risk management organizations by providing solutions that effectively identify, assess and profitably manage risks across the entire mortgage life-cycle. The following goals guide our strategy and actions as a risk management organization: Embed and continually reinforce a disciplined, corporate-wide risk culture that utilizes an understanding of risk/return tradeoffs to drive quality decisions, utilizing a disciplined approach designed to achieve long-term, through-the-cycle profitability; Maintain credit, underwriting and risk/return disciplines based on sound data and analytics and continuous feedback throughout the organization; Proactively monitor origination, portfolio and market trends to identify and mitigate emerging risks; Continually refine analytical and technological capabilities, processes and systems to effectively identify, assess and manage risks; and Develop and leverage tools and capabilities to analyze the risk/return trade-offs of corporate strategy and business decisions in order to inform and optimize capital allocation.
Our risk appetite is driven by our business strategy, which is established by executive management and overseen by Radian’s board of directors. Risk appetite is defined as the amount of risk, on a broad level, that an organization is willing to take on in pursuit of value. Based on our risk appetite, management then determines our risk tolerances. Risk tolerances represent the typical measures of risk used to monitor exposure in a particular risk category or for a specific initiative, compared with the stated risk appetite. The illustration below depicts our framework for developing risk appetite and tolerance. We define our risk appetite qualitatively through the key risk categories where strategic execution can take place. We develop risk appetite statements that are designed to achieve the following: Define the risk Radian is willing to accept and manage in pursuit of long-term value on a risk-adjusted basis; Incorporate risk management into our strategic planning process; Enhance risk understanding and awareness at the board and executive management levels; Develop risk tolerances for business units within the context of the defined risk appetite; and Improve the quality of decision-making on significant business decisions. Risk Categories Our key risk categories are: | | | • | Credit: The risk of default or failure to fulfill a financial obligation in a timely manner; |
| | | • | Financial: The risk of market forces on the ability to meet financial obligations; |
| | | • | Strategic: The risk of failure to properly respond to changes in the business environment; |
| | | • | Operational: The risk that business practices, processes, policies and systems are not adequate to meet enterprise objectives; and |
| | | • | Regulatory and Compliance: The risk of non-compliance with laws, rules, regulations and prescribed practices in any jurisdiction in which the business operates. |
We do not identify reputational risk as a distinct category of risk. Rather, we view reputational risk as pervasive throughout our entire risk portfolio, as each risk on its own can impact our reputation if not mitigated or managed properly.
Risk Governance Our ERM program is subject to a comprehensive governance structure, as illustrated in the following chart and further described below. Board of Directors. The full board of directors is responsible for the general oversight of risks. Our board of directors seeks to understand and oversee the most critical risks relating to our business, allocates responsibilities for the oversight of risks among the full board and its committees, and reviews the systems and processes that management has in place to manage the current risks facing Radian, as well as those that could arise in the future. The full board of directors oversees our strategic risks, regulatory risks, risks related to our information technology activities and cyber security risks. As noted above, the board conducts certain aspects of its risk oversight function through the following board committees: Audit Committee; Credit Management Committee; Finance and Investment Committee; Governance Committee; and Compensation and Human Resources Committee. Each Committee Chair provides regular reports to the full board regarding the Committee’s specific risk oversight responsibilities. The board regularly meets with management to receive reports derived from (i) our ERM function regarding the most significant risks we are facing, and the steps being taken to assess, manage and mitigate those risks; and (ii) the Company’s information security function regarding cybersecurity risks and the Company’s efforts to mitigate such risks. The full board further considers current and potential future strategic risks facing the company as part of its annual strategic planning session with management.
Integrated ERM Framework.We have adopted an integrated approach to risk management. As partmanagement, which includes: (i) a centralized ERM function that resides within the office of our Chief Financial Officer and is responsible for overseeing the process for risk identification, assessment, management and mitigation across the organization; (ii) various management committees that oversee specific risks; (iii) business units that manage specific risks associated with their business activities; and (iv) an internal audit function that performs periodic, independent reviews and tests compliance with risk management strategy,policies, procedures and standards across the company. The various management committees include, but are not limited to, a Pricing and Credit Committee, a Capital and Liquidity Review Committee and a Model Governance Committee (collectively “ALCO”), an Information Security and Resilience Committee, a Regulatory Compliance Council, a Mortgage Insurance Reserve Committee, a Title Insurance Underwriting Committee, a Title Insurance Claims Committee and an Enterprise Data Governance Committee. Our integrated ERM framework is designed to identify the risks we have implemented a comprehensive Enterprise Risk Management (“ERM”) program. are facing, and to assess, manage and mitigate those risks. Our ERM process is designed to provide executive management with the ability to evaluate the most significant risksconcerns we face and to calibrate the risk mitigation strategies to account for challenges in the current business environment, as well as external factors that may negatively impact our operations. The risks that fall under the program span the entire spectrum of organizational risks and include risks that may not be easily quantifiable or measurable. These include critical risks that fall into our credit, financial, operational, regulatory and compliance, and strategic risk categories. Enterprise level risk reviews are conducted for theboth our Mortgage Insurance and Services businesses. Our ERM process is illustrated in the following chart:  Our ERM program takes a holistic approach to managing risks that we face in our businesses. A cross-functional team, guided by subject matter experts and experienced managers, follows a systematic method to identify, evaluate and monitor both known and emerging risks. Our ERM program is a dynamic process, which includes ongoing analysis and ranking of the most significant risks and the alignment of risk management activities with business strategies. Risk assessments and mitigation plans are developed to address these risks. These assessments and plans are subject to review and modification to account for changes in markets and the regulatory environment, as well as other internal or external factors. Our Chief Risk Officer reports to the Board at least quarterly,scoring and more frequently as necessary, regarding our ERM program and management’s evaluationvalidation of known and emerging risks, including changes in the potential impact and likelihood of these risks occurring. Given the credit-based nature of our mortgage insurance business, in addition to our ERM policies, we employ more than 50 dedicated risk management professionals and have established credit, portfolio and counterparty risk policies. For information about risk management activities in our mortgage insurance business, see “Mortgage Insurance—Mortgage Insurance Risk Management.”
the effectiveness of risk management plans through management reporting facilitate program sustainability and promote accountability for risk management activities throughout the company. An ERM Council, consisting of mid-senior level employees, meets at least quarterly to review the organization’s top risks, as well as any risks that may have been upgraded or downgraded during the review cycle. The output (reports, dashboards, etc.) from the ERM Council is consolidated and presented to an ERM Executive Steering Committee (consisting of executive management) at least quarterly. The ERM Executive Steering Committee, along with the ERM Council, is responsible for assisting the board of directors in the fulfillment of its risk oversight responsibilities. Radian currently employs more than 60 dedicated risk management professionals and has developed and established credit, portfolio, and counterparty risk policies, enterprise risk management policies, procedures for monitoring compliance with these policies and comprehensive capabilities and tools to identify, communicate, and mitigate credit and risk-related issues. Mortgage Insurance Risk Management Our mortgage insurance business employs a comprehensive risk management function, which is responsible for establishing our credit and counterparty risk policies, monitoring compliance with our policies, managing our insured portfolio and communicating credit related issues to management, the Credit Management Committee of Radian Group’s board of directors and to our customers. Risk Origination and Servicing. We believe that understanding our business partners and customers is a key component of managing risk. Accordingly, we assign individual risk managers to specific customers so that they can more effectively perform ongoing monitoring of loan performance, underwriting quality and the risk profile and mix of business of a customer’s mortgage insurance applications. This also allows us to address specific needs of individual customers. The risk managers are located across the country, and their direct interaction with our customers and their access to local markets improves our ability to observe business patterns and manage risk trends. This oversight provides us with the ability to review and study best practices throughout the industry and develop robust data management analysis. The risk managers leverage a suite of customer-level reports to monitor trends at the customer level, identify customers who may exceed certain risk tolerances, and share meaningful data with our customers. The risk managers are also responsible for lender corrective action in the event we discover credit performance issues, such as high early payment default levels. Portfolio Management. We have developed risk and capital allocation models that support our mortgage insurance business. These models provide robust analysis to establish portfolio limits for product type, loan attributes, geographic concentrations and counterparties. We proactively monitor market concentrations across these and other attributes. We also identify, evaluate and negotiate potential transactions for terminating insurance risk and for distributing risk to others, including through reinsurance arrangements. See “—Ceded Reinsurance”for more information about the use of reinsurance as a risk management tool in our mortgage insurance business. As part of our portfolio management function, we monitor and analyze the performance of various risks in our mortgage insurance portfolio. We use this information to develop our mortgage credit risk and counterparty risk policies, and as a component of our default and prepayment analytics. The portfolio management group analyzes the current composition of our mortgage insurance portfolio, and assesses risks to the portfolio from the market (e.g., the effects of changes in home prices and interest rates) as well as risks from particular lenders, products and geographic locales. Credit Policy. We have developed and maintain mortgage-related credit risk policies. These policies reflect our tolerance levels regarding counterparty, portfolio and operational risks involving mortgage collateral. Our credit policy function develops and updates our mortgage insurance eligibility and guidelines through regular monitoring of competitor offerings, customer input regarding lending needs, analysis of historical performance and portfolio trends, quality assurance results, underwriter experience and observations and risk tolerances. The credit policy function also maintains the policies for loan and lender-level exceptions to published guidelines and under-performing lenders, which are administered by mortgage insurance underwriters and risk managers. The credit policy function works closely with our mortgage insurance underwriters to ensure that underwriting decisions align with risk tolerances and principles. Quality Assurance. Quality assurance is a key element of our credit analytics function, and as part of our quality control program, we audit individual loan files to examine underwriting decisions for compliance with agreed-upon underwriting guidelines. These audits are conducted across loans submitted through our delegated and non-delegated underwriting channels. Our quality assurance team audits both our customers and our underwriters to ensure quality in our NIW. Observations and trends derived from our quality assurance process serve as critical inputs into portfolio monitoring, eligibility and guideline
updates and customer surveillance, while also providing valuable feedback to our customers and our underwriters regarding the quality of their mortgage insurance underwriting decisions. Loss Mitigation. We have a dedicated loss mitigation group that works with servicers to identify and pursue loss mitigation opportunities for loans in both our performing and non-performing (defaulted) portfolios. This includes regular surveillance and benchmarking of servicer performance with respect to default reporting, borrower retention efforts, foreclosure alternatives and foreclosure processing. Through this process, we seek to hold servicers accountable for their performance and communicate to servicers identified best practices for servicer performance. Risk Modeling. We have expertise in the development and deployment of integrated credit and interest rate risk models. Using analytical techniques, we have developed loan level default and prepayment models for a wide range of risk management applications, including portfolio analysis, credit decision making, forecasting, and reserving. Ceded Reinsurance. Radian’s reinsurance programs represent a component of our long-term risk distribution strategy. We use reinsurance as a capital and risk management tool in our mortgage insurance business. We have entered into third-party reinsurance transactions as part of our capital and risk management activities, including quota share reinsurance programs that are utilized to proactively manage Radian Guaranty’s capital position under the PMIERs financial requirements, and manage the mix of business in our portfolio. During 2018, we expanded our risk distribution strategy in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk. The objectives of our risk distribution strategy include: (i) supporting our overall capital plans; (ii) lowering our cost of capital; and (iii) reducing portfolio risk and financial volatility through economic cycles. For additional information regarding our third-party quota share reinsurance programs, see Note 8 of Notes to Consolidated Financial Statements. Cybersecurity Risk Management Information security is a significant operational risk for financial institutions such as Radian and includes the risk of loss resulting from cyber-attacks. In an effort to mitigate this risk, Radian has built an Information Security Program that is dedicated to protecting our corporate data as well as data entrusted to us by our customers and partners. At the core of our program is a defense-in-depth strategy, which utilizes multiple layers of security controls to protect data and solutions. Radian utilizes the National Institute of Standards and Technology Cybersecurity Framework (the “NIST CSF”), as a guideline to manage our cybersecurity-related risk. The NIST CSF outlines 98 information security measures over five functions: Identify, Protect, Detect, Respond and Recover. We have developed key security services, including but not limited to, Enterprise Data Protection, Vulnerability Management and Application Security, Managed Threat Detection and Incident Response. We test our incident response readiness and reporting through table top exercises, external and internal penetration testing and other means in our efforts to ensure that risks and incidents are escalated and communicated to appropriate personnel. Our commitment to growing and maintaining our Information Security Program extends across the organization. Our core Information Security Team is comprised of industry-certified practitioners who are committed to adopting security technologies and practices that meet regulatory standards. We have an Information Security and Resilience Committee comprised of company executives, cross-functional Incident Response teams, and strong governance mechanisms designed to ensure compliance with our security policies and protocols. Additionally, our full board of directors is actively engaged in the Information Security Program’s oversight and receives regular updates and reporting from the Company’s Chief Information Security Officer on information security strategies, defense initiatives, event preparedness and continuous improvement efforts. While we have an Information Security Program in place in order to attempt to prevent, detect and respond to unauthorized use or disclosure of confidential information, including non-public personal information, there can be no assurance that such use or disclosure will not occur. See “Item 1A. Risk Factors—The security of our information technology systems may be compromised and confidential information, including non-public personal information that we maintain, could be improperly disclosed.” Regulation We are subject to comprehensive regulation by both federal and state regulatory authorities. Set forth below is a description of significant state and federal regulations and other requirements of the GSEs that are applicable to our businesses. The descriptions below are qualified in their entirety by reference to the full text of the laws and regulations discussed. See “ItemIn Item 1A. Risk Factors—Factors, see “—Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.”and “—Legislation and administrative and regulatory changes and interpretations could impact our businesses.”
State Regulation Overview of State Insurance Regulation and Our Insurance Subsidiaries We and our insurance subsidiaries are subject to comprehensive regulation by the insurance departments in the various states where our insurance subsidiariesthey are licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business. These regulations principally are designed for the protection of policyholders, rather than for the benefit of investors. Insurance regulations address, among other things, the licensing of companies to transact business, claims handling, reinsurance requirements, premium rates and policy forms offered to customers, financial statements, periodic reporting, permissible investments and adherence to financial standards relating to surplus, dividends and other measures of solvency intended to assure the satisfaction of obligations to policyholders. Our insurance subsidiaries’ premium rates and policy forms are generally subject to regulation in every state in which they are licensed to transact business. These regulations are intended to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. In most states where our insurance subsidiaries are licensed, premium rates and policy forms must be filed with the state insurance regulatory authority and, in some states must also be approved, before their use. PremiumWith respect to mortgage insurance, premium rates may be subject to actuarial justification, generally on the basis of the mortgage insurer’s loss experience, expenses and future projections. In addition, states may consider general default experience in the mortgage insurance industry in assessing the premium rates charged by mortgage insurers. As to title insurance, forms and rates must be filed, and in most states approved, prior to usage. Forms require approval to ensure that the coverage and exceptions conform to state insurance regulations. Rates subject to approval often must be supported by actuarial data or a study of financial impact of the rate on the company. Each insurance subsidiary is required by the insurance regulatory authority of its state of domicile, and the insurance regulatory authority of each other jurisdiction in which it is licensed to transact business, to make various filings with those insurance regulatory authorities and with the NAIC, including quarterly and annual financial statements prepared in accordance with statutory accounting principles. In addition, our insurance subsidiaries are subject to examination by the insurance regulatory authority of their state of domicile, as well as each of the states in which they are licensed to transact business. Our Insurance Subsidiaries
All of our insurance subsidiaries are domiciled in Pennsylvania.
Effective December 31, 2015, as part of our efforts to create a more efficient organizational structure, we obtained the necessary approvals from the Pennsylvania Insurance Commissioner to effectuate a reorganization of our mortgage insurance subsidiaries, which included a significant redistribution of assets and RIF among our legal entities. As a result of these actions, substantially all of the RIF and assets previously held by certain of our insurance subsidiaries (RGRI, RMAI, Radian Insurance and Radian Mortgage Insurance) were transferred to Radian Guaranty and a newly formed insurance company, Radian Reinsurance. After this reorganization, the following represents our principal insurance companies as of December 31, 2016:
Radian Guaranty.Radian Guaranty is our primary mortgage insurance company. Radian Guaranty is our only mortgage insurance company that is eligible to insure GSE loans. It is a monoline insurer, restricted to writing first-lien residential mortgage guaranty insurance. In addition to Pennsylvania, Radian Guaranty is authorized to write mortgage guaranty insurance (or in states where there is no specific authorization for mortgage guaranty insurance, the applicable line of insurance under which mortgage guaranty insurance is regulated) in each of the other 49 states, the District of Columbia and Guam. Radian Guaranty is a direct subsidiary of Radian Group.
Radian Reinsurance. Radian Reinsurance is a licensed affiliated reinsurer that primarily provides reinsurance to Radian Guaranty. Radian Reinsurance is a direct subsidiary of Radian Group. In 2016, we also used Radian Reinsurance to participate in the front-end credit risk transfer pilot programs developed by Fannie Mae and Freddie Mac. See “Mortgage Insurance—Mortgage Insurance Business Overview—Mortgage Insurance Products—Non-Traditional Risk” for more information about these pilot programs.
Radian Insurance. Radian Insurance is our insurance subsidiary that is authorized in Hong Kong to insure our remaining Hong Kong insurance portfolio and also insures our other remaining Second-lien risk. Radian Insurance is a direct subsidiary of Radian Group.
In addition, we have the following insurance subsidiaries, each of which had no risk as of December 31, 2016: Radian Investor Surety Inc.; Radian Mortgage Guaranty Inc.; Radian Guaranty Reinsurance; Radian Mortgage Insurance and RMAI.
Insurance Holding Company Regulation
Radian Group is an insurance holding company and our mortgage insurance subsidiaries belong to an insurance holding company system. All states regulate insurance holding company systems, including the non-insurer holding company within that system. These laws generally require each insurance subsidiary within an insurance holding company system to register with the insurance regulatory authority of its domiciliary state, and to furnish to the regulators in these states applicable financial statements, statements related to intercompany transactions and other information concerning the holding company and its affiliated companies within the holding company system that may materially affect the operations, management or financial condition of insurers or the holding company system. Radian Group is considered anWe are subject to the insurance holding company laws of Pennsylvania and Ohio because all of our mortgage insurance subsidiaries are domiciled in Pennsylvania theand EnTitle is domiciled in Ohio. These insurance holding company laws of Pennsylvania regulate, among other things, certain transactions between Radian Group, our insurance subsidiaries and other parties affiliated with us. The holding company laws of Pennsylvania also govern certain transactions involving Radian Group’s common stock, including transactions that constitute a “change of control” of Radian Group and, consequently, a “change of control” of ourits insurance subsidiaries. Specifically, no person may, directly or indirectly, seek to acquire “control” of Radian Group or any of its mortgage insurance subsidiaries unless that person files a statement and other documents with the Pennsylvania Insurance Commissioner and the commissioner’sreceives prior approval is obtained.from the Commissioner. Under Pennsylvania’s insurance statutes, “control” is defined broadly and is “presumed to exist if any person, directly or indirectly, owns, controls, holds with power to vote or holds proxies representing 10% or more of the voting securities” of a holding company of a Pennsylvania domestic insurer. The statute further defines “control” as the “possession, direct or indirect, of the power to direct or cause the direction of the management and policies of” an insurer.
In addition, material transactions between us or our affiliates and our insurance subsidiaries or among our insurance subsidiaries are subject to certain conditions, including that they be “fair and reasonable.” These conditions generally apply to all persons controlling, or who are under common control with, us or our insurance subsidiaries. Certain transactions between us or our affiliates and our insurance subsidiaries may not be entered into unless the Pennsylvania Insurance Commissioner or Ohio Department of Insurance, as applicable, is given 30 days’ prior notification and does not disapprove the transaction during that 30-day period.
Pennsylvania and Ohio regulations also requiresrequire that we identify the material risks within the insurance holding company system that could pose enterprise risk to the insurer. Pennsylvania has adopted the Risk Management and Own Risk and Solvency Assessment Act, which was effective January 1, 2015 and requires, amongAmong other things, Pennsylvania and Ohio require that Pennsylvania-domiciled insurers domiciled in their states maintain a risk management framework and conduct an Own Risk and Solvency Assessment (“ORSA”) annually in accordance with applicable NAIC requirements. Dividends
Under Pennsylvania’s insurance laws, dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance Commissioner approves the payment of dividends or other distributions from another source. While all proposed dividends and distributions to shareholders must be filed with the Pennsylvania Insurance Department prior to payment, if a Pennsylvania domiciled insurer had positive unassigned surplus as of the end of the prior fiscal year, then unless the prior approval of the Pennsylvania Insurance Commissioner is obtained, such insurer could only pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income.
Radian Guaranty and Radian Reinsurance had negative unassigned surplus at December 31, 2016 of $691.3 million and $118.4 million, respectively, therefore no dividends or other distributions can be paid from these subsidiaries in 2017 without approval from the Pennsylvania Insurance Commissioner. Neither Radian Guaranty nor Radian Reinsurance paid any dividends in 2016 or 2015. Due in part to the need to set aside contingency reserves, as discussed below, we do not expect that Radian Guaranty or Radian Reinsurance will have positive unassigned surplus, and therefore will not have the ability to pay ordinary dividends, for the foreseeable future.
All of our othermortgage insurance subsidiaries had negative unassigned surplus atare domiciled in Pennsylvania. Listed below are our principal insurance companies as of December 31, 2016. Therefore,2018: | | | • | Radian Guaranty. Radian Guaranty is our primary mortgage insurance company. Radian Guaranty is a direct subsidiary of Radian Group. Radian Guaranty is our only mortgage insurance company that is eligible to provide mortgage insurance on GSE loans. It is a monoline insurer, restricted to writing first-lien residential mortgage guaranty insurance. In addition to Pennsylvania, Radian Guaranty is authorized to write mortgage guaranty insurance (or in states where there is no specific authorization for mortgage guaranty insurance, the applicable line of insurance under which mortgage guaranty insurance is regulated) in each of the other 49 states, the District of Columbia and Guam. |
| | | • | Radian Reinsurance. Radian Reinsurance is a licensed affiliated reinsurer that primarily provides reinsurance to Radian Guaranty. Radian Reinsurance is a direct subsidiary of Radian Group. We also use Radian Reinsurance to participate in the Front-end and Back-end credit risk transfer programs developed by Fannie Mae and Freddie Mac. See “Mortgage Insurance—Mortgage Insurance Business Overview—Mortgage Insurance Products—Other Mortgage Insurance Products—GSE Credit Risk Transfer” for more information about these programs. |
| | | • | Radian Insurance. Radian Insurance is our insurance subsidiary that insures our remaining second-lien mortgage loan risk. Radian Insurance is a direct subsidiary of Radian Group. Previously, Radian Insurance also insured our Hong Kong insurance portfolio. As of December 31, 2018, we had no remaining RIF in Hong Kong. |
In addition, we have the following mortgage insurance subsidiaries, each of which had no dividends or other distributions can be paidRIF as of December 31, 2018: Radian Investor Surety Inc., Radian Mortgage Guaranty Inc., Radian Guaranty Reinsurance and Radian Mortgage Assurance. As part of our title services we offer title insurance through EnTitle Insurance, an Ohio domiciled title insurance underwriter and settlement services company that is licensed to issue title insurance policies in 39 states and the District of Columbia. EnTitle Insurance is a wholly owned subsidiary of EnTitle Direct, which we acquired on March 27, 2018. As an insurance company, EnTitle Insurance is subject to comprehensive regulation by these subsidiariesthe insurance departments in 2017 without approval from the Pennsylvaniavarious states where it is licensed to transact business and subject to examination by the insurance regulatory authority of its state of domicile, the Ohio Department of Insurance. Mortgage Insurance Commissioner. Risk-to-CapitalCapital Requirements and Dividends
Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, in certain states, a minimum ratio of statutory capital relative to the level of net RIF, or Risk-to-capital. Sixteen states currently impose a Statutory RBC Requirement. The most common Statutory RBC Requirement is that a mortgage insurer’s Risk-to-capital may not exceed 25 to 1. In certain of the RBC States, Radian Guaranty must satisfy a MPP Requirement. The statutory capital requirements for the non-RBC States are de minimis (ranging from $1 million to $5 million); however, the insurance laws of these states generally grant broad supervisory powers to state agencies or officials to enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer, such as Radian Guaranty, is not in compliance with the Statutory RBC Requirement of suchthat state, it may be prohibited from writing new mortgage insurance business in that state. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States. In 20162018 and 2015,2017, the RBC States accounted for approximately 55.4%55.0% and 55.8%55.1%, respectively, of Radian Guaranty’s total primary NIW. As of December 31, 2016,2018, Radian Guaranty’s Risk-to-capital was 13.513.9 to 1, and Radian Guaranty was in compliance with all applicable Statutory RBC Requirements. The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers. The process for developing this framework is ongoing. While the timing and outcome of this process is not known,remains uncertain, in the event the NAIC adopts changes to the Model Act, we expect that the capital requirements in states that adopt the new Model Act may increase as a result of the changes. While we cannot provide any assurance, based on the current exposure draft, we do not believe that the capital requirements that may be adopted under the new Model Act are likely to exceed those of the PMIERs.PMIERs financial requirements. See “Item 1A. Risk Factors—Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.” Contingency Reserves
Under Pennsylvania’s insurance laws, dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance Commissioner approves the payment of dividends or other distributions from another source. While all proposed dividends and distributions to stockholders must be filed with the Pennsylvania Insurance Department prior to payment, if a Pennsylvania domiciled insurer had positive unassigned surplus as of the end of the prior fiscal year, then unless the prior approval of the Pennsylvania Insurance Commissioner is obtained, such insurer could only pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income. At December 31, 2018, although Radian Guaranty and Radian Reinsurance had statutory policyholders' surplus of $814.1 million and $356.2 million, respectively, both companies had negative unassigned surplus balances, primarily due to the need for mortgage guaranty insurers to establish and maintain contingency reserves. Radian Guaranty and Radian Reinsurance had negative unassigned surplus at December 31, 2018 of $701.9 million and $84.8 million, respectively, therefore no ordinary dividends or other distributions can be paid by these subsidiaries in 2019 without approval from the Pennsylvania Insurance Commissioner. Because they also had negative unassigned surplus positions at December 31, 2017 and December 31, 2016, neither Radian Guaranty nor Radian Reinsurance was able to pay any ordinary dividends in 2018 or 2017. Due in part to the need to set aside contingency reserves, which are not included in an insurer’s statutory surplus as discussed below, we do not expect that Radian Guaranty or Radian Reinsurance will have positive unassigned surplus, and therefore we expect that they will not have the ability to pay ordinary dividends, for the foreseeable future. During the fourth quarter of 2018, the Pennsylvania Insurance Department approved a $450 million distribution of capital from Radian Guaranty to Radian Group, which was paid on December 21, 2018. See Note 19 of Notes to Consolidated Financial Statements for a discussion of this distribution of capital and another Extraordinary Distribution that was paid from Radian Guaranty to Radian Group in 2017 in connection with the reallocation of capital among our mortgage insurance subsidiaries. All of our other mortgage insurance subsidiaries also had negative unassigned surplus at December 31, 2018. Therefore, no ordinary dividends or other distributions can be paid by these subsidiaries in 2019 without approval from the Pennsylvania Insurance Commissioner. For statutory reporting, mortgage insurance companies are required annually to set aside contingency reserves in an amount equal to 50% of earned premiums. Such amounts cannot be released into surplus for a period of 10 years, except when loss ratios exceed 35%, in which case the amount above 35% can be released under certain circumstances. The contingency reserve, which is designed to be a reserve against catastrophic losses, essentially restricts dividends and other distributions by mortgage insurance companies. We classify the contingency reserves of our mortgage insurance subsidiaries as a statutory liability. At December 31, 2016,2018, Radian Guaranty and Radian Reinsurance had contingency reserves of $1,260.6 million,$2.1 billion, and $180.3$293.5 million, respectively. ReinsuranceTitle Insurance Capital Requirements and Dividends
Certain states limitEnTitle Insurance is required to maintain Statutory Premium Reserves (“SPR”), calculated as a percentage of gross premium collected. The SPR requirements are set by each state, with the amount of risk a mortgage insurer may retainmost common being 7%. The SPR is then recovered based on a single loanrelease schedule, amortized over twenty years. In addition to 25%the SPR, EnTitle Insurance is subject to periodic reviews of certain financial performance ratios, and the states in which it is licensed can impose capital requirements on EnTitle Insurance based on the results of those ratios.
Under Ohio’s insurance laws, dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the total loan amount. Coverage in excessend of 25% (i.e., deep coverage)the prior fiscal year, unless the Ohio Department of Insurance approves the payment of dividends or other distributions from another source. While all proposed dividends and distributions to stockholders must be reinsured. We currently use Radian Reinsurancefiled with the Ohio Department of Insurance prior to provide deep coverage reinsurancepayment, if an Ohio domiciled insurer had positive unassigned surplus as of the end of the prior fiscal year, then unless the prior approval of the Ohio Department of Insurance is obtained, such insurer could only pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to Radian Guarantythe greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income. EnTitle Insurance had negative unassigned surplus at December 31, 2018 of $23.9 million, therefore it is unable to pay ordinary dividends or other distributions in compliance with these statutory limits.2019 without approval from the Ohio Department of Insurance. Cybersecurity
TheIn September of 2017, the New York State Department of Financial Services has(“DFS”) issued cybersecurity regulations that become effective March 1, 201711 NYCRR 228 (“Regulation 208”) which regulates title insurance marketing practices, expenses and apply to all financial institutionstransaction related charges in the state of New York. Regulation 208 limits or bans title underwriters and insurance companies licensedagents from charging consumers certain title and closing related fees, and contains strict rules around marketing expenses aimed at restricting or stopping certain marketing practices in New York, includingthe title industry. Radian GuarantySettlement Services and certain of our other insurance subsidiaries. The regulations require regulated institutions to establish a cybersecurity program; adopt a written cybersecurity policy; designate a Chief Information Security Officer responsible for implementing, overseeingEnTitle Insurance have adjusted their transaction fees and enforcing the cybersecurity programmarketing practices and policy; and have policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third-parties, along with a variety of other requirements to protect the confidentiality, integrity and availability of information systems.
expenses to comply with Regulation 208. Regulation 208 also requires that title insurance underwriters retroactively affirm that they and their agents have not charged fees over the past six years in excess of those amounts which are now limited or expenses which are now banned. If a title insurance underwriter cannot affirm that it or its agents did not charge fees in excess of those allowed under Regulation 208 over the last six years, it will need to submit a reduced rate filing to come into compliance. On February 13, 2019, EnTitle Insurance submitted its reduced rate filing to comply with Regulation 208. DFS approved EnTitle’s reduced rate filing on February 15, 2019. Mortgage, Real Estate and Title and Appraisal Management LicensingServices Certain of our Services subsidiaries are subject to regulation and oversight by the states where they conduct their businesses, including requirements to be licensed and/or registered in the states in which they conduct operations. Red Bell and its affiliates provide Our real estate brokerage businesses provide services in all 50 states and the District of Columbia, and they and their designated brokers are required to hold licenses and conduct their brokerage business in conformity with the applicable license laws and administrative regulations of the states in which they are conducting their business. As a licensed real estate brokerage, Red Bell receives residential real estate information from various multiple listing services (“MLS”) which it uses to broker real estate transactions and provide valuation products and services, pursuant to the terms of agreements with the MLS providers. If these agreements were to terminate or Red Bell otherwise were to lose access to this information, it could negatively impact Red Bell’s ability to conduct its business. ValuAmericaRadian Settlement Services and its affiliates provide title services and serve as an appraisal management company. Thesethese entities are required to hold the applicable required licenses in the jurisdictions where they operate their business. Title insurance agency licensing is primarily regulated by states in which the services are being offered, with licensing and registration typically within the jurisdiction of each state’s department of insurance. ValuAmericaRadian Settlement Services is domiciled and licensed in Pennsylvania as a resident title insurance agency and, together with its affiliates, is licensed in 2832 additional states.
Radian Settlement Services and its affiliates also serve as an appraisal management company. In 2018, Radian acquired Independent Settlement Services, a national appraisal and title management services company. Radian Settlement Services and its affiliates are licensed to provide appraisal management services in 42 states and Independent Settlement Services is licensed as an appraisal management company in 45 states. Real estate appraisal management statutes and regulations vary from state to state, but generally grant broad supervisory powers to agencies or officials to examine companies and enforce rules. While these businesses are generally state regulated, the Dodd-Frank Act established minimum requirements to be implemented by states regarding the registration and supervision of appraisal management companies. Most states have based their legislation on model legislation developed by the Appraisal Institute for the registration and oversight of appraisal management companies. ValuAmericaRadian Settlement Services’ affiliate, ValuEscrow, Inc., is a California licensed escrow company, and its affiliates are licensedis required to provide their appraisal management servicesmaintain all applicable licenses and fidelity certifications to operate in 37 states.California. Radian Clayton Services LLC provides third party underwriting services to lenders, including services that may be deemed loan origination activities as defined by the SAFE Act (discussed below) and state law equivalents. This entity and its employees that provide our contract underwriting services are compliant with the SAFE Act in all 50 states and the District of Columbia. See “—Federal Regulation—The SecureSAFE Act.” Cybersecurity The DFS issued cybersecurity regulations that became effective March 1, 2017 and Fair Enforcementapply to all financial institutions and insurance companies licensed under the New York Banking, Insurance, and Financial Services Laws, including Radian Guaranty and certain of our other subsidiaries. The regulations require covered entities to, among other things: establish a cybersecurity program; adopt a written cybersecurity policy; designate a Chief Information Security Officer responsible for Mortgage Licensingimplementing, overseeing and enforcing the cybersecurity program and policy; and have policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third-parties, along with a variety of other requirements to protect the confidentiality, integrity and availability of information systems. Privacy In June of 2018, the State of California enacted the California Consumer Privacy Act (“SAFE Act”CCPA”).” which applies to any company that does business in California and meets certain threshold requirements. The CCPA will become effective January 1, 2020, and the legislation requires the California Attorney General to adopt implementing regulations by July 1, 2020. While we are continuing to evaluate the applicability of the CCPA to our businesses, we believe Radian Group and certain of its affiliates may meet the CCPA threshold requirements, and therefore, may be deemed covered businesses under the CCPA. The CCPA creates a new privacy framework for covered businesses that collect, sell or disclose personal information of California consumers. The definition of protected “personal information” under the CCPA is broad, and the CCPA creates five new Our valuation subsidiaries are also subject
categories of data privacy rights for California consumers: the right to comprehensive oversight(1) know what personal information is being collected about them, whether their personal information is sold or disclosed and to whom; (2) access a copy of their personal information; (3) delete their personal information from business servers and service providers, unless it is necessary to maintain the information under enumerated exceptions; (4) opt out of the sale of their personal information to third parties; and (5) have equal access and service if they exercise their rights. The CCPA provides a private right of action for data breaches, including statutory or actual damages, and public enforcement by the states in which they operate.California Attorney General for other violations. Compliance with the CCPA will require the development of new policies, procedures and operational changes. It is reasonably possible that the CCPA will prompt other state and federal regulators to move forward with new privacy regulations that could impact our businesses or those of our customers. GSE Requirements PMIERs - Private Mortgage Insurer Eligibility Requirements. As the largest purchasers of conventional mortgage loans, and therefore, the main beneficiaries of private mortgage insurance, the GSEs impose eligibility requirements that private mortgage insurers must satisfy in order to be approved to insure loans purchased by the GSEs. The PMIERs - Private Mortgage Insurer Eligibility Requirements. In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. The GSEs revised the PMIERs,initially became effective December 31, 2015, with theand aim of ensuringto ensure that approved insurers will possess the financial and operational capacity to serve as strong counterparties to the GSEs throughout various market conditions. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer of GSE loans, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer and the approved insurer’s financial condition. The PMIERs contain extensive requirements related to the conduct and operations of our mortgage insurance business, including operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others. In addition, the GSEs have a broad range of consent rightsPMIERs prohibit private mortgage insurers from engaging in certain activities such as insuring loans originated or serviced by an affiliate (except under the PMIERs,certain circumstances) and require private mortgage insurers to obtain the prior consent of the GSEs before taking certain actions, such as paying dividends,which may include entering into various inter-companyintercompany agreements and commuting or reinsuring risk, among others. The GSEs have significant discretionRadian Guaranty currently is an approved mortgage insurer under the PMIERs and may amendis in compliance with the PMIERs at any time.financial requirements. The PMIERs Financial Requirementsfinancial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. Under the PMIERs, Radian Guaranty’s Available Assets and Minimum Required Assets are determined on an aggregate basis, taking into account the assets and insured risk of Radian Guaranty and its exclusive affiliated reinsurers. Therefore, developments that impact the assets and insured risk of Radian Guaranty’s exclusive affiliated reinsurers individually (such as capital contributions from Radian Group) also will impact the aggregate Available Assets and Minimum Required Assets, and importantly, Radian Guaranty’s compliance with the PMIERs Financial Requirements. The PMIERs Financial Requirementsfinancial requirements include more stringentincreased financial requirements for defaulted loans, as well as loans with a higher likelihood of default and/or certain credit characteristics, such as higher LTVs and lower FICO scores, and for loans originated after January 1, 2016 that are insured under lender-paid mortgage insurance policies not subject to automatic termination under the HPA. Therefore, if our mix of business includes a higher percentage of loans that are subject to these increased financial requirements, it would increaseincreases the Minimum Required Assets and/or the amount of Available Assets that Radian Guaranty is required to hold. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Operating Environment.”
There continues to be some uncertainty regarding the amount of capital that private mortgage insurers, including Radian Guaranty, may require in the future in order to remain compliant withThe GSEs have significant discretion under the PMIERs Financial Requirements. The PMIERs specifically provide for the factors that are applied to calculate and determine a mortgage insurer’s Minimum Required Assets to be updated every two years following a minimum of 180 days’ notice (with the next review scheduled to take place in 2017), or more frequently, as determined by the GSEs, to reflect changes in macroeconomic conditions or loan performance. In addition, as noted above, the GSEs may amend the PMIERs at any time, andalthough the GSEs have broad discretion to interpret the requirements, which could impact the calculation of our Available Assets and/orcommunicated that for material changes, including material changes affecting Minimum Required Assets. Assets, they will generally provide written notice 180 days prior to the effective date and engage in a discussion and comment process with the private mortgage insurers regarding the proposed changes prior to finalizing them. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. PMIERs 2.0 eliminates any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. In addition, among other changes, defaulted loans in FEMA-declared major disaster areas will require a reduced level of Minimum Required Assets under PMIERs 2.0, subject to certain requirements. Radian Guaranty expects to comply with PMIERs 2.0 as of the effective date.
We have entered into reinsurance transactions as part of our capital and risk management activities, including to manage Radian Guaranty’s capital position under the PMIERs Financial Requirements,financial requirements. The initial and theongoing credit that we receive under the PMIERs Financial Requirementsfinancial requirements for these transactions is subject to the periodic review of the GSEs. In December 2016, Although we expect Radian Guaranty to retain its eligibility status with the GSEs issued interim guidance for the industry that negatively impacted the amount of credit that we receive for our Single Premium QSR Transaction, but also gave creditand to certain liquid investments that are readily available to pay claims that previously were not permitted to be included in our Available Assets. This interim guidance did not affect Radian Guaranty’s compliance with the PMIERs. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs Financial Requirements. If Radian Guaranty is not ablecontinue to comply with the PMIERs in the future, it could lose its eligibility with the GSEs.financial requirements, including as they may be updated, we cannot provide assurance that this will occur. See “Item 1A. Risk Factors—Radian Guaranty may fail to maintain its eligibility status with the GSEs.”
Other GSE Business Practices and Requirements. The GSEs, acting independently or through their conservator, the FHFA, have the ability to change their business practices and requirements in ways that impact our business. Recent examplesExamples of more recent changes or proposed changes in the GSEs’ business practices and requirements that have impacted our business are: implementationthe GSEs’ proposal of new minimum requirements for master insurance policies for loansto revise the GSEs acquire that include,GSE Rescission Relief Principles to, among other requirements, specific standards for loss mitigation and claims processing activities;things, further limit the circumstances under which mortgage insurers may rescind insurance coverage;
adoption ofthe changes to the PMIERs eligibility requirements for mortgage insurers, as discussed above;under PMIERs 2.0 that become effective on March 31, 2019; and
changes to underwriting standards on mortgages they purchase, including for example, the GSEs’ decision to expand credit in guarantee fees and loan-level price adjustments charged2017 by the GSEs.purchasing a larger portion of loans with debt-to-income ratios greater than 45%. For additional information on additional potential changes in GSE business practices and requirements that could impact our business, see “Item 1A. Risk Factors—Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business.” Federal Regulation Housing Finance Reform Presently, theThe federal government plays a significant role in the U.S. housing finance system through, among other things, the involvement of the FHFA and GSEs, the FHA and the VA. The GSEs’ charters generally prohibit them from buying low down payment mortgage loans without certain forms of credit enhancement, the primary form of which has been private mortgage insurance. There has been ongoing debate about the roles that the federal government and private capital should play in the housing finance system, and in recent years, there generally has been broad policy consensus that there is a need to increase the role of private capital. As a significant source of private capital in the existing housing finance system, private mortgage insurance is well-positioned in recent legislative proposals to continue to be able to provide the type of coverage that has become the predominant form of credit enhancement for satisfying the requirements currently memorialized in rules implementing the GSE charters, sometimes referred to as “standard coverage.” However, to the extent new legislative action alters the existing GSE charters without explicit preservation of the role of private mortgage insurance for high-LTV loans, our business could be adversely affected. Furthermore, should legislative or administrative action, such as the imposition of higher guarantee fees or loan level price adjustments, changes to loan limits, or significantly tightening the credit underwriting standards for the GSEs, it is possible that non-GSE executions, including the “private label” secondary market or loans insured by the FHA, VA, or U.S. Department of Agriculture (“USDA”) would result in better execution or price to consumers. In such a scenario, our business could be adversely impacted.
Since FHFA was appointed as conservator of the GSEs in September 2008, there has been a wide range of legislative proposals to reform the U.S. housing finance market, including proposals for GSE reform ranging from some that advocate nearly complete privatization and elimination of the role of the GSEs to others that support a system that combines a federal role with private capital. It remains unclear whetherRecent proposals have focused on making the federal guaranty of mortgage backed securities explicit, with some models proposing the repurposing of the GSEs to have them compete with other secondary market guarantors and other models proposing a broad implementation of the multiple issuer structure that exists with Ginnie Mae backed loans. In addition, the Trump administration and U.S. Treasury have stated that they are seeking to advance housing finance reform, legislation willparticularly if the U.S. Congress does not take action to end the current conservatorship of the GSEs. Under current law, the FHFA has significant discretion with respect to the future state of the GSEs, including the ability to place the GSEs into receivership without further legislative action. The term of the most recent director of the FHFA ended in January 2019 and an acting director was appointed, pending the U.S. Senate’s confirmation of the Administration’s nominee to lead the FHFA. With new leadership at FHFA, we believe there may be adopted,an increased likelihood that the Administration could take action to reform the GSEs through current authorities of the director under The Housing and if so, what form it may ultimately take,Economic Recovery Act of 2008 and the recent change in administration in the United States has increased this uncertainty.through Executive Order. The U.S. Treasury currently owns the preferred stock of the GSEs pursuant to the terms of thea senior preferred stock purchase agreement and under current law, iswas prohibited from selling its stake in the GSEs until January 1, 2018. UnderOn December 21, 2017, the terms ofFHFA and the Treasury Department reached an agreement to reinstate a $3 billion capital reserve for the GSEs under the senior preferred stock purchase agreement, allowing the GSEs to build a limited amount of reserves to allow for income fluctuations. Beyond this $3 billion capital buffer, the GSEs are required under the senior preferred stock purchase agreements to sweep all profits to the U.S. Treasury and retain zero capital beginning January 1, 2018, which could increase the need for further government assistance to the GSEs, and as a result, heighten the demand for housing finance reform legislation.Treasury. It is possible that the U.S. Treasury could further amend the terms of the senior preferred stock purchase agreement to permit the GSEs to further retain profits and recapitalize which could, in turn, affect the prospects for comprehensive housing finance reform legislation. In June 2018, FHFA released a proposed rule to establish a CCF that would
apply minimum capital requirements for the GSEs, if the CCF is finalized. This rule proposes both risked-based capital requirements and would revise the minimum leverage capital requirement for the GSEs. Under this proposed rule, these requirements would only take affect once the GSEs exit conservatorship, although in the absence of greater transparency we believe the CCF provides a reasonable basis for understanding how the GSEs are currently conducting their operations, including their decisions with respect to capital allocation and pricing. If the CCF is finalized, it is reasonably possible that the GSEs will seek to more closely align the capital requirements of the PMIERs with the CCF, which could result in further changes to the PMIERs. In the absence of comprehensive housing finance reform legislation, the FHFA has made changes to the business and operations of the GSEs. As a mechanism for implementing changes, the FHFA most commonly uses the annual process of releasing a strategic plan for conservatorship and setting goals for the GSEs (the “Scorecard”) to meet as part of their on-goingits ongoing regulation. Among other things, the 20172019 Scorecard includes goals to increase access to single-family mortgage credit for creditworthy borrowers and to finalize post-financial crisis loss mitigation activities. In addition, the 20172019 Scorecard calls for the GSEs to transfer a meaningful portion of credit risk, also known as “credit risk transfer,” to the private sector. The mandate for meaningful credit risk transfer builds upon the goals set in each of the last three years for the GSEs to transfer portions of their mortgage credit risk to the private sector by experimenting with different forms of transactions and structures. Since 2013,In response to this mandate, the GSEs have engaged in roughly $1.3 trillion ofFront-end, Back-end and other credit risk transfer transactions that occurred afterto transfer a portion of credit risk. From 2013 through June 2018 the acquisitionGSEs transferred risk on over $2.5 trillion of residential mortgage loans (i.e., back-end risk transfer programs). In 2016,unpaid principal balance, and we participated in a new front-endexpect these credit risk transfer pilot programtransactions to continue. We have participated in both the Front-end and Back-end credit risk transfer programs developed by Fannie Mae as well as a similar pilot program developed byand Freddie Mac. For more information about these pilot programs, see “Mortgage Insurance—Mortgage Insurance Business Overview—Mortgage Insurance Products—Non-Traditional Risk.” In addition, alternatives to traditional mortgage insurance may be introduced that compete with private mortgage insurance. In 2018, Freddie Mac and Fannie Mae announced the launch of limited pilot programs, Integrated Mortgage Insurance (“IMAGIN���) and Enterprise-Paid Mortgage Insurance (“EPMI”), respectively, as alternative ways for lenders to sell to the GSEs loans with LTVs greater than 80%. These investor-paid mortgage insurance programs, in which insurance is acquired directly by each GSE, have many of the same features as and represent an alternative to traditional private mortgage insurance products that are provided to individual lenders. Participants in IMAGIN and EPMI are not subject to compliance with the PMIERs, which may create a competitive disadvantage for private mortgage insurers if these pilot programs are expanded. It is difficult to predict what other types of credit risk transfer transactions and other structures might be used by the GSEs in the future. If any of the credit risk transfer transactions and structures that are being developed were to displace primary loan level, standard levels of mortgage insurance, the amount of insurance we write may be reduced. However, the GSEs also have solicited comments regarding the possibility of including additional mortgage insurance in excess of standard coverage amounts through a concept known as “deeper cover MI,mortgage insurance,” which could increase the amount of insurance we write. As a result, it is difficult to predict the impact of any credit risk transfer products and transactions implemented by the GSEs. See “ItemIn Item 1A. Risk Factors—Factors, see “—Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business.” and“—Our mortgage insurance business faces intense competition.”
FHA Private mortgage insurance competes with the single-family mortgage insurance programs of the FHA. As such, the FHA is one of our biggest competitors. We compete with the FHA on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. Since the financial crisis,2013, the loan limits for FHA-insured loans and the loan limits for GSE conforming loans have been substantially the same. It is possible that, in the future, Congress could impose different loan limits for FHA loans than for GSE conforming loans as it has done in the past, which could impact the competitiveness of private mortgage insurance in relation to FHA programs. Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its market share of the insured mortgage market. Since then, the private mortgage insurance industry generally had been recapturing market share from the FHA, primarily due to: (i) improvements in the financial strength of private mortgage insurers; (ii) the development of new products and marketing efforts directed at competing with the FHA; (iii) increases in the FHA’s pricing; (iv) the U.S. government’s pursuit of legal remedies against FHA-approved lenders related to loans insured by the FHA; and (v) various policy changes at the FHA, including the general elimination of the premium cancellation provision.provision that exists for borrower-paid private mortgage insurance. In January 2015, the FHA reduced its annual mortgage insurance premium by 50 basis points to approximately 85 basis points for loans entering the origination process on or after January 26, 2015, including
refinancings. The FHA’s upfront mortgage insurance premium was not changed. The FHA’s pricing reduction in January 2015, combined with our premium changes in April 2016 to increase our pricing for borrowers with lower FICO scores has negatively impacted our ability to compete with the FHA on certain high-LTV loans to borrowers with FICO scores below 720. However, we believe that our pricing changes made during the first half of 2016 enable us to more effectively compete with the FHA on certain high-LTV loans to borrowers with FICO scores above 720. On January 9, 2017, the FHA announced another reduction of its annual mortgage insurance premium by 25 basis points. Before this reduction went into effect, the FHA announced that it was suspending the premium reduction indefinitely. It is unclear whether the reduction will ultimately be canceled or the suspension will be removed. In November 2016, the U.S. Department of Housing and Urban Development released its annual report to Congress on the financial condition of the FHA Mutual Mortgage Insurance Fund, which found that the FHA’s single family mortgage and reverse mortgage insurance programs had recovered and now exceeded its minimum capitalization threshold for the second consecutive year. This development may put pressure on the FHA to further reduce premiums or implement changes to its current non-cancellation policy or other policies. Reductions in the FHA’s annual premiums or changes to its policies may further impact our competitiveness with the FHA.
Congress has been considering FHA reform in addition to GSE reform. Given that FHA and GSE reform have significant impacts on each other, as well as on borrower access to credit and the housing market more broadly, policymakers may consider both GSE reform and FHA reform together. It is unclear whether FHA reform legislation will be adopted and, if so, what provisions it might ultimately contain. If legislative changes to the FHA and GSEs are not made contemporaneously, there is a possibility that the relative competitiveness of private mortgage insurance could be disadvantaged.
The Dodd-Frank Act The Dodd-Frank Act mandates significant rulemaking by several regulatory agencies to implement its provisions. The Dodd-Frank Act established the CFPB to regulate the offering and provision of consumer financial products and services under federal law, including residential mortgages, and transferred authority to the CFPB to enforce many existing consumer related federal laws, including TILAthe Truth in Lending Act (“TILA”) and RESPA. Given the unified Republican control of the federal government, it is possible that provisions of the Dodd-Frank Act, including provisions relating to the structure and authority of the CFPB, may be subject to repeal or amendment. However, at this time we cannot predict what changes will be sought and, if adopted, how they will affect our businesses. Among the most significant provisions for private mortgage insurers under the Dodd-Frank Act are the ability to repay mortgage provisions (“Ability to Repay Rule”), including a related safe harbor set forth in the QM Rule (defined below), the securitization risk retention provisions and the expanded mortgage servicing requirements under TILA and RESPA. Qualified Mortgage Requirements - Ability to Repay Requirements. The Ability to Repay Rule requires mortgage lenders to make a reasonable and good faith determination that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan. The Dodd-Frank Act provides that a creditor may presume that a borrower will be able to repay a loan if the loan has certain low-risk characteristics that meet the definition of a qualified mortgage or “QM.”(“QM Rule”). TheIn adopting the QM Rule, the CFPB established rigorous underwriting and product feature requirements for the loans to be deemed QM.qualified mortgages. Within those regulations, the CFPB created a special exemption for Fannie Mae and Freddie Mac for a period ending upon the earlier of the end of conservatorship or January 10, 2021, which allows any loan that meets the GSE underwriting and product guidelines to be a QM.qualified mortgage. In January 2019, the CFPB released a five year review of the Qualified Mortgage and Ability to Repay rule, as required by the Dodd-Frank Act. While this report provided observations on the impact of the QM rule on the market based on CFPB research, it did not include any policy recommendations or propose amending the current rules.
The QM Rule requires that points and fees paid at or prior to closing cannot exceed 3% of the total loan amount, with higher points and fees thresholds provided for loan amounts below $100,000. Any mortgage insurance paid by the borrower at the time of loan closing that is not refundable on a pro-rata basis must be applied toward the 3% points and fee calculation. Additionally, any refundable borrower-paid insurance premiums paid at closing in excess of 175 basis points must be included in a lender’s QM 3% points and fees calculation. There are no similar restrictions on the points and fees associated with FHA premiums, and thus FHA has a market advantage for smaller balance loans where the 3% cap is more easily reached. The Dodd-Frank Act also granted the FHA, VA and the U.S. Department of Agriculture (“USDA”) flexibility to establish their own definitions of QMqualified mortgages for their insurance guaranty programs. Both the FHA and VA have created their own definition of QMqualified mortgages that differ from both the CFPB’s definition and the current underwriting and product guidelines at the GSEs that are subject to the special exemption. These alternate definitions of QMqualified mortgages are more favorable to lenders and mortgage holders than the CFPB QM Rule that applies to the GSEs and the markets in which we operate, which could drive business to these agencies and have a negative impact on our mortgage insurance business. Qualified Residential Mortgage Regulations - Securitization Risk Retention Requirements. The Dodd-Frank Act requires securitizers to retain at least 5% of the credit risk associated with mortgage loans that they transfer, sell or convey, unless the mortgage loans are qualified residential mortgages (“QRMs”) or are insured by the FHA or another federal agency. Under applicable federal regulations, a QRM is generally defined as a mortgage meeting the requirements of a qualified mortgage under the CFPB’s QM ruleRule described above. Because of the capital support provided by the U.S. government to the GSEs, the GSEs satisfy the proposed risk retention requirements of the Dodd-Frank Act while they are in conservatorship, so sellers of loans to the GSEs currently are not be subject to the risk retention requirements referenced above. This means that securitizers would not be required to retain risk under the final QRM rule on loans that are guaranteed by the GSEs while in conservatorship. The final rule requires the agencies that implemented the rule to review the QRM definition no later than four years after its effective date (i.e., December 2018) and every five years thereafter, and allows each agency to request a review of the definition at any time. Mortgage Servicing Rules. Among its products and services, our Services business provides services to financial institutions that are focused on evaluating compliance with and establishing processes and procedures to implement national
and state servicing standards, including the CFPB’s mortgage servicing regulations. The Dodd-Frank Act amended and expanded upon mortgage servicing requirements under TILA and RESPA. The CFPB amended Regulation Z (promulgated under TILA) and Regulation X (promulgated under RESPA) to conform these regulations to the new statutory requirements. Among other things, the rules include new or enhanced requirements for handling loans that are in default. Complying with the mortgage servicing rules has been challenging and costly for many loan servicers. Since the final rules were adopted in 2014, the CFPB has clarified those rules through subsequent rulemakings and provided guidance on how servicers must apply them in certain circumstances. In August 2016October 2017 the CFPB finalizedissued an interim final rule that amended provisions of the Regulation X mortgage servicing rules that it had previously issued in 2016. Along with its latest rulemakingreview of the Qualified Mortgage and updated itsAbility to Repay Rule in January of 2019, the CFPB also provided an assessment of the mortgage servicing rules. Among its productsThe CFPB offered observations regarding the impact of the rules on foreclosure avoidance and services, our Services business provides services to financial institutions that are focused on evaluating compliance with and establishing processes and procedures to implement compliance with national and state servicing standards, includingcosts, but again offered no specific proposed action regarding the CFPB’s mortgage servicing regulations.rules going forward.
Other. In addition to the foregoing, the Dodd-Frank Act establishes a Federal Insurance Office within the U.S. Treasury (the “FIO”). While the FIO does not have a general supervisory or regulatory authority over the business of insurance, the director of this office performs various functions with respect to insurance, such as serving as a non-voting member of the Financial Stability Oversight Council. In December 2013, the FIO published a study on how to modernize and improve the system of insurance regulation in the U.S., which recommended the development and implementation of federal oversight for private mortgage insurers. In its 2015 annual report to Congress, the FIO again recommended federal enforcement of federal standards for the mortgage insurance industry, however this recommendation was not included in the FIO’s 2016 annual report. It is difficult to predict whether legislators or other executive agencies will pursue the development and implementation of federal standards for the mortgage insurance industry. However, to the extent these recommendations are acted upon by legislators or other executive action, a divergence from the current system of state regulation could significantly change compliance burdens and possibly impact our financial condition. RESPA Settlement service providers in connection with the origination or refinance of a federally regulated mortgage loan are subject to RESPA.RESPA and Regulation X. Under the Dodd-Frank Act, the authority to implement and enforce RESPA was transferred to the CFPB. RESPA authorizes the CFPB, the U.S. Department of Justice, state attorneys general and state insurance commissioners to bring civil enforcement actions, and also provides for criminal penalties and private rights of action. Mortgage insurance isand other products and services provided by Radian’s affiliates are considered to be a settlement serviceservices for purposes of RESPA under applicable regulations. As a result, mortgage insurers are subject to theRESPA. The anti-referral fee and anti-kickback provisions of Section 8 of RESPA which,generally provide, among other things, generally provide that mortgage insurerssettlement service providers are prohibited from paying or accepting anything of value in connection with the referral of a settlement service. Our acquisitionservice or sharing in fees for those services. RESPA also prohibits requiring the use of Clayton in 2014 has enhancedan affiliate for settlement services and requires certain information to be disclosed if an affiliate is used to provide the suitesettlement services. In addition to mortgage insurance, through our Services business we offer a broad array of both settlement and non-settlement services available to our customers, including real estate, valuation, appraisal, title and closing services through Clayton’s Red Bell and ValuAmerica subsidiaries.services. To the extent any of theseproducts and services provided by our Services business are settlement services for purposes of RESPA, the “anti-referral fee”anti-referral fee, anti-kickback, and “anti-kickback”required use provisions of Section 8 of RESPA may apply and itwhich could impact how these products and services are marketed and sold individually or together with the mortgage insurance we offer.sold. In the past, we and other mortgage insurers have faced lawsuits alleging, among other things, that our captive reinsurance arrangements constituted unlawful payments to mortgage lenders under RESPA. We also have been subject to lawsuits alleging that our Pool Insurance and contract underwriting services violated RESPA. In addition, we and other mortgage insurers have been subject to inquiries and investigative demands from state and federal governmental agencies, including the CFPB, requesting information relating to captive reinsurance. In April 2013, we reached a settlement with the CFPB that concluded its investigation with respect to Radian Guaranty without any findings of wrongdoing. As part of the settlement, Radian Guaranty paid a civil penalty and agreed that it would not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of 10 years ending in 2023. In June 2015, Radian Guaranty executed a Consent Order with the Minnesota Department of Commerce that resolved the Minnesota Department of Commerce’s outstanding inquiries related to captive reinsurance arrangements involving mortgage insurance in Minnesota without any findings of wrongdoing. As part of the Consent Order, Radian Guaranty paid a civil penalty and agreed not to enter into new captive reinsurance arrangements until June 2025. We have not entered into any new captive reinsurance arrangements since 2007. In addition, under the PMIERs, the GSEs prohibit private mortgage insurers from entering into captive insurance arrangements. The CFPB amended Regulations X and Z to establish significant new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property through a regulation known as the “TRID rule” thatrule.” The TRID rule became effective October 3, 2015. The TRID rule2015, and mandates that a series of enhanced disclosures be provided to consumers in connection with the origination of most types of residential mortgage loans. TheImplementation of the TRID rule resulted in an increased burden on loan originators to implement and comply with the TRID rule has resulted in a slowdown in the volume of newly originated loans and resulted in delays in the closing of mortgage loans.comply. In addition, difficulties implementing the new disclosure rules and uncertainty with respect to certain aspects of the TRID rule, including uncertainty as to whether a closed loan fully complies with the TRID
rule requirements, has had a negative impact onnegatively impacted the purchase of loans in the secondary market by private investors which negatively impacted the number of transactions available for the loan review, underwriting and due diligence services offered by our Services segment in the first half of 2016.investors. In July 2016, the CFPB issued proposed amendments to the TRID rule that wouldto formalize CFPB guidance and provide greater clarity and certainty for market participants.participants, and finalized these amendments in the form of new TRID rules in July of 2017, known as “TRID 2.0.” Mandatory compliance with TRID 2.0 became effective in October 2018. We believe that the guidance that has been provided by the CFPB, together with the proposed amendments,TRID 2.0, will reduce the uncertainty and remove thecertain impediments to originating new loans that followed the implementation of the original TRID rule.
Homeowner Assistance Programs The Emergency Economic Stimulus Act of 2008 (“EESA”) included a requirement to “maximize assistance to homeowners and encourage mortgage servicers to take advantage of available programs (including the Hope for Homeowners program) to minimize foreclosures.” In 2008, the U.S. Treasury announced the Homeowner Affordability and Stability Plan to restructure or refinance mortgages to avoid foreclosures through: (i) refinancing mortgage loans through HARP; (ii) modifying first- and Second-liensecond-lien mortgage loans through HAMP and the Second Lien Modification Program; and (iii) offering other alternatives to foreclosure through the Home Affordable Foreclosure Alternatives Program (“HAFA”). Details of these programs are as follows: In 2009, the GSEs began offering HARP, a program which allows a borrower who is not delinquent to refinance his or her mortgage to a more stable or affordable loan if such borrower has been unable to take advantage of lower interest rates because his or her home has decreasedProgram. HAMP expired in value. HARP, as subsequently modified by HARP 2,December 2016 and was extended to December 31, 2015, for loans that were originated or acquired by the GSEs by or before May 30, 2009. The program has again been extended and is now scheduled to terminate by September 30, 2017. In addition, the GSEs are planning to offer a new streamlined refinance offering to replace HARP. The new program is aimed at borrowers with high-LTVs and, similar to HARP, the new program is expected to offer refinance options for non-delinquent borrowers.
In February 2009, the U.S. Treasury established HAMP as a program to modify certain loans to make them more affordable to borrowers, with the goal of reducing the number of foreclosures. Under HAMP, an eligible borrower’s monthly payments may be lowered by lowering interest rates, extending the term of the mortgage or deferring principal. The HAMP program ended December 31, 2016. HAMP has been replaced with the “Flex Modification” program that is expected to become effective in October 2017 and will offer payment relief similar to HAMP.
The U.S. Treasury also has developed uniform guidance for loan modifications to be used by participating servicers in Refinancing under the private sector.HARP program expired on December 31, 2018. The GSEs have incorporated material aspectssince established high LTV streamlined refinance programs in coordination with FHFA to continue providing refinancing options to avoid foreclosure. These programs began enrolling participants in November 2018.
In response to the extensive damage caused by hurricanes during 2017 and 2018, we are supporting the disaster relief policies issued by the GSEs that provide various forms of these guidelines for loansassistance to accommodate the financial needs of homeowners in the affected areas, including temporary suspension of foreclosures, penalty waivers, and forbearance or modification plans that they own and loans backing securities that they guarantee. See “Item 1A. Risk Factors—Foreclosure prevention and borrower relief programs may not continue to provide us with a material benefit.”more flexible mortgage payment terms.
The Secure and Fair Enforcement for Mortgage LicensingSAFE Act (“SAFE Act”) The SAFE Act and its state law equivalents require mortgage loan originators to be licensed with state agencies in the states in which they operate and/or registered with the Nationwide Mortgage Licensing System and Registry (the “Registry”). The Registry is a database established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators that tracks the licensing and eligibility requirements of loan originators. Among other things, the database was established to support the licensing of mortgage loan originators by each state. As part of this licensing and registration process, loan originators who are employees of institutions other than depository institutions or certain of their subsidiaries that, in each case, are regulated by a federal banking agency, must generally be licensed under the SAFE Act guidelines enacted by each state in which they engage in loan origination activities and registered with the Registry. The entity and its employees that provide our contract underwriting services are compliant with the SAFE Act in all 50 states and the District of Columbia. Mortgage Insurance Cancellation The HPA imposes certain cancellation and termination requirements for borrower-paid private mortgage insurance and requires certain disclosures to borrowers regarding their rights under the law. The HPA also requires certain disclosures for loans covered by lender-paid private mortgage insurance. Specifically, the HPA provides that private mortgage insurance on most loans originated on or after July 29, 1999 may be cancelled at the request of the borrower once the LTV reaches 80% of the original unpaid principal balance,value, provided that certain conditions are satisfied. Under HPA, private mortgage insurance on borrower-paid mortgage insurance must be canceled automatically onceon the date the LTV reachesis scheduled to reach 78% of the unpaid principal balanceoriginal value (or, if the loan is not current on that date, on the date that the loan becomes current).
The HPA establishes special rules for the termination of private mortgage insurance in connection with loans that are “high risk.” The HPA does not define “high risk” loans, but leaves that determination to the GSEs for loans up to the GSE conforming loan limits and to lenders for any other loan. For “high risk” loans, above the GSE conforming loan limits, private mortgage insurance must be terminated on the date that the LTV is first scheduled to reach 77% of the unpaid principal balance. In no case, however, may private mortgage insurance be required beyond the midpoint of the amortization period of the loan if the borrower is current on the payments required by the terms of the mortgage. The Fair Credit Reporting Act (the “FCRA”) The FCRA imposes restrictions on the permissible use of credit report information.information and disclosures that must be made to consumers when information from their credit reports is used. The FCRA has been interpreted by some Federal Trade Commission staff to require mortgage insurance companies to provide “adverse action” notices to consumers in the event an
application for mortgage insurance is declined or a higher premium is charged based on the basisuse, wholly or partly, of a review ofinformation contained in the consumer’s credit.credit report. Privacy and Information Security - Gramm-Leach-Bliley Act of 1999 (the “GLBA”) and Other Regulatory Requirements As part of our business, we, and certain of our subsidiaries, and affiliates, maintain large amounts of confidential information, including non-public personal information on consumers and our employees. We and our customers are subject to a variety of privacy and information security laws and regulations. The GLBA imposes privacy requirements on financial institutions, including obligations to protect and safeguard consumers’ nonpublic personal information and records, and limitations on the re-use of such information. The GLBA is enforced by state insurance regulators and by federal regulatory agencies. In addition, many states have enacted privacy and data security laws that impose compliance obligations beyond GLBA, including obligations to provide notification in the event that a security breach results in a reasonable belief that unauthorized persons may have obtained access to consumer nonpublic personal information. Federal and state agencies have increased their focus on compliance obligations related to privacy, data security and cybersecurity. The CFPB, Office of the Comptroller of the Currency and non-governmental regulatory agencies, such as the Financial Industry Regulatory Authority (FINRA), have announced new compliance measures and enforcement efforts designed to monitor and regulate the protection of personal consumer data, including with respect to: the development and delivery of financial products and services; underwriting; mortgage servicing; credit reporting; digital payment systems; and vendor management. For information regarding the New York Department of Financial Services cybersecurity regulations and the California Consumer Privacy Act see “—State Regulation—Cybersecurity.” Asset Backed Securitizations Our Services business provides services to issuers of and investors in asset backed securitizations and similar transactions. As a result, regulations impacting the asset backed securitization market may impact our Services business directly, or indirectly through the regulation of our Services customers. In August 2014, the SEC adopted final rules under Regulation AB that substantially reviserevised the offering process, disclosure and reporting requirements for offerings of ABS. The Regulation AB II rules implement several key areas of reform. Specifically, Regulation AB II introduces several new requirements related to public offerings of ABS, including the following that are significant for our Services business: Asset-level disclosure requirements for ABS backed by residential mortgage loans, commercial mortgage loans, automobile loans or leases, re-securitizations of ABS backed by any of those asset types, and debt securities; and A requirement that the transaction documents provide for the appointment of an “asset representations manager” to review the pool assets when certain trigger events occur. In June 2015 the final credit rating agency reform rules issued by the SEC became effective. The new NRSROThese rules for nationally recognized statistical ratings organizations (“NRSRO”) include requirements that are applicable to providers of third-party due diligence services (such as our Services business) for both publicly and privately issued Exchange Act-ABS.Act ABS. Among other things, the new NRSRO rules require that any issuer or underwriter of registered or unregistered ABS that are to be rated by a NRSRO furnish a form filed on the SEC’s EDGAR system that describes the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. In addition, the rule requires that a due diligence firm (such as our Services business) that is engaged to perform services in connection with any rated ABS issuance furnish a form that describes the scope of due diligence services performed and a summary of their findings and conclusions; this form is required to be posted on the ABS issuer’s password-protected website.
Mortgage Insurance Tax Deduction In December 2015,2006, Congress once again temporarily extendedenacted the private mortgage insurance tax deduction availablein order to certain individuals, subject to income limitations,foster homeownership. The deduction was enacted on a temporary basis and it expired at the end of 2011. Since 2011, the private mortgage insurance tax deduction has been extended four times, most recently for insurance premiums paid through December 31, 2017. It has not yet been extended for the payment of mortgage insurance premiums. Under that legislation, the deduction2018 tax year, and it is allowable for filers for the 2015unclear if and 2016 tax years. However, the tax deduction for mortgage insurance premiums expired on December 31, 2016 when Congress failedit may be extended. There continue to extend any temporary tax deductions. There are pendingbe legislative efforts to make this tax deduction a permanent, part of the Internal Revenue Code, but to date this has not been enacted. It is difficult to predict whether the deduction will be further extended in the future or if legislation to make the deduction permanent will become law.future. Basel III Over the past few decades, the Basel Committee on Banking Supervision (the “Basel Committee”) has established international benchmarks for assessing banks’ capital adequacy requirements.requirements (“Basel III”). Included within those benchmarks
are capital standards related to the residential lending and securitization activity and importantly for private mortgage insurers, the capital treatment of mortgage insurance on those loans. These benchmarks are then interpreted and implemented via rulemaking by U.S. banking regulators. In July 2013, the U.S. banking regulators promulgated regulations, referred to as the “U.S. Basel III Rules,” to implement significant elements of the Basel framework. The U.S. Basel III Rules, among other things, revise and enhance the U.S. banking agencies’ general risk-based capital rules. Today, the U.S. Basel III Rules assign a 20%, 50% or 100% risk weight to loans secured by one-to-four-family residential properties. Generally, under the U.S. Basel III Rules in place today, the explicit government guarantees (FHA/VA/USDA) receive a 0% risk weight, and Fannie Mae and Freddie Mac related loans receive a 20% risk weight. Non-government related mortgage exposures secured by a first lien on a one-to-four family residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weighting. All other one-to-four family residential mortgage loans are assigned a 100% risk weight. In December 2014, the Basel Committee on Banking Supervision issued a proposal for further revisions to Basel III. It proposed adjustments to the risk weights for residential mortgage exposures that take into account LTV ratio and the borrower’s ability to service a mortgage.mortgage, which were not previously addressed by Basel III. The proposed LTV ratio did not take into consideration any credit enhancement, including private mortgage insurance. The comment period for this proposal closedinsurance, but in March 2015, and in December 2015, the Basel Committee on Banking Supervision released a second proposal that retained the LTV provisions of the initial draft, but not the debt servicing coverage ratios. The comment period for the 2015 proposal closed in March 2016. In July 2013, U.S. banking regulators promulgated regulations to implement significant elements of the Basel framework, referred to as “Basel III.” In that rulemaking, there is a five year phase-in period that started tolling in January 2014. Today, the current capital regime under Basel III for U.S. banks assigns a 50% or 100% risk weight to one- to four-unit residential mortgage exposures. Generally, residential mortgage exposures that are prudently underwritten and performing receive a 50% risk weight, while all other residential mortgage exposures are assigned a 100% risk weight. In March 2015, the U.S. banking regulators clarified that for purposes of the U.S. Basel III Rules, calculation of LTV ratios can account for credit enhancement such as private mortgage insurance in determining whether a loan is made in accordance with prudent underwriting standards for purposes of receiving the preferred 50% risk weight.
Following consideration The comment period for this proposal closed in March 2015, and in December 2015, the Basel Committee released a second proposal which retained the LTV provisions of the comments received, it is possibleinitial draft, but not the provisions pertaining to a borrower’s ability to service a mortgage (the “2015 Basel Committee Proposal”). The comment period for the 2015 Basel Committee Proposal closed in March 2016. To date, federal regulators have not adopted or implemented any new regulations, including based on these proposals, that newlyupdate or modify the U.S. Basel III Rules.
The revised risk weighting guidelinesand final recommendations from the Basel Committee with respect to Basel III were published in December 2017 (the “2017 Basel Committee III Recommendations”), and finalized risk weighting guidelines for residential mortgage exposures. These rules recognize guarantees provided by sovereign governments (such as FHA, VA, USDA and Ginnie Mae) as off-setting the capital requirements, resulting in a 0% risk weight. While the 2017 Basel Committee III Recommendations include consideration of LTV ratios, including the impact of credit enhancement provided by third-party private mortgage insurance and the GSEs on Banking Supervision may be proposedLTV ratios, the credit enhancement provided by third-party private mortgage insurance and that the U.S. banking regulators may consider changes toGSEs would have higher risk weightings than the existing rules.explicitly government guaranteed products, putting loans insured by private mortgage insurance at a disadvantage. It isremains unclear whether new guidelines will be proposed or finalized.finalized in the U.S. in response to the most recent 2017 Basel III Committee Recommendations. See “Item 1A. Risk Factors—The implementation of the Basel III guidelines may discourage the use of mortgage insurance.” Foreign Regulation
By reason of Radian Insurance’s authorization, in September 2006, to conduct insurance business through a branch in Hong Kong, we are subject to regulation by the Hong Kong Insurance Authority (“HKIA”). The HKIA’s principal purpose is to supervise and regulate the insurance industry, primarily for the protection of policyholders and the stability of the industry. Hong Kong insurers are required by the Insurance Companies Ordinance to maintain minimum capital as well as an excess of assets over liabilities of not less than a required solvency margin, which is determined on the basis of a statutory formula. Foreign-owned insurers are also required to maintain assets in Hong Kong in an amount sufficient to ensure that assets will be available in Hong Kong to meet the claims of Hong Kong policyholders if the insurer should become insolvent.
Employees At December 31, 2016,2018, we had 1,9711,942 employees which consists of individuals employed by Radian Group and its subsidiaries. Management considers employee relations to be good.
Part 1 Item 1A. Risk FactorsFactors.
Radian Guaranty may fail to maintain its eligibility status with the GSEs. In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs, which became effective December 31, 2015.PMIERs. The PMIERs aim to ensure that approved insurers will possess the financial and operational capacity to serve as strong counterparties to the GSEs throughout various market conditions. As a consequence, the PMIERs are comprehensive, covering virtually all aspects of the business of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer and the approved insurer’s financial condition, as well as extensive requirements related to the conduct and operations of a mortgage insurer’s business. In addition, the PMIERs require private mortgage insurers to obtain the prior consent of the GSEs before taking certain actions. The GSEs have significant discretion under the PMIERs and may amend the PMIERs at any time. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, Freddie Mac and/or Fannie Mae could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty. The PMIERs Financial Requirementsfinancial requirements currently require that a mortgage insurer’s Available Assets (as defined, these primarily include liquid assets and exclude Unearned Premium Reserves) meet or exceed its Minimum Required Assets (a risk-based minimum required asset amount calculated based on net RIF, and which is intended to approximate the loss exposure based on a variety of criteria that are indicative of credit quality).Assets. At December 31, 2016,2018, Radian Guaranty was in compliance with the PMIERs Financial Requirementsfinancial requirements and had Available Assets under the PMIERs of approximately $4.0$3.5 billion, which resulted in an excess or “cushion” of approximately $210.0$567 million over its Minimum Required Assets of approximately $3.8$2.9 billion. Radian Guaranty’s ability to continue to comply with the PMIERs Financial Requirementsfinancial requirements could be impacted by: (i) the product mix of our NIW and factors affecting the performance of our mortgage insurance business,portfolio, including our level of defaults, prepayments, the losses we incur on new or existing defaults and
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the credit characteristics of our mortgage insurance; (ii) the amount of credit that we receive under the PMIERs Financial Requirementsfinancial requirements for our third-party reinsurance transactions including our QSR Transactions and our Single Premium QSR Transaction, which credit(which is subject to periodicinitial and ongoing review by the GSEs;GSEs), including the credit received for our quota share and excess-of-loss reinsurance programs; and (iii) potential updates to the possibility that the GSEs willPMIERs, including an increase in the capital requirements under the PMIERs Financial Requirements, given thatfinancial requirements. Under the PMIERs providefinancial requirements there are increased financial requirements for loans with a higher likelihood of default and/or certain credit characteristics, such as higher LTVs and lower FICO scores, as well as for loans originated after January 1, 2016 that are insured under lender-paid mortgage insurance policies not subject to automatic termination under the factors usedHPA. Therefore, if our mix of business includes more loans that are subject to determinethese increased financial requirements, it increases the amount of Available Assets that Radian Guaranty is required to hold. Depending on the circumstances, we may limit the type and volume of business we are willing to write for certain of our products based on the increased financial requirements associated with certain loans. This could reduce the amount of NIW we write, which could reduce our revenues. Additionally, as we have experienced in the past, our insured loans may experience increased delinquencies in the future. Increases in delinquencies, including as a mortgage insurer’sresult of natural disasters, would subject Radian Guaranty to an increase in Minimum Required Assets to be updated every two years (withunder the next review scheduled to take place in 2017) or more frequently, as determined by the GSEs, to reflect changes in macroeconomic conditions or loan performance. In December 2016, the GSEs issued interim guidance for the industry that had a negativePMIERs, and therefore, could impact on the amount of PMIERs credit that we receive for our Single Premium QSR Transaction, but also gave credit to certain liquid investments that are readily available to pay claims that previously were not permitted to be included in our Available Assets. Although this interim guidance did not impact Radian Guaranty’s compliance with the PMIERs there can be no assuranceor negatively impact our results of operations.
The GSEs may amend the PMIERs at any time, although the GSEs have communicated that for material changes, including material changes affecting Minimum Required Assets, they will generally provide written notice 180 days prior to the effective date. The GSEs also have broad discretion to interpret the PMIERs, which could impact the calculation of Radian Guaranty’s complianceAvailable Assets and/or Minimum Required Assets. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. Radian expects to comply with PMIERs 2.0 and to continue to maintain a significant excess of Available Assets over Minimum Required Assets as of the effective date. If applied as of December 31, 2018, the changes under PMIERs 2.0 would not have resulted in a material change in Radian’s Minimum Required Assets, but would have reduced Radian’s PMIERs cushion. The reduction in Radian Guaranty’s PMIERs cushion is primarily due to a reduction in Available Assets of approximately $215 million as a result of the elimination in PMIERS 2.0 of any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. If Radian Guaranty’s Available Assets and Minimum Required Assets were calculated as if the PMIERs Financial Requirements will not be impacted by2.0 requirements were in effect, Radian Guaranty’s Available Assets at December 31, 2018 would have resulted in an excess or “cushion” of approximately $340 million, or 12%, over its Minimum Required Assets. We expect the GSEs to continue to update the PMIERs periodically in the future, changes in interpretation ofincluding if and when the PMIERs.CCF is finalized. Compliance with the PMIERs Financial Requirementsfinancial requirements could impact our holding company liquidity. If additional cash from Radian Group is required to support Radian Guaranty’s compliance with the PMIERs Financial Requirements,financial requirements, it will leave less liquidity to satisfy Radian Group’s other obligations. Depending on the amount of liquidity that is utilized from Radian Group, we may be required (or may decide) to seek additional capital by incurring additional debt, issuing additional equity, or selling assets, which we may not be able to do on favorable terms, if at all. The PMIERs Financial Requirements are more stringent than previous capital standards and have negatively impacted projected returns on capital throughout the industry. Compliance with the PMIERs Financial Requirements could impact our NIW and further impact our returns to the extent they are revised. In addition, under the PMIERs Financial Requirements there are increased financial requirements for loans with a higher likelihood of default and/or certain credit characteristics, as well as for loans originated after January 1, 2016 that are insured under lender-paid mortgage insurance policies not subject to automatic termination under the HPA. Therefore, if our mix of business includes more loans that are subject to these increased financial requirements, it would increase the amount of Available Assets that Radian Guaranty is required to hold. As a result, depending on the circumstances, we may limit the type and volume of business we are willing to write for certain of our products based on the increased financial requirements associated with certain loans. This could reduce the amount of NIW we write, which could reduce our revenues.
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Compliance with the PMIERs has resulted in additional expenses and has required significant time and attention. In addition to the PMIERs Financial Requirements,financial requirements, the PMIERs contain new requirements related to the operations of our mortgage insurance business, including extensive operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others. These increased operational requirements have resulted in additional expenses and have required substantial time and effort from management and our employees, which we expect will continue.
Compliance withThe PMIERs prohibit Radian Guaranty from engaging in certain activities such as insuring loans originated or serviced by an affiliate (except under certain circumstances) and require Radian Guaranty to obtain the PMIERs requires us to seek GSE approvalprior consent of the GSEs before taking many actions, such as paying dividends,which may include entering into various inter-companyintercompany agreements and commuting or reinsuring risk, among others. These restrictions could prohibit or delay Radian Guaranty from taking certain actions that would be advantageous to it or its affiliates.
Although we expect Radian Guaranty to retain its eligibility status with the GSEs and to continue to comply with the PMIERs Financial Requirements,financial requirements, including as updated by PMIERs 2.0 or in the future, we cannot provide assurance that this will occur. Loss of Radian Guaranty’s eligibility status with the GSEs would have an immediate and material adverse impact on the franchise value of our mortgage insurance business and our future prospects, as well as a material negative impact on our future results of operations and financial condition.
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Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy. We and our insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance regulators in the states where they are licensed to transact business. These regulations are principally designed for the protection of our insurance policyholders rather than for the benefit of our investors. Insurance laws vary from state to state, but generally grant broad supervisory powers to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Among other matters, the state insurance regulators impose various capital requirements on our insurance subsidiaries. These State insurance capital requirements for our mortgage insurance subsidiaries include risk-to-capitalRisk-to-capital ratios, other risk-based capital measures and surplus requirements that may limit the amount of insurance that our mortgage insurance subsidiaries write. Similarly, our title insurance subsidiary is required to maintain statutory premium reserves that vary by state and is subject to periodic reviews of certain financial performance ratios, and the states in which it is licensed can impose additional capital requirements based on the results of those ratios. Our failure to maintain adequate levels of capital, among other things, could lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition. If Radian Guaranty is not in compliance with a state’s applicable Statutory RBC Requirement, it may be prohibited from writing new business in that state until it is back in compliance or it receives a waiver of, or similar relief from, the requirement. As of December 31, 2018, Radian Guaranty was in compliance with all applicable Statutory RBC Requirements. In those states that do not have a Statutory RBC Requirement, it is not clear what actions the applicable state regulators would take if a mortgage insurer fails to meet the Statutory RBC Requirement established by another state. As of December 31, 2016, Radian Guaranty was in compliance with all applicable Statutory RBC Requirements; however, ifIf Radian Guaranty were to fail to meet the Statutory RBC Requirement in one or more states, it could be required to suspend writing business in some or all of the states in which it does business. In addition, the GSEs and our mortgage lending customers may decide not to conduct new business with Radian Guaranty (or may reduce current business levels) or impose restrictions on Radian Guaranty while it was not in compliance. The franchise value of our mortgage insurance business likely would be significantly diminished if we were prohibited from writing new business or restricted in the amount of new business we could write in one or more states. Radian Group also may be required to provide capital support for Radian Guaranty and its affiliated insurers if additional capital is required by those subsidiaries pursuant to future changes to insurance laws and regulations. The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. While the timing and outcome of this process is not known, inIn the event the NAIC adopts changes to the Model Act, we expect that the capital requirements in states that adopt the new Model Act may increase as a result of the changes. Although the outcome of this process remains uncertain, we believe that if changes are made to the Model Act it will not result in financial requirements that require greater capital than the level currently required under the PMIERs Financial Requirements.financial requirements.
Part 1 Item 1A. Risk Factors
The mortgage insurance industry has always been highly competitive with respect to pricing. Our mortgage insurance subsidiaries’ premium rates and policy forms are generally subject to regulation in every state in which they are licensed to transact business. These regulations are intended to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. In most states where our insurance subsidiaries are licensed, premium rates and policy forms must be filed with the state insurance regulatory authority and, in some states, must be approved, before their use. The mortgage insurance industry has always been highly competitive with respect to pricing. In the recent past, the willingness of mortgage insurers to offer reduced pricing (whether through filed or customized rates) led to an increased demand from certain lenders for reduced rate products. We and other mortgage insurers have beenmay be subject to inquiries from the Wisconsin Department of Insurance and examination by the California Department of Insurance regarding customized insurance rates and policy form filings. In 2016, the California Department of Insurance issued guidance to the mortgage insurance industry stating that under California law, permissible discounting of mortgage insurance rates must be applied to all similarly situated customers. The current regulatory environment could increase the likelihood that additional regulatory inquiries or examinations may be initiated. The limited flexibility currently provided under existing regulatory requirements with respect to our mortgage insurance premium rates and policy forms. Our title insurance business is subject to extensive rate regulation by the applicable state agencies in the states in which it operates. Title insurance rates makes it more difficultare regulated differently in various states, with some states requiring the subsidiaries to respond to competitor pricing actionsfile and customer demands in a timely fashion. Wereceive approval of rates before such rates become effective and some states promulgating the rates that can be charged. In general, premium rates are determined on the basis of historical data for claim frequency and severity as well as related production costs and other expenses. Given that the premium rates for our insurance subsidiaries are highly regulated, we could lose business opportunities and fail to successfully implement our business strategies if we are unable to respond to competitor pricing actions and our customers’ demands in a timely and acceptablecompliant manner. The credit performance of our insuredmortgage insurance portfolio is impacted by macroeconomic conditions and specific events that affect the ability of borrowers to pay their mortgages. As a seller of mortgage credit protection, and mortgage and real estate products and services, our results are subject to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage origination environmentoriginations and the credit
Part 1 Item 1A. Risk Factors
performance of our underlying insured assets.mortgage insurance portfolio. Many of these conditions are beyond our control, including national and regional economic conditions,, housing prices, unemployment levels, interest rate changes, the availability of credit and other factors.factors that may be derived from national and regional economic conditions. In general, a deterioration in economic conditions increases the likelihood that borrowers will be unable to satisfy their mortgage obligations andobligations. A deteriorating economy can also adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments despite having the financial resources to do so. Mortgage defaults also can occur due to a variety of specific events affecting borrowers, including death or illness, divorce or other family problems, unemployment, increases in the interest rates of adjustable rate mortgages, changes in regional economic conditions, a borrower choosing not to pay due to housing value changes that cause the outstanding mortgage amount to exceed the value of a home, or other events. In addition, natural disasters,factors impacting regional economic conditions, acts of terrorism, war or other severe conflicts, event-specific economic depressions or other catastrophic events such as natural disasters could result in increased defaults due to the impact of such events on the ability of borrowers to satisfy their mortgage obligations and the value of affected homes. Unfavorable macroeconomic developments and the other factors cited above could have a material negative impact on our results of operations and financial condition. The length of time that our mortgage insurance policies remain in force could decline and result in a decrease in our revenue.future revenues. As of December 31, 2016, 68%2018, 70% of our total primary IIF consists of policies for which we expect to receive premiums in the future, typically through Monthly Premium Policies. As a result, most of our earned premiums are derived from insurance that was written in prior years. The length of time that this insurance remains in force, which we refer to as the Persistency Rate, is a significant determinantdriver of our future revenues. Arevenues, with a lower overall Persistency Rate could reducegenerally reducing our future revenues. The factors affecting the length of time that our insurance remains in force include: prevailing mortgage interest rates compared to the mortgage rates on our IIF, which affects the incentive for borrowers to refinance (i.e., lower current interest rates make it more attractive for borrowers to refinance and receive a lower interest rate); applicable policies for mortgage insurance cancellation, along with the current value of the homes underlying the mortgages in our IIF; the mix of business we write between Single Premium Policies (for which a lower Persistency Rate has a positive effect on future revenues) and those policies that provide for a premium stream in the future, such as our Monthly Premium Policies (for which a lower Persistency Rate has a negative effect on future revenues); the credit policies of lenders, which may make it more difficult for homeowners to refinance loans; and
economic conditions that can affect a borrower’s decision to pay-offpay off a mortgage earlier than required.
Part 1 Item 1A. Risk Factors
If these or other factors cause a decrease in the length of time that our Monthly Premium Policies (or other policies for which we expect to receive premiums in the future) remain in force, to decline, our future revenues could be negatively impacted, which could negatively impact our results of operations and financial condition. Our Loss Mitigation Activity is not expected to mitigate mortgage insurance losses to the same extent as in prior years; Loss Mitigation Activity could continue to negatively impact our customer relationships. As part of our claims management process we pursue opportunities to mitigate losses both before and after we receive claims.claims, including processes to ensure claims are valid. Following the financial crisis, our Loss Mitigation Activities, such as Rescissions, Claim Denials and Claim Curtailments, increased significantly in response to the poor underwriting, servicer negligence and general non-compliance with our insurance policies that was prevalent in the period leading up to the financial crisis. These Loss Mitigation Activities materially mitigated our paid losses during this period and resulted in a significant reduction in our loss reserves. As our Legacy Portfolio has become a smaller percentage of our overall insured portfolio andFollowing the financial crisis, mortgage underwriting and servicing have generally improved, there has been a decrease inand the amount of Loss Mitigation Activity required with respect to the claims we receive, and we expect this trend to continue.have received in more recent periods has significantly decreased. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as it did in prior years.the years following the financial crisis. In addition, under the new, uniform master policies developed with the GSEs in 2014, including our 2014 Master Policy, for NIW after October 1, 2014, with only limited exceptions, the potential forour rights to conduct Loss Mitigation Activity generally isare more limited throughout the private mortgagethan under our prior master insurance industry.policies. Radian Guaranty also now offers 12-month and 36-month rescission relief programs in accordance with the specified terms and conditions set forth in the newour 2014 Master Policy. Further, the FHFA and the GSEs have initiatedproposed revised GSE Rescission Relief Principles to, among other things, further limit the circumstances under which mortgage insurers may rescind coverage. We are in the process of incorporating these principles into a process to revise the minimum standards for mortgage insurernew master policies, including with respect to rescission relief,policy, which we expect maywill be finalizedeffective during the second half of 2017.2019. We expect thatcurrently are in discussions with the GSEs regarding the form of this new master policy, including as it relates to these factors will continueproposed principles, which if adopted, are likely to contributefurther reduce our ability to arescind insurance coverage in the future. A reduction in the Loss Mitigation Activity.rights available under our master policy could result in higher losses than would have been the case under our existing Master Policies.
Part 1 Item 1A. Risk Factors
Our Loss Mitigation Activities and claims paying practices have resulted in disputes with certain of our customers and in some cases, damaged our relationships with certain customers, resulting in a loss of business. While we have resolved many of these disputes, a risk remains that our Loss Mitigation Activities or claims paying practices could continue to have a negative impact on our relationships with customers or potential customers. Further, disputes with our customers that are not resolved could result in additional arbitration or judicial proceedings beyond those we are currently facing. See “Item 3. Legal Proceedings.” To the extent that past or future Loss Mitigation Activities or claims paying practices impact our customer relationships, our competitive position could be adversely affected, resulting in the potential loss of business and impacting our results of operations. Foreclosure prevention and borrower relief programs may not continue to provide us with a material benefit.
The federal government and various lenders have adopted programs, such as HARP and HAMP, to modify loans to make them more affordable to borrowers with the goal of reducing the number of foreclosures. While the ultimate success of these loan modification programs will depend on the future re-default rates for loans that have been modified through these programs, we believe these programs have significantly benefited the composition and credit quality of our Legacy Portfolio. HAMP expired in December 2016 and was replaced with the “Flex Modification” program that is expected to become effective in October 2017 and will offer payment relief similar to HAMP. However, we do not expect to continue to materially benefit from these programs in the future because the number of loans remaining in our mortgage insurance portfolio that are eligible to complete a HARP refinance or other loan modification has substantially declined.
Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business. Our current business model is highly dependent on the GSEs. TheGSEs as the GSEs are the primary beneficiaries of most of our mortgage insurance policies, and they impose eligibility requirements that private mortgage insurers must satisfy to insure loans purchased by the GSEs.policies. The GSEs’ federal charters generally require credit enhancement for low down payment mortgage loans (i.e., a loan amount that exceeds 80% of a home’s value) in order for such loans to be eligible for purchase by them. Lenders generally have used private mortgage insurance to satisfy this credit enhancement requirement. As a result, low down payment mortgages purchased by the GSEs generally are insured with private mortgage insurance.
Part 1 Item 1A. Risk Factors
In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs.
The GSEs’ business practices may be impacted by their results of operations, by administrative policy decisions (such as a desire to increase the competitiveness of private capital executions in the secondary mortgage market) as well as by legislative or regulatory changes. Since September 2008, the GSEs have been operating under the conservatorship of the FHFA. With respect to loans purchased by the GSEs, changes in the business practices of the GSEs, which can be implemented by the GSEs acting independently or through their conservator, the FHFA, could negatively impact our mortgage insurance business and financial performance, including changes to: eligibility requirements for a mortgage insurer to become and remain an approved eligible insurer for the GSEs; the underwriting standards on mortgages they purchase;
policies or requirements that may result in a reduction in the number of mortgages they acquire; the national conforming loan limit for mortgages they acquire; the level of mortgage insurance required, including expanding the loans that are eligible for reduced insurance coverage; the terms on which mortgage insurance coverage may be canceled before reaching the cancellation thresholds established by law; the requirements for terms required to be included in master policies for the mortgage insurance policies they acquire; the process for claim payments and requirements for actionsacquire, including limitations on our ability to be taken that are intended to avoid or mitigate losslosses on insured mortgages that are in default;
the amount of LLPAsloan level price adjustments (based on risk) or guarantee fees (which may result in a higher cost to borrowers) that the GSEs charge on loans that require mortgage insurance; and the degree of influence that the GSEs have over a mortgage lender’s selection of the mortgage insurer providing coverage. The FHFA’s 2017 strategic plan for the GSEs callsFHFA has called for the GSEs to transfer a meaningful portion of credit risk, known as a “credit risk transfer,” to the private sector. TheThis mandate for meaningful credit risk transfer builds upon the goals set in each of the last three years for the GSEs to transfer portionsincrease the role of their mortgage credit risk to the private sectorcapital by experimenting with different forms of transactions and structures. SinceFrom 2013 through June 2018 the GSEs have engaged in roughly $1.3transferred risk on over $2.5 trillion of unpaid principal balance, and we expect these credit risk transfer transactions that occurred after the acquisition of residential mortgage loans (i.e., back-end risk transfer programs). In 2016, we participatedto continue. We have been participating in new, front-endthese credit risk transfer pilot programs developed by Fannie Mae and Freddie Mac. These pilot programs involve participation as part of a panel of mortgage insurance company affiliates in writing credit insurance policies on loans that are to be purchased by the GSEs in the future (i.e., front-end), subject to certain pre-established credit parameters. For additionalAdditional information about these pilot programs may be found in Item 1. Business, see “Item 1. Business—Mortgage“Regulation—Federal Regulation—Housing Finance Reform” and “Mortgage Insurance—Mortgage Insurance Business Overview—Mortgage Insurance Products—Non-TraditionalProducts—Other Mortgage Insurance Products—GSE Credit Risk Transfer.” We may participate in other credit risk transfer transactions and structures used by the GSEs in the future. It is difficult to predict what other types of credit risk transfer transactions and structures may be used.used in the future . If any of the credit risk transfer transactions and structures were to displace primary loan level or standard levels of mortgage insurance, the amount of insurance we write may be reduced, which could negatively impact our franchise value, results of operations and financial condition. As a result, the impact of any credit risk transfer products and transactions or other
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structures implemented by the GSEs is uncertain and hard to predict. For example, in 2018, Freddie Mac and Fannie Mae announced the launch of limited pilot programs, IMAGIN and EPMI, respectively, as alternative ways for lenders to sell to the GSEs loans with LTVs greater than 80%. These investor-paid mortgage insurance programs, in which insurance is acquired directly by each GSE, have many of the same features and represent an alternative to traditional private mortgage insurance products that are provided to individual lenders. Participants in IMAGIN and EPMI are not subject to compliance with the PMIERs, which may create a competitive disadvantage for private mortgage insurers if these pilot programs are expanded. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform” Since the FHFA was appointed as conservator of the GSEs, there havehas been a wide range of legislative proposals to reform the U.S. housing finance market, including proposals for GSE reform ranging from some that advocate nearly complete privatization and elimination of the role of the GSEs to others that support a system that combines a federal role with private capital. In addition, the Trump administration and U.S. Treasury have stated that they are seeking to advance housing finance reform, particularly if the U.S. Congress does not take action to end the current conservatorship of the GSEs. Under current law, the FHFA has significant discretion with respect to the future state of the GSEs, including the ability to place the GSEs into receivership without further legislative action. The term of the most recent director of the FHFA ended in January 2019 and an acting director was appointed, pending the U.S. Senate’s confirmation of the Administration’s nominee to lead the FHFA. With new leadership at FHFA, we believe there may be an increased likelihood that the Administration could take action to reform the GSEs through current authorities of the director under The Housing and Economic Recovery Act of 2008 and through Executive Order. The future structure of the residential housing finance system remains uncertain, including whether comprehensive housing reform legislation will be adopted and, if so, what form it may ultimately take, and the recent change in administration in the U.S. has increased this uncertainly.take. It is difficult to predict the impact of any changes on our business. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform.” Although we believe that traditional private mortgage insurance will continue to play an important role in any future housing finance structure, developments in the practices of the GSEs, including potentially new federal legislation could reducethat reduces the level of private mortgage insurance coverage used by the GSEs as credit enhancement, or even eliminateeliminates the requirement, which would significantly reduce our available market,may diminish the franchise value of our mortgage insurance business and materially and adversely affect our business prospects, results of operations and financial condition.
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A decrease in the volume of home mortgage originations could result in fewer opportunities for us to write new mortgage insurance business. The amount of new business we write depends, among other things, on a steady flow of low down payment mortgages that benefit from our mortgage insurance. The volume of low down payment mortgage originations is impacted by a number of factors, including: restrictions on mortgage credit due to changes in lender underwriting standards, more restrictivecapital requirements affecting lenders, regulatory requirements, such as the required ability-to-pay determination prior to extending credit, and the significantly reducedhealth of the private securitization market; home mortgage interest rates;
the health of the domestic economy generally, as well as specific conditions in regional and local economies; housing affordability; tax laws and policies including the deductibility ofand their impact on, among other things, deductions for mortgage insurance premiums, and mortgage interest payments;payments and real estate taxes; populationdemographic trends, including the rate of household formation;
the rate of home price appreciation; government housing policy encouraging loans to first-time homebuyers; and the practices of the GSEs, including the extent to which the guaranty fees, LLPAs,loan level price adjustments (based on risk), credit underwriting guidelines and other business terms provided by the GSEs affect the cost of mortgages and lenders’ willingness to extend credit for low down payment mortgages. Although for the past several years, mortgage origination volumes have been supported by increased mortgage refinancings as a result of the low interest rate environment, as well as a recovery in the home purchase market, total domestic mortgage originations have decreased significantly from $2.7 trillion in 2006 (pre-dating the housing downturn) to approximately $1.9 trillion in 2016. Most industry experts are predicting that the overall mortgage origination market in 2017 will be lower compared to 2016, largely due to an expected decrease in refinancings as a result of higher interest rates, partially offset by an increase in mortgage origination volume from home purchases. If the overall volume of new mortgage originations continues to decline or remains at reduced levels for a prolonged period of time,declines, we could experience a reduced opportunity to write new insurance business and likely will be subject to increased competition, with respect to that opportunity, which could negatively affect our business prospects, results of operations and our financial condition.
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Our NIW and franchise value could decline if we lose business from significant customers. Our mortgage insurance business depends on our relationships with our customers. Our customers place insurance with us directly on loans that they originate and they also do business with us indirectly through purchases of loans that already have our mortgage insurance coverage. Our relationships with our customers may influence both the amount of business they do with us directly and also their willingness to continue to approve us as a mortgage insurance provider for loans that they purchase. The loss of business from significant customers could have an adverse effect on the amount of new business we are able to write, and consequently, our franchise value. During 2016,2018, our top 10 mortgage insurance customers (measured by NIW) were responsible for 31.7%29.1% of our primary NIW, as compared to 28.0%32.4% in 2015. Although we have taken steps in recent years to diversify our customer base, if2017. If we were to lose a significant customer, it is unlikely that the loss could be completely offset by other customers in the near-term, if at all. Some of our lending customers may decide to write business only with a limited number of mortgage insurers or only with certain mortgage insurers, based on their views with respect to an insurer’s pricing, service levels, underwriting guidelines, loss mitigation practices, financial strength or other factors. Alternatively, certain other lending customers have chosen for risk management purposes to diversify and expand the number of mortgage insurers with which they do business, which has negatively affected our level of NIW and market share with those customers. Given that many of our customers currently give us a significant portion of their total mortgage insurance business, it is possible that if there is further diversification it could have a negative impact on our NIW if we are unable to mitigate the market share loss through new customers or increases in business with other customers. Further, we actively engage with our customers to ensure that we are receiving an appropriate mix of business from such customers at acceptable projected returns, and depending on the circumstances, we could take action with respect to customers (e.g., limiting the type of business we accept from them or instituting pricing changes that impact them) that could result in customers reducing the amount of business they do with us or deciding not to do business with us altogether. Any significant loss in our market share could negatively impact our mortgage insurance franchise, results of operations and financial condition.
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Our mortgage insurance business faces intense competition. The U.S. mortgage insurance industry is highly competitive. Our competitors primarily include other private mortgage insurers and governmental agencies, principally the FHA and VA. We currently compete with other private mortgage insurers that are eligible to write business for the GSEs on the basis of price, underwriting guidelines, customer relationships, reputation, perceived financial strength (including based on comparative financial strength credit ratings) and overall service, including services and products that complement our mortgage insurance products and that are offered through our Services business.service. Overall service competition is based on, among other things, effective and timely delivery of products, timeliness of claims payments, customer service, timely and accurate servicing of policies, training, loss mitigation efforts and management and field service expertise. Pricing has always been competitive in the We also believe that service includes our ability to offer services to customers through our Services business that complement our mortgage insurance industry and, with newer entrants joining the industry, price competition has continued as these companies have sought to gain a greater presence in the market andproducts. For more established industry participants seek to defend their market share and customer relationships. As a result of thisinformation about our competitive environment, recentincluding pricing trends have included: (i) the use of a spectrum of filed rates to allow for formulaic, risk-basedcompetition, see “Item 1. Business—Mortgage Insurance—Competition.”
In developing our pricing (commonly referred to as “black-box” pricing); (ii) the use of customized (often discounted) rates on lender-paid, Single Premium Policies and to a limited extent, on borrower-paid Monthly Premium Policies; and (iii) overall reductions in standard filed rates on borrower-paid Monthly Premium Policies. In the recent past, the willingness of mortgage insurers to offer reduced pricing (through filed or customized rates) led to an increased demand from certain lenders for reduced rate products. This further intensified the pricing environment and resulted in new pricing levels (whether through filed or customized rates) by private mortgage insurers in order to avoid risking a potential significant loss in NIW. Weorigination strategies, we monitor various competitive and economic factors while seeking to balanceincrease the long-term value of our portfolio by balancing both profitability and market share considerationsvolume considerations. Pricing strategies continue to evolve in developing ourthe mortgage insurance industry and mortgage insurers are migrating toward offering various pricing and origination strategies. We have taken a disciplinedmethodologies with increasing degrees of risk-based granularity. Our strategy is to consistently apply an approach to establishing our premium rates and writing a mix of businesspricing that we expect to produce our targeted level of returnsis customer-centric based on a blended basislender’s loan origination process, flexible and an acceptable levelcustomizable, as well as balanced with our objectives for managing the risk and return profile of NIW. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF.”our insured portfolio. Although we believe we are well-positioned to compete effectively, our pricing strategy may not be successful. Despite our pricing actions, we may experience returns below our targeted returns and we may lose business to other competitors. There can be no assurance that pricing competition will not intensify further, which could result in a decrease in our projected returns for the industry and for Radian Guaranty.returns.
Certain of our private mortgage insurance competitors are subsidiaries of larger corporations, that may have access to greater amounts of capital and financial resources than we do at a lower cost of capital (including as a result of tax-advantaged, off-shore reinsurance vehicles) and currently have better financial strength ratings than we have. As a result, they may be better positioned to compete outside of traditional mortgage insurance, including in the private label securitization market or if the GSEs expand their use of, or pursue alternative forms of, credit enhancement.enhancement outside of private mortgage insurance in its traditional form. In addition, because of the current tax-advantage oftax advantages associated with being off-shore, certain of our competitors arehave been able to reinsure to their offshore affiliates and achieve higher after-tax rates of return on the NIW they write compared to on-shore mortgage insurers such as Radian Guaranty, which could allow these off-shore competitors to leverage reduced pricing to gain market share, while continuing to achieve acceptable returns on NIW. We also compete with governmental entities, such as the FHA and VA, thatprimarily on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. These governmental entities typically do not have the
Part 1 Item 1A. Risk Factors
same capital requirements or business objectives that we and other private mortgage insurance companies have, and therefore, may have greater financial flexibility in their pricing guidelines and capacity that could put us at a competitive disadvantage. If these entities lower their pricing or alter the terms and conditions of their mortgage insurance or other credit enhancement products in furtherance of political, social or other goals rather than a profit motive, we may be unable to compete in that market effectively, which could have an adverse effect on our business, financial condition and operating results. Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its share of the mortgage insurance market, including by insuring a number of loans that would meet our current underwriting guidelines, sometimes at a lower monthly cost to the borrower than a loan that carries our mortgage insurance. While the private mortgage insurance industry generally had been recapturing market share from the FHA, in January 2015, the FHA reduced its annual mortgage insurance premium by 50 basis points, which has impacted our competitiveness with respect to certain high-LTV loans to borrowers with FICO scores below 720. Further, on January 9, 2017, the FHA announced another reduction of its annual mortgage insurance premium by 25 basis points. However, before this reduction went into effect, the FHA announced that it was suspending the premium reduction indefinitely. It is unclear whether the reduction will ultimately be canceled or the suspension will be removed. If the suspension is removed it could have a negative effect on our ability to compete with the FHA.
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The FHA may continue to maintain a strong market position and could increase its market position again in the future.position. Factors that could cause the FHA to remain a significant competitor include: governmental policy, including further decreases in the pricing of FHA insurance or changes in the terms of FHA insurance such insurance;as the current life-of-loan coverage requirement; capital constraints of the private mortgage insurance industry; the tightening by private mortgage insurers of underwriting guidelines based on credit risk concerns; business changes by the GSEs, including underwriting changes, a reduction in loan limits or increases in the LLPAsloan level price adjustments (based on risk) charged by the GSEs on loans that require mortgage insurance and changes in the amount of guarantee fees for the loans that they acquire (which may result in higher cost to borrowers); and the perceived operational ease of using FHA insurance compared to the products of private mortgage insurers. Other private mortgage insurers may seek to regaincompete for market share from the FHA or other mortgage insurers by reducing pricing, which could, in turn, improve their competitive position in the industry and negatively impact our level of NIW. We have faced increasing competition from the VA. Based on publicly available information, the VA accounted for 28%25% of the insurable mortgage market in 2016.2018. We believe that the VA’s market share has generally been increasing because the VA offers 100% LTV loans and charges a one-time funding fee that can be included in the loan amount with no additional monthly expense, and because of an increase in the number of borrowers that are eligible for the VA’s program. In addition, as market conditions change, alternatives to traditional private mortgage insurance may become more prevalent, which could reduce the demand for private mortgage insurance in its traditional form, including: structures, such as the limited pilot programs IMAGIN and EPMI launched in 2018 by Freddie Mac and Fannie Mae, respectively, that are commonly referred to as “investor paid mortgage insurance” in which affiliates of traditional mortgage insurers directly insure the GSEs against loss; lenders and other investors holding mortgages in their portfolio and self-insuring; lenders using pass-through vehicles that take on the risk of loss for loans ultimately sold to the GSEs; engaging in credit-linked note transactions or other structured risk transfer transactions in the capital markets;
risk sharing, risk transfer or using other risk mitigation techniques in conjunction with reduced levels of private mortgage insurance coverage; and lenders originating mortgages using “piggyback” structures to avoid private mortgage insurance, such as a first-lien mortgage with an 80% LTV and a second mortgage with a 10%, 15% or 20% LTV, which could become more attractive becausegiven that interest on piggyback loans remains tax deductible while the tax deduction for mortgage insurance premiums has not been renewedextended beyond the 20162017 tax year.year; and other potential forms of credit enhancement that do not involve private mortgage insurance. See “—Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business.” Managing the competitive environment is extremely challenging given the multitude of various factors discussed above. If we do not appropriately manage the strategic decisions required in this environment, our franchise value, business prospects, results of operations and financial condition could be negatively impacted.
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Our business depends, in part, on effective and reliable loan servicing. We depend on third-party servicing of the loans that we insure. Dependable servicing is necessary for timely billing and effective loss mitigation opportunities for delinquent or near-delinquent loans. ChallengingChanges in the servicing industry, challenging economic and market conditions following the financial crisis strained the resourcesor periods of servicerseconomic stress and high mortgage defaults could negatively affectedaffect the ability of many servicers to effectively service the loans that we insured. We believe that servicers have improved their operations and standards in recent years; however, it is possible that another period of economic stress and high mortgage defaults could again negatively impact the servicing of our insured loans.insure. Further, servicers are now required to comply with new and more burdensome requirements, procedures and standards for servicing residential mortgages.mortgages than in the past, such as the CFPB’s mortgage servicing rules. While these new requirements which have been instituted by the CFPB and others following the financial crisis, are intended to improve servicing performance, they also impose a high cost of compliance on servicers that may impact their financial condition and their operating effectiveness. If we experience a disruption in the servicing of mortgage loans covered by our insurance policies, this, in turn, could contribute to a rise in defaults and/or claims among those loans, which could have a material adverse effect on our business, financial condition and operating results.
Part 1 Item 1A. Risk Factors
An extension in the period of time that a loan remains in our delinquent loan inventory may increase the severity of claims that we ultimately are required to pay. High levels of defaults and corresponding delays in foreclosures could delay our receipt of claims, resulting in an increase in the period of time that a loan remains in our delinquent loan inventory, and as a result, the severity of claims that we are ultimately required to pay.Claim Severity. Following the financial crisis, the average time that it has takentook for us to receive a claim has increased. This is,was, in part, due to loss mitigation protocols that were established by servicers and also to a significant backlog of foreclosure proceedings in many states, and especially in those states that impose a judicial process for foreclosures. Generally, foreclosure delays do not stop the accrual of interest or affect other expenses on a loan, and unless a loan is cured during such delay, once title to the property ultimately is obtained and a claim is filed, our paid claim amount may include additional interest and expenses, increasing the severity of claims we ultimately are required to pay.Claim Severity. While foreclosure timelines have improved in recent years, a portion of our Legacy Portfolioportfolio originated in the years prior to and including 2008 consists of severely delinquent loans. Further, another period of significant economic stress and a high level of defaults could once again delay claims and result in higher levels of severity.Claim Severity. Higher levels of severityClaim Severity would increase our incurred losses and could negatively impact our results of operations and financial condition. Our success depends on our ability to assess and manage our underwriting risks; the premiums we charge may not be adequate to compensate us for our liability for losses and the amount of capital we are required to hold against our insured risks. We expect to incur future provisions for losses beyond what we have reserved for in our financial statements. The estimates and expectations we use to establish premium rates are based on assumptions made at the time our insurance is written.Our mortgage insurance premiums are based on, among other items, the amount of capital we are required to hold against our insured risks and our estimates of the long-term risk of claims on insured loans. Our premium rates take into account, among other factors, LTV, type (e.g., prime vs. non-prime or fixed vs. variable payments), premium structure (e.g., single lump sum, monthly or other variations), term, coverage percentageare established based on performance models that consider a broad range of borrower, loan and whether there is a deductible in front of our loss position. Theseproperty characteristics, as well as market and economic conditions. Our assumptions may ultimately prove to be inaccurate. We generally cannot cancel or elect not to renew the mortgage insurance we provide, and because we generally fix premium rates for the life of a policy when issued, we cannot adjust renewal premiums or otherwise adjust premiums during the life of a policy. Therefore, ifIf the risk underlying a mortgage loan we have insured develops more adversely than we anticipated, we generally cannot increase the premium rates on this in-force business, or cancel coverage or elect not to renew coverage, to mitigate the effects of such adverse developments. Similarly, we cannot adjust our premiums if the amount of capital we are required to hold against our insured risks increases from the amount we were required to hold at the time a policy was written (as occurred when the PMIERs Financial Requirements became effective and could occur again if the GSEs impose more burdensome capital requirements as part of their periodic review of the PMIERs Financial Requirements), we cannot adjust the premiums to compensate for this.written. As a result, if we are unable to compensate for or offset the increased capital requirements in other ways, the returns on our business may be lower than we assumed or expected. Our premiums earned and the associated investment income on those premiums may ultimately prove to be inadequate to compensate for the losses that we may incur and may not provide an adequate return on increased capital that may be required. As a result, our results of operations and financial condition could be negatively impacted.
Additionally, in accordance with industry practice, we do not establish reserves in our mortgage insurance business until we are notified that a borrower has failed to make at least two monthly payments when due. Because our mortgage insurance reserving does not account for the impact of future losses that we expect to incur with respect to performing (non-defaulted) loans, our obligation for ultimate losses that we expect to incur at any period end is not reflected in our financial statements, except to the extent that a premium deficiency exists. As a result, our losses can be more severe in periods of high-defaultshigh defaults given that we generally are not permitted to establish reserves in anticipation of such defaults. If the estimates we use in establishing loss reserves are incorrect, we may be required to take unexpected charges to income, which could adversely affect our results of operations. We establish loss reserves in our mortgage insurance business to provide for the estimated cost of future claims on defaulted loans. Setting our loss reserves requires significant judgment by management with respect to the likelihood,
Part 1 Item 1A. Risk Factors
magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities with respect to defaulted loans. The models, assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially in the event of an extended economic downturn or a period of extreme market volatility and uncertainty. Because our reserves represent our best estimate of claims to be paid in the future,this, claims paid may be substantially different than our loss reserves and these reserves may be insufficient to satisfy the full amount of claims that we ultimately have to pay. Changes to our estimates could adversely impact our results of operations and financial condition.
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We have a numberA portion of the defaulted loans in our Legacy Portfolio thatportfolio originated in the years prior to and including 2008 have been in default for an extended period of time. While these loans are generally assigned a higher loss reserve based on our belief that they are more likely to result in a claim, we also assume, based on historical trends, that a significant portion of these loans will cure or otherwise not result in a claim. Given the significant period of time that these loans have been in default, it is possible that the ultimate cure rate for these defaulted loans will be less than our current estimates of Cures for this inventory of defaults.
If our estimates are inadequate, we may be required to increase our reserves, which could have a material adverse effect on our results of operations and financial condition. Our delegated underwriting program may subject our mortgage insurance business to unanticipated claims. In our mortgage insurance business, we permit lenders to obtain mortgage insurance for residential mortgage loans originated and underwritten by them using Radian’s pre-established underwriting guidelines. Once we accept a lender into our delegated underwriting program, we generally insure a mortgage loan originated by that lender based on our expectation that the lender has followed our specified underwriting guidelines in accordance with the endorsement. Under this program, a lender could commit us to insure a material number of loans with unacceptable risk profiles before we discover the problem and terminate that lender’s delegated underwriting authority or pursue other rights that may be available to us, such as our rights to rescind coverage or deny claims. We face risks associated with our contract underwriting business. We provide third partythird-party contract underwriting services for both our mortgage insurance and Services customers. We provide these customers with limited indemnification rights with respect to those loans that we simultaneously underwrite for both secondary market compliance and for potential mortgage insurance eligibility. In addition, in certain limited circumstances, we may also offer limited indemnification when we underwrite a loan only for secondary market compliance. In addition to indemnification, we typically have limited loss mitigation defenses available to us for loans that we have underwritten through our contract underwriting services. As a consequence, our results of operations could be negatively impacted if we are required to indemnify our customers for material underwriting errors in our contract underwriting services. OurThe current insurance financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position.
The current financial strength ratings for Radian Guaranty are Baa3has been assigned a rating of Baa2 by Moody’s and BBBa rating of BBB+ by S&P. While Radian Guaranty’s financial strength ratings currently are investment grade, and although theythese ratings are below the ratings assigned to certain other private mortgage insurers, we have been successful in competing in the private mortgage insurance market, and weinsurers. We do not believe our ratings have had a material adverse effect on our relationships with existing customers. To the extent this changes, however, andHowever, if financial strength ratings become a more prominent consideration for lenders, we may be competitively disadvantaged by customers choosing to do business with private mortgage insurers that have higher financial strength ratings. In addition, the current PMIERs doand PMIERs 2.0 will not include a specific ratings requirement with respect to eligibility, but if this were to change in the future, or if the GSEs were to place an emphasis on ratings with respect to considering forms of credit enhancement other than traditional mortgage insurance, we may become subject to a ratings requirement in order to retain our GSE eligibility status orunder the PMIERs.
The GSEs currently consider financial strength ratings, among other items, to determine the amount of collateral that an insurer must post when participating in the credit risk transfer transactions currently being conducted by the GSEs. As a result, the returns that we are able to achieve when participating in these transactions are dependent, in part, on our financial strength ratings. We currently use Radian Reinsurance to participate in the GSEs’ credit risk transfer transactions. Radian Reinsurance has been assigned a rating of BBB+ by S&P. Market participants with higher ratings than us generally have the ability to price more aggressively, and therefore, are better positioned than us to compete effectively with respect to such other forms of execution.in these transactions. We believe that financial strength ratings remain a significant consideration for participants seeking to secure credit enhancement in the non-GSE mortgage market, which includes most non-QMnon-qualified mortgage loans. While this market has remained limited since the financial crisis, we view this market as an area of potential future growth and our ability to participate in this market could depend on our ability to secure higher ratings for our mortgage insurance subsidiaries. In addition, if legislative or regulatory changes were to alter the current state of the housing finance industry such that the GSEs
Part 1 Item 1A. Risk Factors
no longer operatedoperate in their current capacity or loans purchased by the GSEs were no longer automatically deemed qualified mortgages under the QM Rule, we may be forced to compete in a new marketplace in which financial strength ratings may play a greater role. If we are unable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our mortgage insurance subsidiaries, the franchise value and future prospects for our mortgage insurance business could be negatively affected. Our success depends, in part, on our ability to manage risks in our investment portfolio. Our investment portfolio is an important source of revenue.revenue and is our primary source of claims paying resources. Although our investment portfolio consists mostly of highly-rated fixed income investments, our investment strategy is affected by general economic conditions, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and credit spreads and, consequently, the value of our fixed-incomefixed income securities, and as such, we may not achieve our investment objectives. Volatility or lack of liquidity in the markets in which we hold positions has at times reduced the market value of some of our investments, and if this worsens substantially it could have a material adverse effect on our liquidity, financial condition and results of operations.
Part 1 Item 1A. Risk Factors
Compared to historical averages,Although in recent years our portfolio yield has been increasing, interest rates and investment yields on our investments generally have declined in recent years,continue to be below historical averages, which has reduced the investment income we generate. For the significant portion of our investment portfolio held by our insurance subsidiaries, to receive full capital credit under insurance regulatory requirements and under the PMIERs, we generally are limited to investing in highly-rated investments that are unlikely to increase our investment returns. Because we depend on our investments as a source of revenue, a prolonged period of lower than expected investment yields would have an adverse impact on our revenues and could potentially adversely affect our results of operations. Further, future updates to the NAIC Model Act or PMIERs could impact our investment choices, which could negatively impact our investment strategy.
In addition, we structure our investment portfolio to satisfy our expected liabilities, including claim payments in our mortgage insurance business. If we underestimate our liabilities or improperly structure our investments to meet these liabilities, we could have unexpected losses resulting from the forced liquidation of investments before their maturity, which could adversely affect our results of operations. Radian Group’s sources of liquidity may be insufficient to fund its obligations. Radian Group serves as the holding company for our operating subsidiaries and does not have any significant operations of its own. As of December 31, 2016,2018, Radian Group held,had available, either directly or through unregulated subsidiaries, unrestricted cash and liquid investments of approximately $460 million, excluding$714.1 million. This amount excludes certain additional cash and liquid investments that have been advanced to Radian Group from our subsidiaries for corporate expenses and interest payments. Of this amount, $110.1Total liquidity, which includes our undrawn $267.5 million unsecured revolving credit facility entered into in October 2017, was used in January 2017 to redeem our remaining Convertible Senior Notes due 2019. See Note 21$981.6 million as of Notes to Consolidated Financial Statements.December 31, 2018. Radian Group’s principal liquidity demands for the next 12 months are expected to include: (i) the payment of $22.2 million principal amount to settle our obligations under our Convertible Senior Notes due 2017 which must be settled in cash in November 2017, plus any related conversion premium which may, at our option, be settled in cash, common shares or a combination thereof;corporate expenses, including taxes; (ii) the payment of corporate expenses;$159 million principal amount of our outstanding Senior Notes due 2019; (iii) interest payments on our outstanding long-term debt;debt obligations; and (iv) the payment of dividends on our common stock. Substantially all of Radian Group’s obligations to pay corporate expenses and interest payments on outstanding debt are reimbursed to Radian Group through the expense-sharing arrangements currently in place with its subsidiaries. Radian Group’s liquidity demands for the next 12 months or in future periods could also include: (i) the repurchasepotential use of up to $125$100 million ofto repurchase Radian Group common stock pursuant to the existing share repurchase program;authorization; (ii) capital support for Radian Guaranty and our other mortgage insurance subsidiaries if additional capital is required pursuant to future changes to the PMIERs Financial Requirements or insurance laws and regulations, or reinterpretations of existing requirements;subsidiaries; (iii) additional conversion settlements,repayments, repurchases or early redemptions of portions of our long-term debt;debt obligations; and (iv) potential investments to support our strategy of growing our businesses; and (v) potential payments to the U.S. Treasury resulting from our ongoing dispute with the IRS relating to the examination of our 2000 through 2007 consolidated federal income tax returns.business strategy. In addition to existing available cash and marketable securities, Radian Group’s principal sources of cash to fund future short-term liquidity needs include: (i)include payments made to Radian Group under tax- and expense-sharing arrangements with our subsidiaries. Radian Group has expense-sharing arrangements in place with its principal operating subsidiaries that require those subsidiaries to pay their allocated share of certain holding-company-level expenses, including interest payments on most of our outstanding senior notes. The expense-sharing arrangements between Radian Group and (ii) toour insurance subsidiaries, as amended, have been approved by the extent available, potential dividends from our Services segment, ifPennsylvania Insurance Department, but such approval may be modified or revoked at any in excess of payments due under tax-and expense-sharing arrangements.time. The Services segment didhas not generategenerated sufficient cash flows to pay ordinary dividends to Radian Group in 2016.Group. Additionally, while cash flow is expected to be sufficient to pay the Services segment’s direct operating expenses, it has not been sufficient to satisfy its obligations to reimburse Radian Group for its allocated operating expense and interest expense under tax- and expense-sharing arrangements. We do not expect the Services segment will be able to bring its reimbursement obligations current for the
Part 1 Item 1A. Risk Factors
foreseeable future. In the event the cash flow from operations of the Services segment is not adequate to fund all of its needs, Radian Group may provide additional funds to the Services segment in the next four to five years. These reimbursement obligations and future potential dividend payments would be adversely affected if unanticipated events and circumstances were to result in lower earnings than expected.form of a capital contribution or an intercompany note. Further, in light of Radian Guaranty’s negative unassigned surplus related to operating losses in prior periods, we do not anticipate that Radian Guaranty will be permitted under applicable insurance laws to pay ordinary dividends to Radian Group for the foreseeable future. The expense-sharing arrangements between Radian Group and In addition to our insurance subsidiaries, as amended, have been approved by the Pennsylvania Insurance Department, but such approval may be modified or revoked at any time. short-term liquidity needs discussed above, Radian Group’s liquidity demands beyond the next 12 months are expected to include: (i) the repayment of our outstanding long-term debt;debt obligations; and (ii) potential additional capital contributions to our subsidiaries. We expect to meet the long-term liquidity needs of Radian Group with a combination of: (i) available cash and marketable securities; (ii) private or public issuances of debt or equity securities, which we may not be able to do on favorable terms, if at all; (iii) cash received under tax- and expense-sharing arrangements with our subsidiaries; and (iv) to the extent available, dividends from our subsidiaries.subsidiaries; and (v) any amounts that Radian Guaranty is able to successfully redeem under the Surplus Note.
Part 1 Item 1A. Risk Factors
As of December 31, 2018, certain of our subsidiaries have incurred federal NOLs that could not be carried-back and utilized on a separate company tax return basis. As a result, we are not currently obligated under our tax-sharing agreement to reimburse these subsidiaries for their separate company federal NOL carryforward. However, if in a future period, one of these subsidiaries utilizes its share of federal NOL carryforwards on a separate entity basis, then Radian Group may be obligated to fund such subsidiary’s share of our consolidated tax liability to the IRS. Certain subsidiaries, including Clayton, currently have federal NOLs on a separate entity basis that are available for future utilization. However, we do not expect to fund material obligations related to these subsidiary NOLs.
In light of Radian Group’s long-short- and short-termlong-term needs, it is possible that our sources of liquidity could be insufficient to fund our obligations and could exceed currently available holding company funds. If this were to occur, we may need or otherwise may decide to increase our available liquidity by incurring additional debt, by issuing additional equity or by selling assets, any of which we may be unable to do on favorable terms, if at all. Our revolving credit facility contains restrictive covenants that could limit our operating flexibility. A default under our credit facility could trigger an event of default under the terms of our senior notes. We may not have access to funding under our credit facility when we require it. Radian Group is a party to a $267.5 million unsecured revolving credit facility with a syndicate of bank lenders. Radian Group’s obligations under the credit facility are guaranteed by Clayton and may in the future be guaranteed by other subsidiaries of Radian Group. As of December 31, 2018, no borrowings were outstanding under the credit facility. The credit facility contains certain restrictive covenants that, among other things, provide certain limitations on our ability to incur additional indebtedness, make investments, create liens, transfer or dispose of assets, merge with or acquire other companies and pay dividends. The credit facility also requires us to comply with certain financial covenants and further provides that (i) Radian Group must be rated by S&P or Moody’s and (ii) Radian Guaranty must remain eligible under the PMIERs to insure loans purchased by the GSEs. A failure to comply with these covenants or the other terms of the credit facility could result in an event of default, which could (i) result in the termination of the commitments by the lenders to make loans to Radian Group under the credit facility and (ii) enable the lenders to declare, subject to the terms and conditions of the credit facility, any outstanding obligations under the credit facility to be immediately due and payable. Further, the occurrence of an event of default under the terms of our credit facility may trigger an event of default under the terms of our senior notes. An event of default occurs under the terms of our senior notes if a default (i) in any scheduled payment of principal of other indebtedness by Radian Group or its subsidiaries of more than $100 million principal amount occurs, after giving effect to any applicable grace period or (ii) in the performance of any term or provision of any indebtedness of Radian Group or its subsidiaries in excess of $100 million principal amount that results in the acceleration of the date such indebtedness is due and payable, subject to certain limited exceptions. See Note 12 of Notes to Consolidated Financial Statements for more information on the carrying value of our senior notes. If the commitments of the lenders are terminated or we are unable to satisfy certain covenants or representations, we may not have access to funding in a timely manner, or at all, when we require it. If funding is not available under the credit facility when we require it, our ability to continue our business practices or pursue our current strategy could be limited. If the indebtedness under the credit facility or our senior notes is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If there were to be an event of default under our credit facility or senior notes for any reason, our cash flows, financial results or financial condition could be materially and adversely affected.
Part 1 Item 1A. Risk Factors
Our reported earnings are subject to fluctuations based on changes in our trading securities and short-term investments that require us to adjust their fair market value. We have significant holdings of trading securities, equity securities and short-term investments that we carry at fair value. Because the changes in fair value of these financial instruments are reflected on our statements of operations each period, they affect our reported earnings and can create earnings volatility. Among other factors, interest rate changes, market volatility and declines in the value of underlying collateral will impact the value of our investments, potentially resulting in unrealized losses that could negatively impact our results of operations. Our information technology systems may fail or become outmoded, be temporarily interrupted or otherwise cause us to be unable to meet our customers’ demands. Our business is highly dependent on the effective operation of our information technology systems, which are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attacks, security breaches, catastrophic events and errors in usage. Although we have disaster recovery and business continuity plans in place, we may not be able to adequately execute these plans in a timely fashion. Additionally, our ability to meet the needs of our customers depends on our ability to keep pace with technological advances and to invest in new technology as it becomes available or otherwise upgrade our technological capabilities. Participants in the mortgage insurance industryWe rely on e-commerce and other technologies to provide theirour products and services andto our customers, and they generally require that we provide an increasing number of our products and services electronically. Accordingly, we may not satisfy our customers’ requirements if we fail to invest sufficient resources or are otherwise unable to maintain and upgrade our technological capabilities. Further, customers may choose to do business only with mortgage insurersbusiness partners with which they are technologically compatible and may choose to retain existing relationships with mortgage insurance or mortgage and real estate services providers rather than invest the time and resources to on-board new providers. As a result, technology can represent a potential barrier to signing new customers. Because we rely on our information technology systems for many critical functions, including connecting with our customers, if such systems were to fail, experience a prolonged interruption, or become outmoded, we may experience a significant disruption in our operations and in the business we receive, which could have a material adverse effect on our business, financial condition and operating results. In addition, we are in the process of implementing a major technology project to improve our operating systems, including a new platform for our mortgage insurance underwriting, policy administration, claims management and billing processes. The implementation of these technological improvements is complex, expensive, time consuming and, in certain respects, depends on the ability of third parties to perform their obligations in a timely manner. If we fail to timely and successfully implement the new technology systems and business processes, or if the systems do not operate as expected, it could have an adverse impact on our business, business prospects and results of operations. The security of our information technology systems may be compromised and confidential information, including non-public personal information that we maintain, could be improperly disclosed. Our information technology systems may be vulnerable to physical or electronic intrusions, computer viruses or other attacks.attacks, including cyberattacks. As part of our business, we, and certain of our subsidiaries and affiliates, maintain large amounts of confidential information, including non-public personal information on borrowers, consumers and our employees. Breaches in security could result in the loss or misuse of this information, which could, in turn, result in potential regulatory actions or litigation, including material claims for damages, as well as interruption to our operations and damage to our customer relationships and reputation. While we have information security policies, controls and systems in place in order to attempt to prevent, detect and respond to unauthorized use or disclosure of confidential information, including non-public personal information, there can be no assurance that such use or disclosure will not occur. Any cybersecurity or other compromise of the security of our information technology systems, or unauthorized use or disclosure of confidential information, could subject us to liability, regulatory scrutiny and action, damage to our reputation and customer relationships and could have a material adverse effect on our business prospects, financial condition and results of operations.
Part 1 Item 1A. Risk Factors
We are subject to the risk of litigation and regulatory proceedings. We operate in highly regulated industries that are subject to a heightened risk of litigation and regulatory proceedings. We often are a party to material litigation and also are subject to legal and regulatory proceedings and otherclaims, assertions, actions, reviews, audits, inquiries and investigations. Increased scrutiny in the current regulatory environment could lead to new regulations and practices, new interpretations of existing regulations, as well as additional regulatory proceedings. Additional lawsuits, legal
Part 1 Item 1A. Risk Factors
and regulatory proceedings and other matters may arise in the future. The outcome of theseexisting and future legal and regulatory proceedings and other matters could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief which could require significant expenditures or have a material adverse effect on our business prospects, results of operations and financial condition. Resolution of our dispute with the IRS could adversely affect us.
We are contesting adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposes the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and has proposed denying the associated tax benefits of these items. We appealed these proposed adjustments to Appeals and made “qualified deposits” with the U.S. Treasury of $89 million relating to the 2000 through 2007 tax years to avoid the accrual of incremental above-market-rate interest with respect to the proposed adjustments.
In September 2014, we received Notices of Deficiency covering the 2000 through 2007 tax years that assert unpaid taxes and penalties of $157 million. The Deficiency Amount has not been reduced to reflect our NOL carryback ability. As of December 31, 2016, there also would be interest of approximately $136 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (estimated in the aggregate to be approximately $35 million as of December 31, 2016) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of $105 million, which are primarily associated with the disallowance of the previously filed carryback of our 2008 NOL to the 2006 and 2007 tax years. We believe that the disallowance of our 2008 NOL carryback is a precautionary position by the IRS and that we will ultimately maintain the benefit of this NOL carryback claim.
On December 3, 2014, we petitioned the Tax Court to litigate the Deficiency Amount. During 2016, we held several meetings with the IRS in an attempt to reach a compromised settlement on the issues presented in our dispute. In January 2017, the parties informed the Tax Court that they believe they have reached a basis for a compromised settlement on the primary issues present in the case. The resolution must be reported to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. If we are unable to complete a compromised settlement, then the ongoing litigation could take several years to resolve and may result in substantial legal expenses. We can provide no assurance regarding the outcome of any such litigation or whether a compromised settlement with the IRS will ultimately be reached. We currently believe that an adequate provision for income taxes has been made for the potential liabilities that may result from this matter. However, if the ultimate resolution of this matter produces a result that differs materially from our current expectations, there could be a material impact on our effective tax rate, results of operations, cash flows and financial condition.
Our ability to recognize benefits from our NOLs and other tax attributes may be limited.
We have generated substantial NOLs and other tax attributes for tax purposes that can be used to reduce our future income tax obligations. Our ability to utilize these tax assets (including federal NOL carryforwards of approximately $653.8 million as of December 31, 2016) on a timely basis (i.e., to offset operating income as generated) will be adversely affected if we have an “ownership change” within the meaning of Section 382. An ownership change is generally defined as a greater than 50 percentage point increase in equity ownership by “five-percent shareholders” (as that term is defined for purposes of Section 382) over a rolling three-year period. While we have adopted the tax benefit preservation measures described below to protect our ability to use our NOLs and other tax assets, these measures may not prevent us from experiencing an ownership change, including as a result of the issuance of our common stock. If we experience an ownership change, we may not be able to fully utilize our NOLs and other tax assets, resulting in additional income taxes.
Part 1 Item 1A. Risk Factors
In 2009, we adopted a Tax Benefit Preservation Plan (the “Plan”), which, as amended, was approved by our stockholders at our 2010, 2013 and 2016 annual meetings. We also adopted certain amendments to our amended and restated bylaws (the “Bylaw Amendment”) and at our 2010, 2013 and 2016 annual meetings, our stockholders approved certain amendments to our amended and restated certificate of incorporation (the “Charter Amendment”). These steps were taken to protect our ability to utilize our NOLs and other tax assets and to attempt to prevent an “ownership change” under U.S. federal income tax rules by discouraging and in most cases restricting certain transfers of our common stock that would: (i) create or result in a person becoming a five-percent shareholder under Section 382 or (ii) increase the stock ownership of any existing five-percent shareholder under Section 382. The continued effectiveness of the Plan, the Bylaw Amendment and the Charter Amendment are subject to periodic examination by the Board and the reapproval of the Plan and the Charter Amendment by our stockholders every three years. There can be no assurance that our stockholders will reapprove the Plan and the Charter Amendment if we elect to present them to our stockholders again in the future.
There is no guarantee that our tax benefit preservation strategy will be effective in protecting our NOLs and other tax assets. The amount of our NOLs has not been audited or otherwise validated by the IRS. The IRS, or other tax authorities, could challenge the amount of our NOLs and other tax assets, which could result in an increase in our liability in the future for income taxes. In addition, determining whether an “ownership change” has occurred is subject to uncertainty, both because of the complexity and ambiguity of Section 382 and because of limitations on a publicly traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, even though we currently have several measures in place to protect our NOLs (such as the Plan, the Bylaw Amendment and the Charter Amendment), we cannot provide any assurance that the IRS or other taxing authority will not claim that we have experienced an “ownership change” and attempt to reduce the benefit of our tax assets.
As of December 31, 2016, our net DTA is $411.8 million. A significant portion of our net DTA relates to the future tax effects of our prior year net operating losses expected to be carried forward to offset future taxable income. A decrease in the federal statutory income tax rate would result in a one-time reduction in the amount at which our DTA is recorded, thereby reducing our net income and book value in that period. However, such a decrease would also reduce our effective income tax rate, thereby increasing net income in future periods. Similarly, changes to the current tax laws, other than a decrease in the federal statutory income tax rate, may also impact our net income and book value. See “Item 3. Legal Proceedings.”
Legislation and administrative and regulatory changes and interpretations could impact our businesses. Our businesses are subject to and may be impacted by many federal and state lending, insurance and consumer laws and regulations and may be affected by changes in these laws and regulations or the way they are interpreted.interpreted or applied. In particular, our businesses may be significantly impacted by the following: Legislationlegislation, administrative or regulatory action impacting the charters or business practices of the GSEs;
Legislative reform of the U.S. housing finance system;
Legislationlegislation and regulation impacting the FHA and its competitive position versus private mortgage insurers;
Statestate insurance laws and regulations that address, among other items, licensing of companies to transact business, claims handling, reinsurance requirements, premium rates, policy forms offered to customers and requirements for Risk-to-capital, minimum policyholder positions, reserves (including contingency reserves), surplus, reinsurance and payment of dividends;
Thethe application of state, federal or private sector programs aimed at supporting borrowers and the housing market;
Thethe application of RESPA, the FCRA and other laws to our businesses;
The amendments to Regulation AB (commonly referred to as Regulation AB II) that were adopted by the SEC and introduce several new requirements related to public offerings of ABS, including public offerings of RMBS for which our Services business traditionally has provided due diligence and servicer surveillance services and new credit rating agency reform rules (the “NRSRO Rules”) adopted by the SEC that include new requirements applicable to providers of third-party due diligence services, such as our Services business, for both publicly and privately issued ABS;
The interpretation and application of the TRID rules requiring enhanced disclosures to consumers in connection with the origination of residential mortgage loans;
Newnew federal standards and oversight for mortgage insurers, including as a result of the recommendation of the Federal Insurance Office of the U.S. Treasury that federal standards and oversight for mortgage insurers be developed and implemented;
Part 1 Item 1A. Risk Factors
Thethe implementation of new regulations under, or the potential repeal or amendment of provisions of, the Dodd-Frank Act;Act, including changes in the QM Rule; and
Thethe implementation in the U.S. of the Basel III capital adequacy guidelines.
See “Item 1. Business—Regulation.” Any of the items discussed above could adversely affect our results of operations, financial condition and business prospects. In addition, our businesses could be impacted by new legislation or regulations, as well as changes to existing legislation or regulations or the way they are interpreted or applied, that are not currently contemplated and which could occur at any time. The implementation of the Basel III guidelines may discourage the use of mortgage insurance. Over the past few decades, the Basel Committee on Banking Supervision has established international benchmarks for assessing banks’ capital adequacy requirements.requirements (“Basel III”). Included within those benchmarks are capital standards related to the residential lending and securitization activity and importantly for private mortgage insurance,insurers, the capital treatment of mortgage insurance on those loans. These benchmarks are then interpreted and implemented via rulemaking by U.S. banking regulators. In July 2013, the U.S. banking regulators promulgated regulations, referred to as the “U.S. Basel III Rules,” to implement significant elements of the Basel framework, referred to as “Basel III.”framework. The U.S. Basel III Rules, among other things, revise and enhance the U.S. banking agencies’ general risk-based capital rules. Today, the current capital regime underU.S. Basel III for U.S. banks assignsRules assign a 20%, 50% or 100% risk weight to one- to four-unitloans secured by one-to-four-family residential mortgage exposures.properties. Generally, residentialunder the U.S. Basel III Rules in place today, the explicit government guarantees (FHA/VA/USDA) receive a 0% risk weight, and Fannie Mae and Freddie Mac related loans receive a 20% risk weight. Non-government related mortgage exposures secured by a first lien on a one-to-four family residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weight, while allweighting. All other one-to-four family residential mortgage exposuresloans are assigned a 100% risk weight. In March 2015, the U.S. banking regulators clarified that LTV ratios can account for credit enhancement such as private mortgage insurance in determining whether a loan is made in accordance with prudent underwriting standards for purposes of receiving the preferred 50% risk weight. In December 2014, the Basel Committee on Banking Supervision issued a proposal for further revisions to Basel III. It proposed adjustments to the risk weights for residential mortgage exposures that take into account LTV ratio and the borrower’s ability to service a mortgage.mortgage, which were not previously addressed by Basel III. The proposed LTV ratio did not take into consideration any credit enhancement, including private mortgage insurance.insurance, but in March 2015, the U.S. banking regulators clarified that for purposes of the U.S. Basel III Rules, calculation of LTV ratios can account for credit enhancement such as private mortgage insurance in
Part 1 Item 1A. Risk Factors
determining whether a loan is made in accordance with prudent underwriting standards for purposes of receiving the preferred 50% risk weight. The comment period for this proposal closed in March 2015, and in December 2015, the Basel Committee on Banking Supervision released a second proposal, thatreferred to as the 2015 Basel Committee Proposal, which retained the LTV provisions of the initial draft, but not the debt servicing coverage ratios.provisions pertaining to a borrower’s ability to service a mortgage. The comment period for the 2015 proposalBasel Committee Proposal closed in March 2016. Following consideration ofTo date, federal regulators have not adopted or implemented any new regulations, including based on these proposals, that update or modify the comments received, it is possible that newlyU.S. Basel III Rules. The revised risk weighting guidelinesand final recommendations from the Basel Committee with respect to Basel III, referred to as the 2017 Basel Committee III Recommendations, were published in December 2017, and finalized risk weighting guidelines for residential mortgage exposures. These rules recognize guarantees provided by sovereign governments (such as FHA, VA, USDA and Ginnie Mae) as off-setting the capital requirements, resulting in a 0% risk weight. While the 2017 Basel Committee III Recommendations include consideration of LTV ratios, including the impact of credit enhancement provided by third-party private mortgage insurance and the GSEs on Banking Supervision may be proposedLTV ratios, the credit enhancement provided by third-party private mortgage insurance and that the U.S. banking regulators may consider changes toGSEs would have higher risk weightings than the existing rules. While itexplicitly government guaranteed products, putting loans insured by private mortgage insurance at a disadvantage. It remains unclear whether new guidelines will be proposed or finalized ifin the U.S. in response to the most recent 2017 Basel III Committee Recommendations. If the federal bank regulators revise their rulesdecide to implementchange the current U.S. Basel III Rules in response to reduce or eliminatethe final 2017 Basel III Committee Recommendations in ways that increase the capital benefit banks receive from insuring low down payment loansrequirements of banking organizations with privaterespect to the residential mortgages we insure or that are guaranteed by the GSEs, demand for our mortgage insurance could be negatively impacted, which could adversely affect our business and business prospects could be adversely affected.prospects. We rely on our management team and our business could be harmed if we are unable to retain qualified personnel or successfully develop and/or recruit their replacements. Our success depends, in part, on the skills, working relationships and continued services of our management team and other key personnel, any of whom could terminate his or her relationship with us at any time. The unexpected departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to obtain other personnel to manage and operate our business. In addition, we will be required to replace the knowledge and expertise of our workforce as our workers retire. In either case, there can be no assurance that we would be able to develop or recruit suitable replacements for the departing individuals, that replacements could be hired, if necessary, on terms that are favorable to us, or that we can successfully transition such replacements in a timely manner. Failure to effectively implement our succession planning efforts and to ensure effective transfers of knowledge and smooth transitions involving members of our management team and other key personnel could adversely affect our business and results of operations. Without a properly skilled and experienced workforce, our costs, including costs associated with a loss of productivity costs and costs to replace employees may increase, and this could negatively impact our earnings.
We may make investments to grow our existing businesses, pursue new lines of business or new business initiatives, acquire other companies or engage in other strategic initiatives, each of which may result in additional risks and uncertainties.
In support of our growth strategy, we may make strategic investments, acquisitions or pursue other strategic initiatives that expose us to additional risks and uncertainties that include, without limitation: the use of capital and potential diversion of other resources, such as the diversion of management’s attention from our core businesses and potential disruption of those businesses; the assumption of liabilities in connection with any strategic investment, including any acquired business; our ability to comply with additional regulatory requirements associated with new products, services, lines of business, or other business or strategic initiatives; our ability to successfully integrate or develop the operations of any new business initiative or acquisition; the possibility that we may fail to realize the anticipated benefits of an acquisition or other strategic investment or initiative, including expected synergies, cost savings, or sales or growth opportunities, within the anticipated timeframe or at all; and the possibility that we may fail to achieve forecasted results for a strategic investment, acquisition or other initiative that could result in lower or negative earnings contribution and/or impairment charges associated with intangible assets acquired.
Part 1 Item 1A. Risk Factors
We face risks associated with our acquisition of Clayton and we may failServices business. We expanded our business to realize the anticipated benefits of the Clayton acquisition. As a result ofinclude our Services segment through our 2014 acquisition of Clayton and our entry into oursubsequent acquisitions of Red Bell, ValuAmerica, EnTitle Direct, Independent Settlement Services and the assets of Five Bridges. Our Services business we are exposedexposes us to certain risks that may negatively affect our results of operations and financial results,condition, including, among others, the following:
Our Services revenue is dependent on a limited number of large customers that represent a significant proportion of our Services total revenues. The loss or reduction of business from one or more of these significant customers could adversely affect our revenues and results of operations. In addition, Radian Guaranty does business with many of these significant customers. In the event of a dispute between a significant customer and either of our business segments, the overall customer relationship for Radian could be negatively impacted. While Clayton is not a defendant in litigation arising out of the financial crisis involving the issuance of RMBS in connection with which it has provided services, it has been in the past, and may again be in the future, subpoenaed byreceive subpoenas from various parties to provide documents and information related to such litigation, and there can be no assurance that Clayton will not be subject to future claims against it, whether in connection with such litigation or otherwise. It is possible that our exposure to potential liabilities resulting from our Services business, some of which may be material or unknown, could exceed amounts we can recover through indemnification claims. AllA significant portion of our goodwillServices engagements are transactional in nature and may be performed in connection with securitizations, loan sales, loan purchases or other intangible assets relatetransactions. Due to the transactional nature of our business, our Services segment as a resultrevenues are subject to fluctuation from period to period and are difficult to predict.
Sales of our acquisitionmortgage, real estate and title services are influenced by the level of Claytonoverall activity in 2014the mortgage, real estate and its subsequent acquisitionsmortgage finance markets generally, and are specifically dependent on the mortgage loan origination volumes of our customers which may fluctuate from period to period. If mortgage origination volumes decline we could experience less demand for our mortgage, real estate and title services. Red Bell is a licensed real estate brokerage and ValuAmericaprovides real estate brokerage services in 2015. The goodwillall 50 states and the District of Columbia. As a licensed real estate brokerage, Red Bell receives residential real estate information from various multiple listing services (“MLS”). Red Bell receives this information, which it uses in its business to broker real estate transactions and provide valuation products and services, pursuant to the terms of agreements with the MLS providers. If these acquisitions is an asset representing the estimated futureagreements were to terminate or Red Bell otherwise were to lose access to this information, it could negatively impact Red Bell’s ability to conduct its business. By their nature, title claims are often complex, vary greatly in dollar amounts and are affected by economic benefits arising from the assets we have acquired that were not individually identified and separately recognized. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment. The value of goodwill is primarily supported by revenue projections which are mostly driven by projected transaction volume and margins. The fair value of goodwill requires the use of significant estimates and assumptions that are highly subjective in nature, and include in particular, among other items, market-based discount rates, future expected cash flows from estimated transaction volumes that are not currently contracted, assumed potential revenues from new initiatives and business strategies as well as volume projections associated with non-agency RMBS securitizations, for which current market conditions and the legal environment existing at the time of settlement of the claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are not favorable. Intangible assets,paid, significantly varying dollar amounts of individual claims and other than goodwill, primarily consist of customer relationships, technology, trade name and trademarks, client backlog and non-competition agreements. Our estimates are based upon assumptions believedfactors. From time to be reasonable, but which are inherently uncertain and unpredictable. If actual results differ from our assumptions,time, we may not realize the full valuecould experience large losses or an overall worsening of our goodwillloss payment experience in regard to the frequency or severity of claims that require us to record additional charges to our claims loss reserve. These loss events are unpredictable and other intangible assets. For these and other reasons there can be no assurance thatcould adversely affect the anticipated benefits from the our acquisition of Clayton will be realized fully or at all. If we fail to realize the anticipated benefits of the Clayton acquisition and its subsequent acquisitions of Red Bell and ValuAmerica, we may not realize the full valuefinancial performance of our goodwill and other intangible assets, in which case we may be required to write down or write off all such goodwill and other intangible assets. Such an impairment of our goodwill or intangible assets could have a material adverse effect on our results of operations and financial condition.
Services business.
| | | Item 1B. | Unresolved Staff Comments. |
None.
At our corporate headquarters, located at 1500 Market Street, West Tower, in Philadelphia, Pennsylvania we currently lease approximately 151,000174,000 square feet of office space and 1,740 square feet of space for data storage under a lease that expires in August 2017. We also lease 23,453 square feet of office space at a separate location, 1500 Market Street in Philadelphia, Pennsylvania, for various operational and IT personnel. On November 3, 2015, we entered into a new 15-year operating lease agreement that will commence on September 1, 2017 (the “2017 Lease”) when our lease for our current headquarters expires. The 2017 Lease is for approximately 152,000 square feet of office space at 1500 Market Street in Philadelphia, PA where our new corporate headquarters will be located. When the square footage leased under the 2017 Lease is combined with the office space we currently lease at the 1500 Market Street location, we will have approximately 175,000 square feet of office space for our corporate headquarters. For information regarding the expected obligation for payments under the 2017 Lease, see Note 13 of Notes to Consolidated Financial Statements.
space.
In connection with our mortgage insurance operations, we lease office space in: Worthington, Ohio; Dayton, Ohio; Plano, Texas; St. Louis, Missouri; and New York, New York; and Hong Kong.York. In addition, we lease office space for our Services operations in various cities in California, Connecticut, Colorado, Connecticut, Florida, Georgia,Maryland, Ohio, Pennsylvania, Texas and Utah, as well as in Bristol, England and Kolonaki, Greece.Utah.
We currently have two co-location agreements with TierPoint that support data center space and services at their Norristown, Pennsylvania and Philadelphia, Pennsylvania locations. These agreements expire in May 2018 and March 2019, respectively.2020. TierPoint serves as a production and disaster recovery location. We believe our existing properties are well utilized, suitable and adequate for our present circumstances.
| | | Item 3. | Legal Proceedings. |
We are routinely involved in a number of legal and regulatory claims, assertions, actions, reviews, and audits, as well as inquiries and investigations by various regulatory entities involving compliance with laws or other regulations, the outcome of which are uncertain. These legal proceedings could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business. In accordance with applicable accounting standards and guidance, we establish accruals only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We accrue the amount that represents our best estimate of the probable loss; however, if we can only determine a range of estimated losses, we accrue an amount within the range that, in our judgment, reflects the most likely outcome, and if none of the estimates within the range is more likely, we accrue the minimum amount of the range. In the course of our regular review of pending legal and regulatory matters, we determine whether it is reasonably possible that a potential loss may have a material impact on our liquidity, results of operations or financial condition. If we determine such a loss is reasonably possible, we disclose information relating to such potential loss, including an estimate or range of loss or a statement that such an estimate cannot be made. On a quarterly basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or range of losses based on such reviews. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. In addition, we generally make no disclosures for loss contingencies that are determined to be remote. For matters for which we disclose an estimated loss, the disclosed estimate reflects the reasonably possible loss or range of loss in excess of the amount accrued, if any. Loss estimates are inherently subjective, based on currently available information, and are subject to management’s judgment and various assumptions. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal and other proceedings, actual results may differ materially from any amounts that have been accrued. As previously disclosed, we are contestingcontested adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposesopposed the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and has proposed denying the associated tax benefits of these items. We appealed these proposedIn July 2018, we finalized a settlement with the IRS related to the adjustments we had been contesting. This settlement with the IRS resolved the issues and concluded all disputes related to Appeals and madethe IRS Matter. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury of $85to settle its $31 million in June 2008 relatingobligation to the 2000 through 2004 tax years and $4 million in May 2010 relating to the 2005 through 2007 tax years in order to avoid the accrual of incremental above-market-rate interest with respect to the proposed adjustments.
Part I Item 3. Legal Proceedings
We attempted to reach a compromised settlement with Appeals, but in September 2014 we received Notices of Deficiency covering the 2000 through 2007 tax years that assert unpaid taxes and penalties of $157 million. The Deficiency Amount has not been reduced to reflect our NOL carryback ability. As of December 31, 2016, there also would be interest of approximately $136 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (estimated in the aggregate to be approximately $35 million as of December 31, 2016) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of $105 million, which are primarily associated with the disallowance of the previously filed carryback of our 2008 NOL to the 2006 and 2007 tax years. We currently believe that the disallowance of our 2008 NOL carryback is a precautionary position by the IRS, and that we will ultimately maintainin 2019, the benefit of this NOL carryback claim. On December 3, 2014, we petitioned the Tax Court to litigate the Deficiency Amount. On September 1, 2015, we received a notice that the case had been scheduled for trial. However, the parties jointly filed, and the Tax Court approved, motions for continuance in this matter to postpone the trial date. Also, in February 2016, the Tax Court approved a joint motion to consolidate for trial, briefing and opinion our case with a similar case involving MGIC Investment Corporation. During 2016, we held several meetings withCompany expects the IRS in an attempt to reach a compromised settlementrefund to Radian the remaining $58 million that was previously on the issues presented in our dispute. In January 2017, the parties informed the Tax Court that they believe they have reached a basis for a compromised settlement on the primary issues present in the case. The resolution must be reported to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. If we are unable to complete a compromised settlement, then the ongoing litigation could take several years to resolve and may result in substantial legal expenses. We can provide no assurance regarding the outcome of any such litigation or whether a compromised settlement with the IRS will ultimately be reached. We currently believe that an adequate provision for income taxes has been made for the potential liabilities that may result from this matter. However, if the ultimate resolution of this matter produces a result that differs materially from our current expectations, there could be a material impact on our effective tax rate, results of operations and cash flows.deposit.
On December 22, 2016, Ocwen Loan Servicing, LLC and Homeward Residential, Inc. (collectively, “Ocwen”) filed a complaint against Radian Guaranty (the “Complaint”). Ocwen has also initiated legal proceedings against several other mortgage insurers. The action filed against Radian Guaranty, titled Ocwen, et al. v. Radian Guaranty, is pending in the U.S. District Court for the Eastern District of Pennsylvania. The Complaint allegesPennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract and bad faith claims and seeksseeking monetary damages and declaratory relief in regard to certain claims handling practices on future insurance claims.relief. Ocwen has also initiated similar legal proceedings against several other mortgage insurers. On December 17, 2016, Ocwen separately filed ana parallel arbitration petition against Radian Guaranty (the “Petition”) before the American Arbitration Association that asserts(“AAA”) asserting substantially the same allegations as contained in the Complaint (the Complaint and the Petition are collectively referred to as the “Filings”“Arbitration”). The Filings listOcwen’s filings together listed 9,420 mortgage insurance certificates issued under multiple insurance policies, including Pool Insurance policies, as beingsubject to the dispute. On June 5, 2017, Ocwen filed an amended complaint and an amended petition (collectively, the “Amended Filings”) with both the court and the AAA, respectively, together listing 8,870 certificates as subject to the dispute. On April 11, 2018, the parties entered into a confidential agreement with respect to all certificates subject to the dispute. The confidential agreement resolved certain categories of these proceedings.claims involved in the dispute and, on April 12, 2018, the parties filed a stipulation of voluntary dismissal of the federal court proceeding and the trial judge issued an Order dismissing all claims and counterclaims subject to the parties’ agreement. Radian Guaranty was not required to make any payment in connection with this confidential agreement. Pursuant to the confidential agreement, the parties: (1) dismissed the federal court proceeding; (2) narrowed the scope of the dispute to Ocwen’s breach of contract claims seeking payment of insurance benefits on approximately 2,500 certificates that Ocwen was previously pursuing through the
Part I Item 3. Legal Proceedings
Amended Filings; and (3) agreed to resolve the remaining dispute through the Arbitration. Radian Guaranty believes that theOcwen’s allegations and claims in the Filingslegal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the current preliminary stage of the Arbitration. On August 31, 2018, Nationstar Mortgage LLC d/b/a Mr. Cooper (“Nationstar”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract, bad faith, and unjust enrichment claims and seeking monetary damages and declaratory relief. The Complaint lists 3,014 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving insurance coverage decisions. The Complaint further lists 2,231 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving premium refund requests. Radian Guaranty believes that Nationstar’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the preliminary stage of the proceedings.litigation. We also are also involved in litigation that has arisen in the normal courseperiodically subject to reviews and audits, as well as inquiries, information-gathering requests and investigations. In connection with these matters, from time to time we receive requests and subpoenas seeking information and documents related to aspects of our business. We are contestingIn March 2017, Green River Capital received a letter from the allegationsstaff of the SEC stating that it is conducting an investigation captioned, “In the Matter of Certain Single Family Rental Securitizations,” and that it is requesting information from market participants. The letter requested that Green River Capital provide information regarding broker price opinions that Green River Capital provided on properties included in each such pending actionsingle family rental securitization transactions. In February 2019, we were advised by the SEC staff that the investigation has been closed. The legal and managementregulatory matters discussed above could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business. Management believes, based on current knowledge and after consultation with counsel, that the outcome of such litigationactions will not have a material adverse effect on our consolidated financial condition. However, the outcome of litigation and other legal and regulatory matters and proceedings is inherently uncertain, and it is possible that one or more of the matters currently pending or threatened could have an unanticipated adverse effect on our liquidity, financial condition or results of operations for any particular period. In June 2015, we and other mortgage insurers received a letter from the Wisconsin OCI requesting information pertaining to customized insurance rates and terms offered to mortgage insurance customers. We submitted a response to the Wisconsin OCI in June 2015, as requested. Although we believe we are in compliance with applicable Wisconsin state law requirements for mortgage guaranty insurance, we cannot predict the outcome of this matter or whether additional inquiries, actions or proceedings may be pursued against us by the Wisconsin OCI or other regulators.
| | | Item 4. | Mine Safety Disclosures. |
Not applicable.
PART II
| | | Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock is listed on the NYSENew York Stock Exchange (“NYSE”) under the symbol “RDN.” At February 23, 2017,25, 2019, there were 215,084,611213,657,506 shares of our common stock outstanding and 5649 holders of record. The following table shows the high and low sales prices of our common stock on the NYSE for the financial quarters indicated: | | | | | | | | | | | | | | | | | | | 2016 | | 2015 | | | High | | Low | | High | | Low | | 1st Quarter | $ | 13.35 |
| | $ | 9.29 |
| | $ | 17.15 |
| | $ | 15.19 |
| | 2nd Quarter | 13.31 |
| | 9.29 |
| | 19.13 |
| | 16.55 |
| | 3rd Quarter | 14.15 |
| | 9.85 |
| | 19.12 |
| | 15.69 |
| | 4th Quarter | 18.45 |
| | 12.96 |
| | 17.00 |
| | 12.82 |
|
In 20162018 and 2015,2017, we declared quarterly cash dividends on our common stock equal to $0.0025 per share. We presently expect to continue to declare a regular quarterly dividend on our common stock. For information on Radian Group’s ability to pay dividends, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Reference is made to the information in Item 12 of this report under the caption “Equity Compensation Plans,” which is incorporated herein by this reference. Issuance of Unregistered Securities During 2014, no equity securities of Radian Group were sold that were not registered under the Securities Act. Over the course of two days on June 22, 2015 and June 23, 2015, in connection with, and as partial consideration for, the purchases of an aggregate principal amount of $389.1 million of our Convertible Senior Notes due 2017, we issued an aggregate of 28,403,278 shares of Radian Group common stock to certain holders of these notes.
On March 21, 2016, March 22, 2016 and March 24, 2016, we issued 11,914,620; 4,673,478 and 393,690 shares; respectively,shares of Radian Group common stock, respectively, in separately negotiated transactions with certain holders of the Convertible Senior Notes due 2017 and 2019. These issuances were made in connection with, and as partial consideration for, the purchases of aggregate principal amounts of $30.1 million and $288.4 million of our Convertible Senior Notes due 2017 and 2019, respectively, for cash or a combination of cash and shares of Radian Group common stock. In all cases, the shares were issued to “qualified institutional buyers” within the meaning of Rule 144A promulgated under the Securities Act and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and corresponding provisions of state securities laws. See Notes 12 and 1415 of Notes to Consolidated Financial Statements for additional information on the individual transactions. Issuer Purchases of Equity Securities On June 29, 2016, the Board authorized a new share repurchase program to spend up to $125 million to repurchaseThe following table provides information about purchases of Radian Group common stock. The authorization provides Radianstock by us (and our affiliated purchasers) during the flexibility to repurchase shares in the open market or in privately negotiated transactions from time to time, based on market and business conditions, stock price and other factors. As ofthree months ended December 31, 2016, the full purchase authority of up to $125 million remained available under this program, which expires on June 30, 2017. See Note 14 of Notes to Consolidated Financial Statements.
During the fourth quarter of 2016, we did not repurchase any of our common stock.
2018.
67 | | | | | | | | | | | | | | | | Issuer Purchases of Equity Securities | | ($ in thousands, except per-share amounts) | | | | | | | | | Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2) | | Share repurchase program | | | | | | | | | 10/1/2018 to 10/31/2018 | — |
| | $ | — |
| | — |
| | $ | 100,000 |
| | 11/1/2018 to 11/30/2018 | 2,329 |
| | $ | 19.30 |
| | — |
| | $ | 100,000 |
| | 12/1/2018 to 12/31/2018 | 11,792 |
| | $ | 15.19 |
| | — |
| | $ | 100,000 |
| | Total | 14,121 |
| | | | — |
| | | | | | | | | | | |
______________________ | | | (1) | Represents shares tendered by employees as payment of taxes withheld on the vesting of certain restricted stock awards granted under the Company’s equity compensation plans. |
| | | (2) | On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program, which expires on July 31, 2019. See Note 15 of Notes to Consolidated Financial Statements for additional information. |
Part II Item 6. Selected Financial Data
| | | Item 6. | Selected Financial Data. |
The information in the following table should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 8 and the information included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” | | | | | | | | | | | | | | | | | | | | | | (In millions, except per-share amounts and ratios) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | Consolidated Statements of Operations (1) | | | | | | | | | | | Net premiums earned—insurance | $ | 921.8 |
| | $ | 915.9 |
| | $ | 844.5 |
| | $ | 781.4 |
| | $ | 702.4 |
| Services revenue (2) | 168.9 |
| | 157.2 |
| | 78.0 |
| | — |
| | — |
| | Net investment income | 113.5 |
| | 81.5 |
| | 65.7 |
| | 68.1 |
| | 72.7 |
| | Net gains (losses) on investments and other financial instruments | 30.8 |
| | 35.7 |
| | 80.0 |
| | (106.5 | ) | | 122.1 |
| | Total revenues | 1,238.5 |
| | 1,193.3 |
| | 1,072.7 |
| | 749.9 |
| | 902.7 |
| | Provision for losses | 202.8 |
| | 198.6 |
| | 246.1 |
| | 562.7 |
| | 921.5 |
| Cost of services (2) | 114.2 |
| | 93.7 |
| | 44.7 |
| | — |
| | — |
| | Other operating expenses | 244.9 |
| | 242.4 |
| | 251.2 |
| | 257.4 |
| | 167.7 |
| | Interest expense | 81.1 |
| | 91.1 |
| | 90.5 |
| | 74.6 |
| | 51.8 |
| | Amortization and impairment of intangible assets | 13.2 |
| | 13.0 |
| | 8.6 |
| | — |
| | — |
| | Pretax income (loss) from continuing operations | 483.7 |
| | 437.8 |
| | 407.2 |
| | (173.3 | ) | | (272.4 | ) | | Income tax provision (benefit) | 175.4 |
| | 156.3 |
| | (852.4 | ) | | (31.5 | ) | | (48.3 | ) | | Net income (loss) from continuing operations | 308.3 |
| | 281.5 |
| | 1,259.6 |
| | (141.9 | ) | | (224.1 | ) | Income (loss) from discontinued operations, net of tax (3) | — |
| | 5.4 |
| | (300.1 | ) | | (55.1 | ) | | (227.4 | ) | | Net income (loss) | 308.3 |
| | 286.9 |
| | 959.5 |
| | (197.0 | ) | | (451.5 | ) | Diluted net income (loss) per share from continuing operations (4) | $ | 1.37 |
| | $ | 1.20 |
| | $ | 5.44 |
| | $ | (0.85 | ) | | $ | (1.69 | ) | Diluted net income (loss) per share (4) | $ | 1.37 |
| | $ | 1.22 |
| | $ | 4.16 |
| | $ | (1.18 | ) | | $ | (3.41 | ) | | Cash dividends declared per share | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | Weighted average shares outstanding-diluted | 229.3 |
| | 246.3 |
| | 233.9 |
| | 166.4 |
| | 132.5 |
| | | | | | | | | | | | | Consolidated Balance Sheets | | | | | | | | | | | Total investments | $ | 4,462.4 |
| | $ | 4,298.7 |
| | $ | 3,629.3 |
| | $ | 3,361.7 |
| | $ | 3,417.8 |
| | Assets held for sale | — |
| | — |
| | 1,736.4 |
| | 1,768.1 |
| | 1,965.6 |
| | Total assets | 5,863.2 |
| | 5,642.1 |
| | 6,842.3 |
| | 5,606.0 |
| | 5,894.6 |
| | Unearned premiums | 681.2 |
| | 680.3 |
| | 644.5 |
| | 567.1 |
| | 382.4 |
| | Reserve for losses and LAE | 760.3 |
| | 976.4 |
| | 1,560.0 |
| | 2,164.4 |
| | 3,083.6 |
| | Long-term debt | 1,069.5 |
| | 1,219.5 |
| | 1,192.3 |
| | 914.3 |
| | 655.0 |
| | Liabilities held for sale | — |
| | — |
| | 947.0 |
| | 642.6 |
| | 722.0 |
| | Stockholders’ equity | 2,872.3 |
| | 2,496.9 |
| | 2,097.1 |
| | 939.6 |
| | 736.3 |
| | Book value per share | $ | 13.39 |
| | $ | 12.07 |
| | $ | 10.98 |
| | $ | 5.43 |
| | $ | 5.51 |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | (In millions, except per-share amounts and ratios) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | | Consolidated Statements of Operations | | | | | | | | | | | Net premiums earned—insurance | $ | 1,014.0 |
| | $ | 932.8 |
| | $ | 921.8 |
| | $ | 915.9 |
| | $ | 844.5 |
| Services revenue (1) | 145.0 |
| | 155.1 |
| | 168.9 |
| | 157.2 |
| | 78.0 |
| | Net investment income | 152.5 |
| | 127.2 |
| | 113.5 |
| | 81.5 |
| | 65.7 |
| | Net gains (losses) on investments and other financial instruments | (42.5 | ) | | 3.6 |
| | 30.8 |
| | 35.7 |
| | 80.0 |
| | Total revenues | 1,273.0 |
| | 1,221.6 |
| | 1,238.5 |
| | 1,193.3 |
| | 1,072.7 |
| | Provision for losses | 104.6 |
| | 135.2 |
| | 202.8 |
| | 198.6 |
| | 246.1 |
| Cost of services (1) | 98.1 |
| | 104.6 |
| | 114.2 |
| | 93.7 |
| | 44.7 |
| | Other operating expenses | 280.8 |
| | 267.3 |
| | 244.9 |
| | 242.4 |
| | 251.2 |
| | Restructuring and other exit costs | 6.1 |
| | 17.3 |
| | — |
| | — |
| | — |
| | Interest expense | 61.5 |
| | 62.8 |
| | 81.1 |
| | 91.1 |
| | 90.5 |
| | Impairment of goodwill | — |
| | 184.4 |
| | — |
| | — |
| | — |
| | Amortization and impairment of acquired intangible assets | 12.4 |
| | 27.7 |
| | 13.2 |
| | 13.0 |
| | 8.6 |
| | Pretax income from continuing operations | 684.2 |
| | 346.7 |
| | 483.7 |
| | 437.8 |
| | 407.2 |
| | Income tax provision (benefit) | 78.2 |
| | 225.6 |
| | 175.4 |
| | 156.3 |
| | (852.4 | ) | | Net income from continuing operations | 606.0 |
| | 121.1 |
| | 308.3 |
| | 281.5 |
| | 1,259.6 |
| Income (loss) from discontinued operations, net of tax (2) | — |
| | — |
| | — |
| | 5.4 |
| | (300.1 | ) | | Net income | 606.0 |
| | 121.1 |
| | 308.3 |
| | 286.9 |
| | 959.5 |
| Diluted net income per share from continuing operations (3) | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | $ | 1.20 |
| | $ | 5.44 |
| Diluted net income per share (3) | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | $ | 1.22 |
| | $ | 4.16 |
| | Cash dividends declared per share | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| Weighted average shares outstanding-diluted (3) | 218.6 |
| | 220.4 |
| | 229.3 |
| | 246.3 |
| | 233.9 |
|
Part II Item 6. Selected Financial Data
| | | (In millions, except per-share amounts and ratios) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | Selected Ratios—Mortgage Insurance (5) | | | | | | | | | | | | Loss ratio | 22.2 | % | | 21.7 | % | | 29.1 | % | | 72.0 | % | | 131.2 | % | | | Expense ratio—NPE basis | 22.7 | % | | 23.7 | % | | 28.2 | % | | 36.6 | % | | 28.7 | % | | | | | | | | | | | | | | | Consolidated Balance Sheets | | | | | | | | | | | | Total investments | | $ | 5,153.0 |
| | $ | 4,643.9 |
| | $ | 4,462.4 |
| | $ | 4,298.7 |
| | $ | 3,629.3 |
| Assets held for sale (2) | | — |
| | — |
| | — |
| | — |
| | 1,736.4 |
| | Total assets | | 6,314.7 |
| | 5,900.9 |
| | 5,863.2 |
| | 5,642.1 |
| | 6,842.3 |
| | Unearned premiums | | 739.4 |
| | 723.9 |
| | 681.2 |
| | 680.3 |
| | 644.5 |
| | Reserve for losses and LAE | | 401.4 |
| | 507.6 |
| | 760.3 |
| | 976.4 |
| | 1,560.0 |
| Senior notes (4) | | 1,030.3 |
| | 1,027.1 |
| | 1,069.5 |
| | 1,219.5 |
| | 1,192.3 |
| Liabilities held for sale (2) | | — |
| | — |
| | — |
| | — |
| | 947.0 |
| | Stockholders’ equity | | 3,488.7 |
| | 3,000.0 |
| | 2,872.3 |
| | 2,496.9 |
| | 2,097.1 |
| | Book value per share | | $ | 16.34 |
| | $ | 13.90 |
| | $ | 13.39 |
| | $ | 12.07 |
| | $ | 10.98 |
| | Selected Ratios—Mortgage Insurance | | | | | | | | | | | Loss ratio (5) | | 10.4 | % | | 14.6 | % | | 22.2 | % | | 21.7 | % | | 29.1 | % | Expense ratio—net premiums earned basis (5) | | 23.9 | % | | 24.7 | % | | 22.7 | % | | 23.7 | % | | 28.2 | % | | Risk-to-capital-Radian Guaranty only | 13.5 | :1 | | 14.3 | :1 | | 17.9:1 |
| | 19.5:1 |
| | 20.8:1 |
| 13.9 | :1 | | 12.8 | :1 | | 13.5 | :1 | | 14.3:1 |
| | 17.9:1 |
| | Risk-to-capital-Mortgage Insurance combined | 13.6 | :1 | | 14.6 | :1 | | 20.3:1 |
| | 24.0:1 |
| | 29.9:1 |
| 12.8 | :1 | | 12.1 | :1 | | 13.6 | :1 | | 14.6:1 |
| | 20.3:1 |
| | Other Data—Mortgage Insurance | | | | | | | | | | | | | | | | | | | | Primary NIW | $ | 50,530 |
| | $ | 41,411 |
| | $ | 37,349 |
| | $ | 47,255 |
| | $ | 37,061 |
| $ | 56,547 |
| | $ | 53,905 |
| | $ | 50,530 |
| | $ | 41,411 |
| | $ | 37,349 |
| | Direct primary IIF | 183,450 |
| | 175,584 |
| | 171,810 |
| | 161,240 |
| | 140,363 |
| 221,443 |
| | 200,724 |
| | 183,450 |
| | 175,584 |
| | 171,810 |
| | Direct primary RIF | 46,741 |
| | 44,627 |
| | 43,239 |
| | 40,017 |
| | 34,372 |
| 56,728 |
| | 51,288 |
| | 46,741 |
| | 44,627 |
| | 43,239 |
| Persistency Rate (12 months ended) (6) | 76.7 | % | | 78.8 | % | | 84.2 | % | | 82.1 | % | | 82.9 | % | 83.1 | % | | 81.1 | % | | 76.7 | % | | 78.8 | % | | 84.2 | % | Persistency (quarterly, annualized) (6) | 76.8 | % | | 81.8 | % | | 83.3 | % | | 83.5 | % | | 81.5 | % | 85.5 | % | | 79.4 | % | | 76.8 | % | | 81.8 | % | | 83.3 | % |
______________________ | | | (1) | For all periods presented, reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue and cost of services have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. See Note 4 of Notes to Consolidated Financial Statements for additional information.
|
| | (2) | Primarily represents the activity of Clayton, acquired June 30, 2014. |
| | (3)(2) | Radian completed the sale of its former financial guaranty subsidiary, Radian Asset Assurance, to Assured on April 1, 2015, pursuant to the Radian Asset Assurance Stock Purchase Agreement. Until the April 1, 2015 sale date, the operating results of Radian Asset Assurance were classified as discontinued operations for all periods presented in our consolidated statements of operations. See Note 18 of Notes to Consolidated Financial Statements for additional information. |
| | (4)(3) | Diluted net income (loss) per share and average share information calculated in accordance with the accounting standard regarding earnings per share. See Note 3 of Notes to Consolidated Financial Statements. |
| | | (4) | Includes Senior Notes and Convertible Senior Notes. |
| | | (5) | Calculated using amounts determined under GAAP, using provision for losses to calculate the loss ratio and policy acquisition costs and other operating expenses to calculate the expense ratio, as percentages of net premiums earned—insurance. |
| | | (6) | Based on loan level detail.detail for the fourth quarter of each year shown. The Persistency Rate on a quarterly, annualized basis may be impacted by seasonality or other factors, and may not be indicative of full-year trends. In Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, see “Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information about the Persistency Rate. |
| | | Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 8. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report. Some of the information included in this discussion and analysis or included elsewhere in this report, including with respect to our projections, plans and our strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note Regarding Forward-Looking Statements—Safe Harbor Provisions” and in the Risk Factors detailed in Item 1A of this Annual Report on Form 10-K. | | | Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | PAGE | | | | | | | | | | | | | | | | | | | | |
Overview We provideare a diversified mortgage insurance on first-lien mortgage loans, and products and services to the real estate and mortgage finance industries. We haveservices business with two business segments—Mortgage Insurance and Services. Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, as well as other credit risk management solutions, to mortgage lending institutions nationwide.and mortgage credit investors. We provide our mortgage insurance products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Our Services segment provides outsourcedis primarily a fee-for-service business that offers a broad array of mortgage, real estate and title services information-based analytics, valuations and specialized consulting and surveillance services for buyers and sellers of, and investors in, mortgage-to market participants across the mortgage and real estate-related loans and securitiesestate value chain, as well as other consumer ABS. The primary linesfurther detailed in “Results of business in our Services segment include: (i) loan review, underwriting and due diligence; (ii) surveillance, including RMBS surveillance, loan servicer oversight, loan-level servicing compliance reviews and operational reviews ofOperations—Services.” These services, comprising mortgage servicers and originators; (iii)services, real estate valuation and component services providing outsourcing and technology solutions for the SFR and residential real estate markets, as well as outsourced solutions for appraisal, title and closing services; (iv) REO management services; and (v) services for the United Kingdom and European mortgage markets through our EuroRisk operations. These services and solutionstitle services, are provided primarily through Clayton and itsour subsidiaries, including Clayton, Green River Capital, Radian Settlement Services and Red BellBell. In 2018, we also acquired the businesses of Entitle Direct and ValuAmerica.
Independent Settlement Services, as well as the assets of Five Bridges, to enhance our Services offerings. Of the combined total of our net premiums earned and services revenue for the years ended December 31, 2018, 2017 and 2016, our Services segment provided 13%, 15% and 16%, respectively.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
______________________ | | | (1) | Includes net premiums earned and services revenue on a segment basis, and excludes net investment income, net gain on investments and other financial instruments and other income. |
Operating Environment and Business Strategy Operating Environment. As a seller of mortgage credit protection and mortgage and other credit risk management solutions, as well as a provider of mortgage, real estate products and title services, our results are subject to macroeconomic conditions and specificother events that impact the housing finance and real estate markets, including events that specifically impact the mortgage origination environment, and the credit performance of our underlying insured assets. As evidenced byassets and our future business opportunities.
Recently, mortgage originations for home purchases have increased and become a larger proportion of total mortgage originations, as refinancing activity has declined due to rising interest rates. During 2017 and 2018, we have benefited from this trend because mortgage insurance penetration in the improved jobinsurable mortgage market andis generally three to five times higher for purchase originations than for refinancings. Additionally, mortgage insurance penetration on purchase transactions has gradually increased housing prices, the operating environment for our businesses has improved over the past several yearsfew years. The increase in home purchase transactions and the higher mortgage insurance penetration for purchase originations resulted in a larger mortgage insurance market in 2018 as compared to 2017. Mortgage Market Credit Characteristics. Loans originated for the U.S. economyprivate mortgage insurance market since 2008 consist primarily of high credit quality loans with significantly better credit performance than the loans originated during 2008 and housing market have been recovering fromprior periods. Significant contributors to the improved loan quality include the greater risk discipline of loan originators and the private mortgage insurance providers, the Qualified Mortgage (QM) loan requirements under the Dodd Frank Act, including the GSE safe harbor, and the loan-level criteria of the PMIERs financial crisis that began in 2007.requirements.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
New lending laws and regulations enacted in response to______________________
| | | (1) | For the PMIERs, in circumstances where there is more than one borrower, the lowest of the borrowers’ FICO scores is used. |
| | | (2) | Seasoning factors are designed to adjust claim rate estimates for an expected loss pattern based on origination vintage. |
Following the 2007-2008 financial crisis, have resulted in increased regulation and regulatory scrutiny and athe more restrictive credit environment that has limitedresulted in an overall improvement in credit quality. More recently, with access to credit expanding and purchase volume becoming a larger proportion of total originations compared to refinancings, Radian Guaranty and the growthrest of the private mortgage industry.insurance industry have been experiencing a shift in the mix of mortgage lending products toward higher LTVs and higher debt-to-income ratios. In part, this is because in general, borrowers who purchase a home with mortgage insurance tend to have higher LTVs than borrowers who refinance with mortgage insurance. Additional factors contributing to the increase in the industry’s NIW on mortgage loans with LTVs greater than 95% include: (i) GSE program enhancements and guideline changes, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible and Home Possible Advantage programs, which are designed to make home ownership more affordable for low- to moderate-income borrowers and (ii) recent lender response to market demands, particularly in light of increasing demand from first-time home buyers. As a result Post-legacy loan originations have consisted primarily of high credit quality loans with significantly better credit performance than the loans in our Legacy Portfolio. While credit quality has improved, the restrictive credit environment has made it more challenging for manythese factors, home purchases by first-time home buyers, who traditionally require mortgage loans with higher LTVs and may have higher debt-to-income ratios, continue to financebe an increasingly significant portion of the total market. Further, due in part to changes in GSE guidelines that increased acceptable debt-to-income limits, beginning in late 2017, the private mortgage industry observed a home, which has limitedmaterial increase in the numbervolume of loans available for private mortgage insurance.to borrowers with debt-to-income ratios greater than 45%, and Radian Guaranty imposed certain credit overlays and pricing changes to address this trend. These higher levels have continued during 2018. We believe that these trends toward higher LTVs and debt-to-income ratios have not materially impacted the overall credit quality of our portfolio. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF”for additional information regarding our portfolio mix and the mortgage industry. Further, while Hurricanes. We insure mortgages for homes in areas that have been or in the more stringent regulatory environment generally benefitsfuture may be impacted by natural disasters such as hurricanes, floods and wildfires, including Hurricanes Harvey and Irma in 2017 and Hurricanes Florence and Michael in 2018. Although the compliance consulting services we offer throughnumber of incremental defaults associated with areas that have been impacted by recent natural disasters, including the hurricanes in 2017 and 2018, became somewhat elevated, consistent with our Services business, the lack ofpast experience, these incremental defaults did not result in a meaningful securitization market has significantly limited the volume of business available for our Services business, as further discussed below. As of December 31, 2016, our portfolio of business written in this improving Post-legacy credit environment, including HARP refinancings, represented 88% of our total primary RIF. The combination of improved portfolio mix and favorable credit trends has had a significant positive impact on our results of operations. The negative impact from losses in our Legacy Portfolio has been reduced and we have continued to write a high volume of insurance on high credit quality loans. The improving environment also has contributed to a reductionmaterial increase in our incurred losses andor paid claims, submitted and paid ingiven the limitations on our mortgage insurance business. The number of total new primary mortgage insurance defaults in our insured portfolio declined by 4.9% during the year ended December 31, 2016, compared to the same period of 2015. Similarly, our primary default rate of 3.2% at December 31, 2016 declined from 4.0% at December 31, 2015.coverage related
Early default experience (“EDE”) within the first 12 months of a mortgage loan is an early indicator of underwriting quality. Radian’s EDE has declined significantly as underwriting quality has improved. In addition, we have expanded our quality control reviews to encompass all 12-month early defaults. These reviews have indicated historically low material loan manufacturing defect rates. The following table provides a historical perspective on Radian’s EDE from 2001 to present on its Flow Basis mortgage insurance.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 Private mortgage insurers, including Radian Guaranty, are requiredPMIERs. In order to comply with the PMIERsbe eligible to remain eligible insurers ofinsure loans purchased by the GSEs.GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs Financial Requirements.financial requirements. The GSEs have significant discretion under the PMIERs are comprehensive, covering virtually all aspects of a private mortgage insurer’s business and operations, including internal risk management and quality controls,may amend the relationship betweenPMIERs at any time. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. Based on Radian’s financial position at December 31, 2018, Radian expects to comply with PMIERs 2.0 and the approved insurer and the approved insurer’s financial condition. The PMIERs require private mortgage insurers to obtain the prior written consentmaintain a significant excess of the GSEs before taking certain actions. The PMIERs also specifically provide for the factors that are applied to calculate and determine a mortgage insurer’sAvailable Assets over Minimum Required Assets to be updated every two years, withas of the next review scheduled to take place in 2017.effective date. See “Item 1. Business—Regulation—GSE Requirements,” “Liquidity and Capital Resources—Radian Group—Group—Short-Term Liquidity Needs” and Note 1 of Notes to Consolidated Financial Statements for additional information.
Tax Cuts and Jobs Act. On December 22, 2017, the TCJA was signed into law, significantly changing the U.S. tax system. It included, among other items, the following provisions that impacted Radian:
Reduction of net deferred tax assets of $102.6 million at December 31, 2017, due to the lower statutory tax rate resulting in an increased tax provision; Significant reduction in our annualized effective tax rate and future cash tax payments due to the reduction in the statutory federal tax rate from 35% to 21% (excluding the impact of Discrete Items), effective January 1, 2018; A material reduction in cash tax payments in 2018 due to the repeal of the corporate alternative minimum tax; Reduced deductibility of certain executive compensation; and Potential impacts of state tax changes that could be prompted in response to the TCJA. For periods beginning January 1, 2018, the TCJA had a significant favorable impact on our net income, diluted earnings per share and cash flows, primarily due to the reduction in the federal corporate tax rate. The TCJA also significantly increased the economic value of our existing mortgage insurance portfolio as of December 31, 2017, due to the increase in expected future net cash flows from our IIF. Services. The macroeconomic conditions and other events that impact the housing, mortgage finance and related real estate markets also affect the demand for our mortgage, real estate and title services offered through our Services business segment. As described in “—Key Factors Affecting our Results—Services,” revenues for our Services segment are subject to fluctuations from period to period, in part due to the combination of the transactional nature of our business and the overall activity in the housing and mortgage finance markets. Our mortgage services business is dependent on customer activity and general secondary market dynamics including volume, types of transactions, and scopes of review. For example, while non-GSE or “private label” securitization activity remains limited compared to the pre-financial crisis market, this market continued to expand in 2018 due to larger institutions re-entering the market, suggesting increased potential growth in 2019. Similarly, the single family rental market continued to experience strong demand in 2018, driven in part by early refinance activity in the rising interest rate environment, as well as a GSE program that drove volume, but was later suspended at the end of 2018. While regulatory demands on mortgage market participants continue to be significant following the financial crisis, regulatory enforcement actions on mortgage industry participants have been less frequent, reducing the demand for our servicing quality control services as target customers form alternative strategies on how best to manage risk in the current and projected environment. Radian’s real estate services consist primarily of home property valuation services, which include appraisals, broker price opinions and automated valuations, and REO services that include property preservation and software as a service (“SaaS”) technology products. These products and services are fundamentally volume driven and therefore sensitive to variances in macro level home sales, home price appreciation, interest rates, home default rates and GSE guidelines. Since the financial crisis, REO inventory levels continue to decline due to lower delinquencies and foreclosure activity, reducing demand for our REO asset management services. Further, as alternatives for managing costs have become more critical to the overall value proposition for market participants, we have observed increasing market trends toward the use of non-appraisal valuation alternatives, which we expect will continue to grow.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 ForSee Notes 4 and 7 of Notes to Consolidated Financial Statements and “Item 1. Business—Services—Services Business Overview” for additional information regarding the Services segment.
Competition and Pricing Competitive Environment. In our mortgage insurance business, our primary competitors include other private mortgage insurers and governmental agencies, principally the FHA and the VA. We currently compete with other private mortgage insurers that are eligible to write business for the GSEs on the basis of price, underwriting guidelines, overall service, customer relationships, reputation, perceived financial strength (including based on comparative financial strength credit ratings) and overall service, includingreputation, as well as the breadth and quality of the services and productsoffered through our Services business that complement our mortgage insurance products and that are offered through our Services business.products. We compete with the FHA and VA, primarily on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. The FHA’s reduction of its annualFor additional information, see “Item 1. Business—Mortgage Insurance—Competition.” Pricing is highly competitive in the mortgage insurance premiumsindustry, with industry participants competing for market share and customer relationships. As a result of this competitive environment, recent industry pricing trends have included: (i) increases in the use of a spectrum of filed rates to allow for pricing based on more granular loan, borrower and property attributes, including granular pricing through the use of a “Black Box” framework, as further discussed below; (ii) the use of customized rates (often discounted from our published rate cards), including in response to requests for pricing bids by certain lenders; and (iii) other pricing changes that include, among other things, reductions in published rates. The mortgage insurance industry is migrating away from a predominantly rate-card-based pricing model, to one where a variety of pricing methodologies are being deployed with differing degrees of risk-based granularity, which may also lead to an increase in the frequency of pricing changes. By the end of 2018 all private mortgage insurers, including Radian, were either piloting or had broadly launched a “Black Box” framework. Currently, these frameworks continue to leverage the same general risk attributes as mortgage insurance pricing historically, and incorporate more granular risk-based pricing factors. Radian’s proprietary “Black Box” framework, RADAR Rates, became broadly available to customers in January 2015, combined with our premium changes in April 20162019. See “Item 1. Business—Mortgage Insurance—Mortgage Insurance Business Overview—Premium Rates” above and “—Radian’s Pricing,” below. As market conditions change, alternatives to increase our pricing for borrowers with lower FICO scores, has negatively impacted our ability totraditional mortgage insurance may be introduced that compete with private mortgage insurance. In 2018, Freddie Mac and Fannie Mae announced the FHA on certain high-LTVlaunch of limited pilot programs, Integrated Mortgage Insurance (“IMAGIN”) and Enterprise-Paid Mortgage Insurance (“EPMI”), respectively, as alternative ways for lenders to sell loans with LTVs greater than 80% to borrowers with FICO scores below 720. However, we believethe GSEs. These investor-paid mortgage insurance programs, in which insurance is acquired directly by each GSE, have many of the same features and represent an alternative to traditional private mortgage insurance products that our pricing changes made duringare provided to individual lenders. Under the first halfIMAGIN and EPMI programs, which are forward insurance arrangements (forward commitments to insure future loan originations), insurance is provided by a third party which, in turn, cedes the risk to a panel of 2016 enable usreinsurers. The reinsurers participating in IMAGIN and EPMI are not subject to more effectively competecompliance with the FHAPMIERs, which may create a competitive disadvantage for private mortgage insurers if these pilot programs are expanded. In their current forms, these programs have not had a material impact on certain high-LTV loansour financial performance or business prospects, in part due to borrowers with FICO scores above 720.the limited nature of the pilots and their current focus on lender-paid Single Premium Policies as well as the operational changes required for lenders to switch from traditional mortgage insurance execution to this new form of execution. The financial impact of these programs has been further mitigated as a result of the shift away from lender-paid singles and the increasing use of our borrower-paid Single Premium Policies. We believe there are significant challenges to the long-term sustainability of the IMAGIN and EPMI programs, including for example that the IMAGIN structure relies on a reinsurance market that, in contrast to traditional mortgage insurance, may not be committed to serving the first-loss mortgage insurance market through various economic and credit cycles. However, if these pilot programs or other alternatives to traditional private mortgage insurance were to expand and become broadly accepted alternatives to traditional private mortgage insurance, they could reduce the demand for private mortgage insurance in its traditional form. See “Item 1A. Risk Factors—Our mortgage insurance business faces intense competition.”
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The positive macroeconomic and credit trends duringRadian’s Pricing. As we continually evaluate our pricing based on many factors, we design our pricing strategies to grow the recovery from the financial crisis have encouraged new insurers to join the privatelong-term economic value of our mortgage insurance industry, althoughportfolio and to align with our overall strategic objectives. During 2018, we made a number of pricing changes consistent with these objectives, including:
implementing rate reductions on our borrower-paid Single Premium Policies in order to shift our NIW toward more recently thereprofitable borrower-paid Single Premium Policies; increasing risk-based granularity of our pricing across most products, including the use of rate adjustors related to multi-borrower loans and loans with a debt-to-income ratio greater than 45%; and introducing our proprietary RADAR Rates, which became available to customers beginning in January 2019, subject to regulatory approval. Our borrower-paid Single Premium Policies provide us with an increased return on required capital compared to lender-paid Single Premium Policies. Under the Homeowners Protection Act, most borrower-paid Single Premium Policies must be cancelled once the mortgage’s scheduled LTV has also been consolidation among industry participants. Price competition continues as these newer entrants have soughtdeclined to gain a greater presence in the market and more established industry participants seek to defend their market share and customer relationships.78%. As a result of this competitive environment, recentautomatic cancellation feature and other factors, over the life of the loans, the Minimum Required Assets under the PMIERs are lower than for lender-paid Single Premium Policies. In the nine months since we implemented our pricing trends have included: (i)strategy for borrower-paid Single Premium Policies, we successfully increased our NIW for borrower-paid Single Premium Policies from 5% of total NIW for the usethree-month period ended March 31, 2018 to 12% of a spectrum of filed rates to allowtotal NIW for formulaic, risk-based pricing (commonly referred to as “black-box” pricing); (ii) the use of customized (often discounted) rates onthree-month period ended December 31, 2018, and our NIW for lender-paid Single Premium Policies decreased from 16% to 5% for the same periods. We currently employ proprietary risk and customer analytics, as well as a digital pricing delivery platform, to deliver loan level pricing electronically to our customers. In January 2019, we broadly introduced RADAR Rates as our newest pricing option that is powered by Radian’s proprietary RADAR risk model and analyzes credit risk inputs to customize a rate quote to a limited extent,borrower’s individual risk profile, loan attributes and property characteristics. The granularity of our pricing is tailored to the business needs of our customers and their risk profiles. This framework represents a continuation of our strategy to consistently apply an approach to pricing that is customer-centric, flexible and customizable based on borrower-paid Monthly Premium Policies;a lender’s loan origination process, as well as balanced with our own objectives for managing the risk and (iii) overall reductions in standard filed ratesreturn profile of our mortgage insurance portfolio. We expect that RADAR Rates, which leverages our proprietary risk model, will enhance our ability to continue to build a high quality mortgage insurance portfolio. We target a blended return on borrower-paid Monthly Premium Policies. In the recent past, the willingness of mortgage insurers to offer reduced pricing (whether through filed or customized rates) led to an increased demand from certain lenders for reduced rate products. This produced a marketplace where balancing both targeted returnsrequired capital on new business andon an acceptable share ofunlevered basis (i.e., after-tax underwriting returns plus projected investment income) within the insured market became more challenging for all participants. Although there can be no assurance that there will not be broad-based declines in mortgage insurance pricing in the future, following the widespread industry pricing changes for standard rates that occurred during the first half of 2016, pricing throughout the industry has been relatively stable with respect to borrower-paid Monthly Premium Policies. Further, in 2016 the California Department of Insurance issued guidance to the mortgage insurance industry stating that any approved discounting of a mortgage insurer’s rates must be provided to all similarly situated customers of the mortgage insurer. See “Item 1A. Risk Factors—Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.” Althoughmid-teens range. This projected return incorporates the impact of this guidanceour Single Premium QSR Program, as well as PMIERs 2.0, which will become effective on March 31, 2019, but does not include the impact of other factors, such as our Excess-of-Loss Program and leverage. See “—Operating Environment—PMIERs,” above. Our pricing actions are expected to gradually affect our results over time, as existing IIF cancels and is uncertain,replaced with NIW at current pricing. As an example, assuming our current NIW levels, mix and persistency levels remain constant, we estimate that it is possible that this guidance will discourage the discountingwould take approximately three years for approximately one-half of rates within the mortgage insurance industry.our IIF to reflect our current pricing structure. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information. Business Strategy.Strategy Radian is focused on a number of strategic objectives, as described in “Radian’s Long-Term Strategic Objectives” in “Item 1. Business—General.” With respect toIn developing our strategies for our mortgage insurance business, we monitor various competitive and economic factors while seeking to balanceincrease the long-term value of our portfolio by balancing both profitability and market sharevolume considerations in developing our pricing and origination strategies. We have takentake a disciplinedstrategic, risk-based approach to establishing our premium rates and writing a mix of business that we expect to grow the economic value of our mortgage insurance portfolio and produce our targeted level of returns on a blended basis, andwhile providing an acceptable level of NIW. See “—Competition and Pricing—Radian’s Pricing,” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF.” During 2016, Our growth strategy includes leveraging our core expertise in furtherancemortgage credit risk management and expanding our presence in the mortgage finance industry, including by participating in certain credit risk transfer programs developed by the GSEs. As part of ourtheir initiative to distribute mortgage risk and increase the role of private capital in the mortgage market, Fannie Mae and Freddie Mac have established Front-end credit risk transfer programs that provide the GSEs with credit risk coverage on a Flow Basis that is incremental to primary mortgage insurance, strategy, we: increased our filed rates for lender-paid mortgage insurance;
adjusted our borrower-paid, filed rates, effectiveas well as Back-end programs that provide the GSEs with credit risk coverage on April 7,existing pools of loans. Since 2016, which generally had the effect of decreasing our standard rates on higher FICO business, and raising our standard rates on lower FICO business where the FHA is already very competitive;
continued to use the authority set forth in our rate filings to provide customized premiums for lender-paid, Single Premium mortgage insurance while maintaining our focus on our overall risk and return targets, and beginningwe have participated in the third quarter of 2016, we electedFront-end programs and Back-end programs through Radian Reinsurance. Our participation in these programs is subject to selectivelypre-established credit parameters. Our total RIF under the Front-end and Back-end credit risk transfer programs was $196.8 million at December 31, 2018 and $100.4 million at December 31, 2017. We expect to continue to participate in certain discounted Single Premium business that has been offered on an aggregated basisthese and is now priced at a level that is within our targeted returns; andother similar programs in the
entered into the Single Premium QSR Transaction to proactively manage the risk and return profile of Radian Guaranty’s insured portfolio, which resulted in increasing our return on required capital for Single Premium Policies and decreasing the percentage of our Single Premium RIF, net of reinsurance ceded.
See Note 8 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources—Radian Group—Short-term Liquidity Needs” for more information about the Single Premium QSR Transaction.
As a result of the actions described above and as demonstrated by our strong NIW generated in 2016, we believe we are well positioned to compete for the high-quality business being originated today, including the generally more profitable, borrower-paid business, while at the same time maintaining projected returns on NIW within our targeted ranges. In addition, the changes that we implemented to our filed premium rates in the first half of 2016 are expected to generate more consistent returns across the credit spectrum and provide more stable loss ratios in the event of further credit expansion. Over the life of the policies, we expect our current pricing (including the impact of the Single Premium QSR Transaction) will produce returns on required capital on new business on an unlevered basis (i.e., after-tax underwriting returns plus projected investment income) of approximately 13% to 14%, and approximately 16% to 17% on a levered basis (i.e., after-tax returns taking into consideration a targeted corporate debt to capital ratio which is consistent with our current level). Our actual portfolio returns will depend on a number of factors, including economic conditions, the amount and mix of NIW that we are able to write at these new pricing levels and the amount of reinsurance we use.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As partfuture, subject to availability and our evaluation of our strategy to leverage our core expertise in credit risk managementrisk-adjusted returns. We will only experience claims under these Front-end and expand our presence in the mortgage finance industry, during 2016 we participated in new front-endBack-end credit risk transfer pilot programs developed by Fannie Mae and Freddie Mac. These pilot programs involve participation as part of a panel oftransactions if the borrower’s equity, any existing primary mortgage insurance company affiliates in writing credit insurance policies(if applicable) and the GSEs’ retained risk are depleted. The GSEs retain the first losses on loans that are to be purchased by the GSEs in the future (i.e., front-end), subject to certain pre-established credit parameters. Our current commitment level for both of these pilot programs will result in premiums and required capital that are immaterial. We may participate in other GSE credit risk transfer programstransactions, ranging from 35 to 60 basis points. Generally, Radian would then be responsible to cover the next layer of losses, which ranges in size from approximately 225 to 325 basis points. In participating in these GSE transactions, we assume incremental risk (beyond that which we typically cover in our traditional mortgage insurance business) associated with the future.risk of defaults caused by physical damage, including natural disasters such as hurricanes and wildfires, which is not covered by the underlying primary mortgage insurance. We regularly evaluate this risk, including the geographic diversity of the loans included in these transactions and our remote risk position, in assessing our participation in these transactions.
We arehave been focused on growingrepositioning our fee-based revenues as part ofServices business by implementing our long-term strategy. Our Services segment is a fee-based business that provides a diverse array of services to participants in multiple facets ofrestructuring plan and using the residentialmortgage, real estate and mortgage finance markets. While our Services business overall is most successful in a healthy and robust housing and economic environment, we believe that the diversity of thetitle services offered bythrough our Services segment positions us to generate revenue in both healthy and challenging mortgage market conditions. Our strategy for future growth includes continuing to growcomplement our Mortgage Insurance business, and expanding our Services business. A key element of this business strategy is to use our Services segment to offer a range of mortgage and real estate-relatedas well as by investing in new products and services that complementto innovate and provide integrated solutions for our Mortgage Insurance business. Thisclients. Our strategy is designed to satisfy demand in the market, grow our fee-based revenues, strengthen our existing mortgage insurance customer relationships, attract new customers and differentiate us from ourother mortgage insurance peers. Our current capabilities are illustrated by the graphic, “Existing Capabilities within Mortgage Finance Industry” in “Item 1. Business—General.”companies.
2016 and Other Recent Capital Management2018 Developments
During 2016, we completed a series of transactions to strengthen our financial position. The combination of these actions had the impact of decreasing our diluted shares, improvingCapital and Liquidity Actions. On August 9, 2017, Radian Group’s debt maturity profile and improvingboard of directors authorized the Company to repurchase up to $50 million of its common stock through July 31, 2018. We completed this program during the first half of 2018 by purchasing 3.0 million shares at an average price of $16.56 per share, including commissions.
On August 16, 2018, Radian Guaranty’s position under the PMIERs Financial Requirements. This seriesGroup’s board of capital management transactions consists of: the issuance of $350 million aggregate principal amount of Senior Notes due 2021;
the purchases of aggregate principal amounts of $30.1 million and $322.0 million, respectively, of our outstanding Convertible Senior Notes due 2017 and 2019;
the termination of the portion of the capped call transactions related to the purchased Convertible Senior Notes due 2017;
the completion of thedirectors approved a new share repurchase program announced in January 2016, by purchasing an aggregatethat authorizes the Company to repurchase up to $100 million of 9.4its common stock. As of December 31, 2018, the full purchase authority of up to $100 million shares of Radian Group common stock for $100.2 million, including commissions;
the implementation of the Single Premium QSR Transaction,remained available under this program, which had the effect of increasing the amount by which Radian Guaranty’s Available Assets exceed its Minimum Required Assets under the PMIERs Financial Requirements; and
the early redemption of the remaining $195.5 million aggregate principal amount of our Senior Notes due 2017.
expires on July 31, 2019. See Notes 8, 12 and 14Note 15 of Notes to Consolidated Financial Statements for additional information about these transactions.details on our share repurchase program. Our purchasesRadian Group’s liquidity increased as a result of Convertible Senior Notes due 2017Radian Guaranty’s return of $450 million in capital to Radian Group in December 2018, as approved by the Pennsylvania Insurance Department. This distribution of capital is part of our long-term capital plan, which is designed to improve our financial flexibility and 2019 and the early redemptioncapital position. A portion of the Senior Notes due 2017 resulted in a loss on induced conversion and debt extinguishment of $75.1 millionproceeds is expected to be used for the year ended December 31, 2016. In connection with the terminationpayment of the capped call transactions related to the purchased Convertible Senior Notes due 2017, we received 0.2$159 million sharesprincipal amount of Radian Group common stock, which was valued at $2.6 million based on a stock price on the closing date of $11.86.
Following the purchases described above, $22.2 million and $68.0 million, respectively, of the principal amounts of the Convertible Senior Notes due 2017 and 2019 remainedour outstanding as of December 31, 2016. Subsequently, in January 2017, we satisfied our obligations with respect to the remaining outstanding Convertible Senior Notes due 2019. See “—Capital Management Developments SubsequentNote 12 of Notes to 2016” below.Consolidated Financial Statements.
The 2016Reinsurance. Radian’s reinsurance programs represent a component of our long-term risk distribution strategy. From time to time, we have entered into reinsurance transactions described above resultedas part of our strategy to manage our capital position and risk profile, which includes managing Radian Guaranty’s capital position under the PMIERs financial requirements. We have recently expanded our risk distribution strategy in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk, including by accessing both the capital and the reinsurance markets to distribute risk. We expect the expansion of our risk distribution strategy to: (i) support our overall capital plans; (ii) lower our cost of capital; and (iii) reduce portfolio risk and financial volatility through economic cycles.
As part of our risk distribution strategy, in November 2018, Radian Guaranty entered into a net decreasefully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in diluted shares (usedBermuda. This reinsurance agreement provides for purposesup to $434.0 million of determining diluted net income per share), in each case asaggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an initial RIF of $9.1 billion. Eagle Re financed its coverage by issuing mortgage insurance-linked notes. In addition, Radian Guaranty entered into a separate excess-of-loss reinsurance agreement for up to $21.4 million of coverage, representing a pro rata share of the datecredit risk alongside the risk assumed by Eagle Re on those Monthly Premium Policies. These two reinsurance agreements reduced net RIF and PMIERs Minimum Required Assets by a total of $455.4 million, thus reducing the capital required to be held at Radian Guaranty and supporting Radian Guaranty’s $450 million return of capital to Radian Group in December 2018. For additional information about our reinsurance see Note 8 in Notes to Consolidated Financial Statements and “Results of Operations—Mortgage Insurance—Net Premiums Written and Earned.” See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs” for additional information on the PMIERs. IRS Matter. Radian finalized a settlement with the IRS which resolved the issues and concluded all disputes related to the IRS Matter. During the second quarter of 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the completionsettlement with the IRS as well as the reversal of certain previously accrued state and local tax liabilities. In 2018, under the terms of the respective transaction, of approximately 23.3 million. Although these transactions resultedsettlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in a net decrease in diluted shares outstanding,2019, the actual shares outstanding increased at December 31, 2016 from December 31, 2015. See “Results of Operations—Consolidated—Diluted Net Income Per Share.”Company expects the IRS to refund to Radian the remaining $58 million that was previously on
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition todeposit. During the net decrease in dilutive shares, inyear ended December 31, 2018, the aggregate the series of 2016 capital management transactions described abovesettlement and related tax benefits resulted in the following changesan increase to liquidity, long-term debtRadian’s net income per share of $0.34 and stockholders’ equity as of their effective dates:
a net decrease in available holding company liquidity of $204.6 million, before the repayment of the Surplus Note described below;
a net decrease in long-term debt of $161.7 million; and
a net decrease in stockholders’ equity of $16.9 million.
In addition, available holding company liquidity increased by $325 million at June 30, 2016 due to Radian Guaranty’s repayment of the Surplus Note to Radian Group. See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs—Sources of Liquidity.”
In the first quarter of 2016, in order to proactively manage the risk and return profile of Radian Guaranty’s insured portfolio and continue managing its position under the PMIERs Financial Requirements in a cost-effective manner, Radian Guaranty entered into the Single Premium QSR Transaction with a panel of third-party reinsurers. Radian Guaranty began ceding business under this agreement effective January 1, 2016.
The Single Premium QSR Transaction increases the amount by which Radian Guaranty’s Available Assets exceeds its Minimum Required Assets under the PMIERs Financial Requirements. The Single Premium QSR Transaction also resulted in the following impacts, which are expected to continue over the term of the transaction:
an increase in the amountbook value per share of our RIF covered by reinsurance, and therefore, the amount of premiums and losses ceded; reduction in net premiums written and earned;
reduction in other operating expenses by the amount of ceding commissions earned; and
improvement in Radian Guaranty’s return on required capital for its Single Premium mortgage insurance products as a result of the combination of the favorable impact to our PMIERs Financial Requirements and the expected ceded underwriting margin.
$0.34. See Note 8 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs” for more information about the Single Premium QSR Transaction. On June 29, 2016, the Board authorized a new share repurchase program to spend up to $125 million to repurchase Radian Group common stock. As of February 27, 2017, the full purchase authority remained available under this share repurchase program, which expires on June 30, 2017.
Capital Management Developments Subsequent to 2016. In November 2016, we announced our intent to exercise our redemption option for the remaining Convertible Senior Notes due 2019, of which $68.0 million aggregate principal amount was outstanding at December 31, 2016. The redemption was settled on January 27, 2017. At the time of the redemption, this transaction reduced our diluted shares by 6.4 million, or approximately 2.8% of our diluted shares outstanding as of December 31, 2016. See Note 2110 of Notes to Consolidated Financial Statements for additional details.information.
Services Acquisitions. During 2018, Radian made three acquisitions that, although the purchase prices were not material to Radian, were consistent with our strategic direction, including growth, diversification and enhancing the core product offerings of our Services business.
During the first quarter of 2018, Radian acquired EnTitle Direct, the owner of EnTitle Insurance, a national title insurance and settlement services company. EnTitle Insurance is qualified to write title insurance business in 39 states and the District of Columbia. By adding the capabilities of EnTitle Insurance to the title and settlement services that we already were offering through our existing title agency, Radian Settlement Services, we have expanded the geographic reach of our title services and are positioned to provide title insurance and settlement services to our customers across the country.
In November 2018, Radian acquired Independent Settlement Services. Independent Settlement Services is a technology-driven national appraisal and title management services company that provides real estate information and valuation solutions in all 50 states, as well as proprietary technology that provides lenders, appraisers, servicing firms, due diligence firms and appraisal-management companies with a fully-automated platform to manage the ordering and delivery of products and services.
In December 2018, Radian acquired the assets of Five Bridges, a developer of proprietary software, data analytics and predictive models leveraging artificial intelligence, machine learning and traditional econometric techniques. With the assets acquired from Five Bridges, we expect to provide consumer and real estate analytics to customers, with a primary focus on valuation and risk management tools that span the entire loan life cycle, from underwriting and origination to servicing, secondary market purchase, and securitization.
77Restructuring and Other Exit Costs. As a result of the Company’s continued implementation of its 2017 plan to restructure the Services business, restructuring charges were recognized in 2018. In the third quarter of 2018, as a result of our periodic review of long-lived assets for impairment, we also incurred other exit costs associated with impairment of internal-use software. See Notes 1 and 7 of Notes to Consolidated Financial Statements for additional details.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Key Factors Affecting Our Results Mortgage Insurance Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, as well as other credit risk management solutions, to mortgage lending institutions and investors nationwide. The chartschart below highlighthighlights certain of the key factorsdrivers affecting our Mortgage Insurance revenue. The following sections discuss these factors,revenue drivers, as well as other key drivers offactors affecting our results. | | CUSTOMERS | • Mortgage bankers | » Independent | » Bank-owned | » Realtor/Builder-owned | • Regional and Community Banks | • Credit Unions |
 | | REVENUE DRIVERS | • IIF | • Persistency Rate | • Premium rates and mix of business | • IIFPersistency Rate Premium rates and mix of business Size of mortgage origination market and market demand for low down payment loans | • Level of mortgage originations for purchase transactions | • Penetration percentage of private mortgage insurance in overall mortgage market | • Radian’s market share of the private mortgage insurance market | • Levels of GSE credit risk transfer |
NIW. NIW is affected by the overall size of the mortgage origination market the penetrationand market demand for low down payment loans
Level of mortgage originations for purchase transactions Penetration percentage of private mortgage insurance into thein overall mortgage origination market and ourlegislative, regulatory and administrative changes impacting the demand for private mortgage insurance Radian’s market share of the private mortgage insurance market. The overall mortgage origination market is influenced by macroeconomic factors such as household formation, household composition, home affordability, interest rates, housing markets in general, credit availability and the impact of various legislative and regulatory actions that may influence the housing and mortgage finance industries. The penetration percentage of private mortgage insurance is mainly influenced by the competitiveness of private mortgage insurance for GSE conforming loans compared to FHA and VA insured loans, and the relative percentage of mortgage originations that are for purchased homes versus refinances. The following charts provide a historical perspective on certain key market drivers, including:level of reinsurance we cede to third parties •the mortgage origination volume from home purchases and refinancings;Levels of GSE credit risk transfer
•private mortgage insurance penetration as a percentage of the mortgage origination market; and | | | • | IIF; Persistency Rate; Mix of Business. Our IIF is one of the primary drivers of our future premiums that we expect to earn over time. Although not reflected in the current period financial statements, nor in our reported |
•the composition of the insured mortgage market between private mortgage insurance and FHA insurance.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The ultimate profitability of our Mortgage Insurance business is affected by the impact of mortgage prepayment speeds on the mix of business we write. The measure for assessing the impact of policy cancellations on our IIF is our Persistency Rate, defined as the percentage of IIF that remains in force over a period of time. Assuming all other factors remain constant, over the life of the policies, prepayment speeds have an inverse impact on IIF and the expected revenue from our Monthly Premium Policies. Slower loan prepayment speeds, demonstrated by a higher Persistency Rate, result in IIF remaining in place, providing increased revenue from Monthly Premium Policies over time as premium payments continue and we recover more of our policy acquisition costs. Earlier than anticipated loan prepayments, demonstrated by a lower Persistency Rate, reduce IIF and the revenue from our Monthly Premium Policies. Prepayment speeds may be affected by changes in interest rates, among other factors. An increasing interest rate environment generally will reduce refinancing activity and result in lower prepayments, whereas a declining interest rate environment generally will increase the level of refinancing activity and therefore increase prepayments.
Part II Item 7. Management’s DiscussionIn contrast to Monthly Premium Policies, when Single Premium Policies are cancelled by the insured because the loan has been paid off or otherwise, after consideration of any refunds owed to the borrower, we accelerate the recognition of any remaining unearned premiums. Although these cancellations reduce IIF, assuming all other factors remain constant, the profitability of our Single Premium business increases when Persistency Rates are lower. As a result, we believe that writing a mix of Single Premium Policies and AnalysisMonthly Premium Policies has the potential to moderate the overall impact on our results if actual prepayment speeds are significantly different from expectations. However, this moderating effect may depend on the amount of Financial Condition and Resultsreinsurance we obtain on portions of Operationsour portfolio, with the Single Premium QSR Program currently reducing the proportion of retained Single Premium Policies in our portfolio. The impact of all of our third-party quota share reinsurance programs reduced our retained RIF on Single Premium Policies as a percentage of total RIF from 29.7% to 17.2% at December 31, 2018. See “Overview—Business Strategy” for more information.
| | | • | NIW; Origination Market; Penetration Rate. NIW increases our IIF and our premiums written and earned. NIW is affected by the overall size of the mortgage origination market, the penetration percentage of private mortgage insurance into the overall mortgage origination market and our market share of the private mortgage insurance market. The overall mortgage origination market is influenced by macroeconomic factors such as household formation, household composition, home affordability, interest rates, housing markets in general, credit availability and the impact of various legislative and regulatory actions that may influence the housing and mortgage finance industries. The penetration percentage of private mortgage insurance is mainly influenced by: (i) the competitiveness of private mortgage insurance for GSE conforming loans compared to FHA and VA insured loans and (ii) the relative percentage of mortgage originations that are for purchased homes versus refinances. We believe, for example, that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans are factors that continue to provide a competitive advantage for private mortgage insurers. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF.” |
Private mortgage insurance penetration in the insurable market tends to be significantly higher on new mortgages for purchased homes than on the refinance of existing mortgages, because average LTV ratiosLTVs are typically higher on home purchases and therefore are more likely to require mortgage insurance. Radian Guaranty’s share of the private mortgage insurance market is influenced by competition in that market. See “Item 1. Business—Mortgage Insurance—Competition” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF.”
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following charts provide a historical perspective on certain key market drivers, including: •the mortgage origination volume from home purchases and refinancings; •private mortgage insurance penetration as a percentage of the mortgage origination market; and •the composition of the insured mortgage market between private mortgage insurance and FHA insurance. ______________________ | | | (1) | Based on actual dollars generated in the credit enhanced market, as reported by the U.S. Department of Housing and Urban Development and industry publicly reported information. Mortgage originations are based upon the average of Mortgage Bankers Association, Freddie Mac and Fannie Mae January 2019 Financial Forecasts. |
| | | (2) | Excluding HARP originations. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
______________________ | | | (1) | Based on actual dollars generated in the market based on industry publicly reported information and the most recent available reporting by the U.S. Department of Housing and Urban Development. |
| | | • | Premiums. The premium rates we charge for our insurance are based on a number of borrower, loan and property characteristics. The mortgage insurance industry is highly competitive and private mortgage insurers compete with each other and with the FHA and VA with respect to price and other factors. We expect price competition to continue throughout the mortgage insurance industry and future price changes from private mortgage insurers or the FHA could impact our future premium rates or our ability to compete. |
Our pricing is risk-based and is intended to generally align with the capital requirements under the PMIERs, while considering pricing trends within the private mortgage insurance industry. As a result, our pricing is expected to generate relatively consistent returns across the credit spectrum and to provide relatively stable expected loss ratios regardless of further credit expansion or contraction. In developing our strategies, we monitor various competitive and economic factors while seeking to increase the long-term value of our portfolio by balancing both profitability and volume considerations in developing our pricing and origination strategies. We continued to generate strong NIW in 2018, and believe we remain well positioned to compete for the high-quality business being originated today, while at the same time maintaining projected returns on NIW within our targeted ranges. Our pricing actions gradually affect our results over time, as existing IIF cancels and is replaced with NIW at current pricing. See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information. Premiums on our mortgage insurance products are generally paid as either on a monthly installment basis (“Monthly Premiums or Single Premiums. In addition, premiums may be paid as a combination of an up-front premium at origination plus monthly renewals,Premiums”) or in some cases, as annual or other periodic premiums paid over multiple years. NIW increases our IIF and our premiums written and earned.a single payment (“Single Premiums”) at the time of loan origination. See “Item 1. Business—Mortgage Insurance—Mortgage Insurance Business Overview—Premium Rates—Primary Mortgage Insurance.” Our IIF growth is expected to be one of our primary sources of increased future revenue over time. An increase or decrease in IIF will generally have a corresponding impact on premiums earned. Cancellations of our insurance policies as a result of prepayments and other reductions of IIF, such as rescissions of coverage and claims paid, generally have a negative effect on premiums earned. The measure for assessing the impact of policy cancellationspremium yield on our IIFSingle Premium Policies is our Persistency Rate, defined as the percentage of IIF that remains on our books over a period of time. Insurance premiumslower than on our Monthly Premium insurance policiesPolicies because our premium rates are paid and earned over time; therefore, higher Persistency Rates on Monthly Premium insurance policies enable us to earn more premiums and recover more of our policy acquisition costs, which generally would result in increased profitability from these monthly policies.
When Single Premium Policies are cancelled by the insured because the loan has been paid off or otherwise, we accelerate the recognition of any remaining unearned premiums. Therefore, assuming all other factors remain constant, profitability increases onlower for our Single Premium business when Persistency Rates are lower. ThePolicies. However, as discussed above, the ultimate profitability of our mortgage insurance business is affected by the impact of mortgage prepayment speeds on the mix of business we write. Because prepayment speeds are difficult to project, our strategy has been to write a mix of Single Premium Policies may be higher or lower than expected due to prepayments. See “—IIF; Persistency Rate; Mix of Business.”
Part II Item 7. Management’s Discussion and Monthly Premium Policies, which we believe balancesAnalysis of Financial Condition and Results of Operations
Our actual portfolio returns will depend on a number of factors, including economic conditions, the overall impact on our results if actual prepayment speeds are significantly different from expectations. The Single Premium QSR Transaction is consistent with our strategy to balance our mix of Single Premium PoliciesNIW that we are able to write, our pricing, the amount of reinsurance we use and Monthly Premium Policies. The impactthe level of all of our third-party QSR transactions reduced our Single Premium RIF from 30.2% at December 31, 2015 to 24.5% at December 31, 2016. See “Overview—Operating Environment and Business Strategy” for more information.capital required under the PMIERs financial requirements. Rescissions, which are discussed in further detail below, result in a full refund of the inception-to-date premiums received, and therefore, premiums earned are negatively affected by any increases in our accrual for estimated Rescission refunds. Additionally, premiums ceded to third-party reinsurance counterparties decrease premiums written and earned. Approximately 60%66% of the loans in our total primary mortgage insurance portfolio at December 31, 20162018 have Monthly Premium Policies that provide a level monthly premium for the first 10 years of the policy, followed by a reduced level monthly premium thereafter. If a loan is refinanced under HARP, the initial 10-year period is reset. Due to the borrower’s ability to cancel the policy generally when the LTV reaches 80% of the original unpaid principal balance,value, and the automatic cancellation of the policy whenon the date the LTV reachesis scheduled to reach 78% of the unpaid principal balance,original value, the volume of loans that remain insured after 10 years and would be subject to the premium reset is generally not material in relation to the total loans originated. However, to the extent the volume of loans resetting from year to year varies significantly, the trend in earned premiums may also vary. Losses.Incurred losses represent the estimated future claim payments on newly defaulted insured loans as well as any change in our claim estimates for existing defaults, including changes in the estimates we use to determine our losses, and estimates with respect to the likelihood, magnitude and timing of anticipated losses on defaulted loans. Other factors influencing incurred losses include:
| | -• | Losses. Incurred losses represent the estimated future claim payments on newly defaulted insured loans as well as any change in our claim estimates for existing defaults, including changes in the estimates we use to determine our expected losses, and estimates with respect to the frequency, magnitude and timing of anticipated losses on defaulted loans. Other factors influencing incurred losses include: |
| | | – | The product mix of credit characteristics in our total direct RIF (loans(e.g., loans with higher risk characteristics, or loans with layered risk that combine multiple higher-risk attributes within the same loan, generally result in more delinquencies and claims). See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF. |
| | -– | The average loan size (higher(relatively higher priced properties with larger average loan amounts generallymay result in higher incurred losses). |
| | -– | The percentage of coverage on insured loans (higher percentages of insurance coverage generally correlate with higher incurred losses) and the presence of structural mitigants such as deductibles or stop losses. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | -– | Changes in housing values (declines in housing values generally make it more difficult for borrowers to sell a home to avoid default or for the property to be sold to mitigate any claim, and also may negatively affect a borrower’s willingness to continue to make mortgage payments when the home value is less than the mortgage balance; conversely, increases in housing values tend to reduce the level of defaults as well as make it more likely that foreclosures will result in the loan being satisfied). |
| | -– | The distribution of claims over the life cycle of a portfolio (historically, claims are relatively low during the first two years after a loan is originated and then increase over a period of several years before declining; however, several factors can impact and change this cycle, including the economic environment, the quality of the underwriting of the loan, characteristics of the mortgage loan, the credit profile of the borrower, housing prices and unemployment rates). |
| | -– | Our ability to mitigate potential losses through Rescissions, Claim Denials, cancellations and Claim Curtailments on claims submitted to us. These actions all reduce our incurred losses. However, if these Loss Mitigation Activities are successfully challenged at rates that are higher than expected or we agree to settle disputes related to our Loss Mitigation Activities, at levels above our expected losses, our incurred losses will increase. We may enter into specific agreements that govern activities such as claims decisions, claim payments, Loss Mitigation Activities and insurance coverage. As our Legacy Portfolioportfolio originated prior to and including 2008 has become a smaller percentage of our overall insured portfolio, there has been a decrease in the amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue. |
| | - | Settlements such ascontinue, particularly given the BofA Settlement Agreement, which establish certain limitslimitations on our Loss Mitigation Activity.Activities imposed in the 2014 Master Policy. See Note 11 of Notes to Consolidated Financial Statements for additional information abouton Loss Mitigation Activities and “Item 1A. Risk Factors—Our Loss Mitigation Activity is not expected to mitigate mortgage insurance losses to the BofA Settlement Agreement.same extent as in prior years; Loss Mitigation Activity could continue to negatively impact our customer relationships.” |
| | -• | The Freddie Mac Agreement, which establishes certain terms forOther Operating Expenses. Our other operating expenses are affected by the treatmentamount of our NIW, as well as the loans subject to that agreement, including claim payments, Loss Mitigation Activity and insurance coverage, and capped Radian Guaranty’s claim exposureamount of RIF. Our other operating expenses may also be affected by the impact of performance on such loans. See Note 11 of Notes to Consolidated Financial Statements for additional information.our incentive |
Other Operating Expenses.Our other operating expenses are affected by the amount of NIW, as well as the amount of RIF. Additionally, during 2014 and 2015, our operating expenses had been impacted significantly by compensation expense associated with changes in the estimated fair value of certain of our long-term equity-based incentive awards that were settled in cash. The fair value of these awards, and associated compensation expense, were dependent, in large part, on our stock price at any given point in time. Now that substantially all of the cash-settled awards have vested, the expense volatility associated with these awards is not expected in the future.
Third-Party Reinsurance. We use third-party reinsurance in our mortgage insurance business to manage capital and risk. When we enter into a reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. This arrangement has the impact of reducing our earned premiums but also reduces our net RIF, which provides capital relief to the insurance subsidiary ceding the RIF and reduces our incurred losses by any incurred losses ceded in accordance with the reinsurance agreement. In addition, we often receive ceding commissions from the reinsurer as part of the transaction, which reduces our operating expenses. See Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance arrangements.
Services
Our Services segment provides services and solutions to the real estate and mortgage finance industries, providing outsourced services, information-based analytics, valuations and specialized consulting and surveillance services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities as well as other consumer ABS. The Services segment’s services and solutions are provided primarily through Clayton and its subsidiaries. See Note 1 of Notes to Consolidated Financial Statements and “Item 1. Business—Services—Services Business Overview” for additional information regarding the Services segment’s business.
The Services segment’s principal customers include a wide range of financial institutions, the GSEs, securitization trusts, investors, regulators and other mortgage-related service providers, including mortgage originators, mortgage purchasers, MBS issuers, MBS investors and mortgage servicers. See “Item 1. Business—Services—Customers” for additional information regarding the Services segment’s customers.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The resultscompensation programs, as a result of Clayton’s operations have been included in our pay-for-performance and risk-based approach to compensation that is based on the level of achievement of both short-term and long-term goals.
| | | • | Third-Party Reinsurance. We use third-party reinsurance in our mortgage insurance business to manage capital and risk in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk. See “Overview—Other 2018 Developments—Reinsurance”and “—IIF; Persistency Rate; Mix of Business.” Currently Radian participates in quota share and excess-of-loss reinsurance programs. When we enter into a quota share reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements have the impact of reducing our earned premiums but also reduce our net RIF, which provides capital relief, including under the PMIERs financial requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement, and we often receive ceding commissions from the reinsurer as part of the transaction, which reduces our operating expenses and policy acquisition costs. Our Excess-of-Loss Program accesses both the capital and the reinsurance markets to distribute risk, and includes reinsurance through a variable interest entity funded by mortgage insurance-linked notes, as well as separate excess-of-loss reinsurance with a third-party reinsurer. Our Excess-of-Loss Program reduces our net RIF and our incurred losses are reduced by any incurred losses allocated in accordance with the structure of the transaction. While these arrangements have the impact of reducing our earned premiums, they also provide capital relief, including under the PMIERs financial requirements. See Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance arrangements. |
Services Our Services segment offers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services primarily are provided to mortgage lenders, financial statements ininstitutions, investors and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers. Our mortgage services help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and real estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive suite of title insurance products, title settlement services and both traditional and digital closing services. See “Item 1. Business—Services—Customers,” “Item 1. Business—Services—Services Business Overview,” and Note 1 of Notes to Consolidated Financial Statements for additional information regarding the Services segment. In contrast to our Mortgage Insurance business, the Services segment from the June 30, 2014 date of acquisition. The Services segment’s resultsis primarily reflect the operations and offerings of Clayton, along with other services and activities we offer that are complementary to our mortgage insurance business. In contrast to the Mortgage Insurance segment, the Services segment is a fee-for-service business without significant balance sheet risk. Key factors impacting results for our Services business include: Services Revenue.Our Services revenue is primarily derived from: (i) loan review, underwriting and due diligence services; (ii) surveillance services, including RMBS surveillance, loan servicer oversight, loan-level servicing compliance reviews and operational reviews of mortgage servicers and originators; (iii) real estate valuation and component services, providing outsourcing and technology solutions for the SFR and real estate markets, as well as outsourced solutions for appraisal, title and closing services; and (iv) REO management services. See “Item 1. Business—Services—Services Business Overview—Services Revenue Drivers”for additional information regarding current and expected future revenue drivers.
Sales volume in our Services business generally varies based on the overall activity in the mortgage finance market and the health of related industries. We believe the diversity of the services offered by our Services segment, which are intended to cover all phases of the mortgage value chain, will help produce fee income from the Services segment throughout various mortgage finance environments. For example, the demand for due diligence services may decrease in unfavorable economic conditions due to lower mortgage origination and securitization volumes, whereas the demand for REO management services may tend to increase in such an environment. In addition, while the size of the mortgage finance market may be adversely impacted by increased regulatory requirements, these increased requirements may increase the demand for certain of our services, such as services related to compliance with the CFPB mortgage servicing standards and the regulatory requirements for third-party review of loans in ABS.
Our real estate valuation and component services business provides services to the SFR market, including SFR securitizations, which is a market that experienced rapid growth in 2014 and into 2015. However, during 2015 and the first half of 2016 there was a decline in the pace of home purchases by institutional investors and a slowdown in SFR securitizations, which negatively impacted our revenue in both years. We have since then experienced a modest increase in SFR securitization and related activity, and we expect this level of activity to continue through 2017. In addition, we believe that if the non-agency RMBS market, which has been limited in recent years, were to return it would represent a potentially significant long-term growth opportunity for our loan review, underwriting, due diligence and surveillance services. However, the size and timing for the return of this market are uncertain and will be impacted by factors outside of our control, including market demand and regulation. | | | • | Services Revenue. Our Services segment is dependent upon overall activity in the mortgage, real estate and mortgage finance markets, as well as the overall health of the related industries. Due, in part, to the transactional nature of its business, revenues for our Services segment are subject to fluctuations from period to period, including seasonal fluctuations that reflect the activities in these markets. Sales volume is also affected by the number of competing companies and alternative products offered in the market. We believe the diversity of services we offer has the potential to produce fee income from the Services segment throughout various mortgage finance environments, although market conditions can significantly impact the mix and amount of fee income we generate in any particular period. In addition, see Note 2 of Notes to Consolidated Financial Statements for information on revenue recognition policies for our Services segment. |
The Services segment is dependent on a limited number of large customers that represent a significant portion of its revenues. Access to Radian Guaranty’s mortgage insurance customer base may provide additional opportunities to expand the segment’s existing customers. However, anAn unexpected loss of a major customer could significantly impact the level of Services revenue. Access to Radian Guaranty’s mortgage insurance customer base provides additional opportunities to expand the Services segment’s existing customers. Generally, our contracts do not contain volume commitments and may be terminated by clients at any time. Revenue for the Services segment also includes inter-segment revenues from services performed for our Mortgage Insurance segment. See Note 4 of Notes to Consolidated Financial Statements for additional information. In our
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Services segment, we generate revenue is generated under three basic types of contracts: | | -– | Fixed-Price Contracts. Under a fixed-price contract,contracts, we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price.price or day rate. To the extent our actual direct and allocated indirect costs decrease or increase from the estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss. We use fixed-price contracts in our real estate valuation and component services, our loan review, underwriting and due diligence services as well as our title and closing review services. These contracts are also used in our surveillance business for our servicer oversight services and RMBS surveillance services, as well as in our REO management business. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | -– | Time-and-Expense Contracts. Under a time-and-expense contract, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. To the extent our actual direct labor costs decrease or increase in relation to the fixed hourly billing rates provided in the contract, we may generate more or less profit, respectively. However, sincebecause these contracts are generally short-term in nature, the risk is limited to the periods covered by the contracts. These contracts are used infor our loan review, underwriting and due diligence and EuroRisk services offerings, as well as in the consulting services that we offer as part of our surveillance business.services. |
| | -– | Percentage-of-Sale Contracts. Under percentage-of-sale contracts, we are paid a contractual percentage of the sale proceeds upon the sale of each property. To the extent the sale of a property is delayed or not consummated, or the sales proceeds are significantly less than originally estimated, we may generate less profit than anticipated, or could incur a loss. These contracts are only usedSee “Item 1. Business—Services—Services Business Overview” for more information on our Services revenue. |
| | | • | Cost of Services. Our cost of services is primarily affected by our level of services revenue. Our cost of services primarily consists of employee compensation and related payroll benefits, including the cost of billable labor assigned to revenue-generating activities and, to a portionlesser extent, other costs of providing services such as travel and related expenses incurred in providing client services, costs paid to outside vendors, data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. The level of these costs may fluctuate if market rates of compensation change, or if there is decreased availability or a loss of qualified employees. |
| | | • | Gross Profit on Services. In addition to the key factors affecting Services revenue and cost of services described above, our gross profit on services may fluctuate from period to period due to a shifting mix of services we provide resulting from changes in the relative demand for those services in the marketplace. Shifts in the business mix of our REO managementServices business can impact our gross profit because each product and service generally produces a different level of gross margin. These individual gross margins in turn can be impacted in any given period by factors such as the implementation of new regulatory requirements, our operating capacity, competition or other environmental factors. |
| | | • | Premiums. We earn net premiums on title insurance, effective with our acquisition of EnTitle Direct in the first quarter of 2018. By adding the capabilities of its subsidiary, EnTitle Insurance, to the title and settlement services that we already were offering through our existing title agency, Radian Settlement Services, we have expanded the geographic reach of our title services and are positioned to provide title insurance and settlement services to our real estate brokerage services. In addition, throughcustomers across the use of proprietary technology, property leads are sent to select clients. Our Services segment recognizes revenue for these transactions based on a percentage of the sale, upon the client’s successful closing on the property.country. |
Cost of Services. Our cost of services is primarily affected by our level of services revenue. Our cost of services primarily consists of employee compensation and related payroll benefits, including the cost of billable labor assigned to revenue-generating activities and, to a lesser extent, other costs of providing services such as travel and related expenses incurred in providing client services, costs paid to outside vendors, data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. The level of these costs may fluctuate if market rates of compensation change, or if there is decreased availability or a loss of qualified employees.
Gross Profit on Services. In addition to the key factors affecting Services revenue and cost of services described above, our gross profit on services may fluctuate from period to period due to a shifting mix of services we provide due to changes in the relative demand for those services in the marketplace. Shifts in the business mix of our Services business can impact our gross profit because each product and service generally produces a different level of gross margin. These individual gross margins in turn can be impacted in any given period by factors such as the implementation of new regulatory requirements, our operating capacity, competition or other environmental factors.
Operating Expenses. Our operating expenses primarily consist of salaries and benefits not classified as cost of services because they are related to employees, such as sales and corporate employees, that are not directly involved in providing client services. Operating expenses also include other selling, general and administrative expenses, depreciation, and allocations of corporate general and administrative expenses.
Financial Guaranty and Discontinued Operations
Radian Asset Assurance Stock Purchase Agreement. Radian completed the sale of Radian Asset Assurance to Assured on April 1, 2015, pursuant to the Radian Asset Assurance Stock Purchase Agreement. Until the April 1, 2015 sale date, the operating results of Radian Asset Assurance were classified as discontinued operations for all periods presented in our consolidated statements of operations.
Radian Asset Assurance provided direct insurance and reinsurance on credit-based structured finance and public finance risks. The assets and liabilities associated with the discontinued operations were historically a source of significant volatility to our results of operations, due to various factors including fluctuations in fair value and credit risk. For additional information related to discontinued operations, see Note 18 of Notes to Consolidated Financial Statements. | | | • | Operating Expenses. Our operating expenses primarily consist of salaries and benefits not classified as cost of services because they are related to employees, such as sales and corporate employees, who are not directly involved in providing client services. Operating expenses also include other selling, general and administrative expenses, depreciation, and allocations of corporate general and administrative expenses. |
Other Factors Affecting Consolidated Results Investment Income. Investment income is determined primarily by the investment balances held and the average yield onThe following items also may impact our overall investment portfolio.
Net Gains (Losses) on Investments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on such factors as market opportunities, our tax and capital profile and overall market cycles that impact the timing of the sales of securities. Unrealized investment gains and losses arise primarily from changesconsolidated results in the market valueordinary course. The items listed are not representative of all potential items impacting our consolidated results. See “Item 1A. Risk Factors” for additional information on the risks affecting our business.
| | | • | Investment Income. Investment income is determined primarily by the investment balances held and the average yield on our overall investment portfolio. |
| | | • | Net Gains (Losses) on Investments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on such factors as market opportunities, our tax and capital profile and overall market cycles that impact the timing of the sales of securities. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading securities or, effective with our implementation of the update to the standard for the accounting of financial |
Part II Item 7. Management’s Discussion and theseAnalysis of Financial Condition and Results of Operations
instruments effective January 1, 2018, equity securities. These unrealized gains and losses are generally the result of changes in interest rates or credit spreads and may not necessarily result in economic gains or losses. | | | • | Impairment of Goodwill or Other Acquired Intangible Assets. The periodic review of goodwill and other acquired intangible assets for potential impairment may impact consolidated results. Our goodwill and other acquired intangible assets primarily relate to the acquisition of Clayton, and their valuation is based on management’s assumptions, which are inherently subject to risks and uncertainties. In 2017, we recorded total impairment charges of $200.2 million related to the goodwill and other acquired intangible assets of the Services segment. See Note 7 of Notes to Consolidated Financial Statements for additional information. |
| | | • | Tax Cuts and Jobs Act. The enactment of the TCJA resulted in a material reduction of our net deferred tax assets at December 31, 2017, because deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax assets or liabilities are expected to be realized or settled. See Note 10 of Notes to Consolidated Financial Statements for additional information on the TCJA. |
The TCJA, excluding the impact of Discrete Items, has had a significant favorable impact on the Company’s net income, diluted earnings per share and cash flows for 2018, as compared to the tax laws in effect in 2017, primarily due to the reduction in the federal corporate tax rate from 35% to 21%, which was effective on January 1, 2018. See “Results of Operations—Consolidated—Income Tax Provision” and Note 10 of Notes to Consolidated Financial Statements for additional information on the TCJA. Future policy changes or interpretations could have a positive or negative impact on our financial performance depending on how the changes would influence the economy, including business and consumer sentiment and the key factors influencing our performance. Key Metrics—Consolidated The following key metrics are used by management in evaluating our performance and measuring the overall growth in value generated for our stockholders. See “Results of Operations—Consolidated,” for additional information on our operating results. | | | | | | | | | | | | | | | Year Ended December 31, | | | 2018 | | 2017 | | 2016 | | Diluted net income per share | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| Adjusted diluted net operating income per share (1) | 2.69 |
| | 1.82 |
| | 1.56 |
| | Book value per share at December 31 | 16.34 |
| | 13.90 |
| | 13.39 |
| | Return on equity | 18.7 | % | | 4.1 | % | | 11.5 | % | Adjusted net operating return on equity (1) | 18.2 | % | | 13.7 | % | | 13.1 | % |
______________________ | | | (1) | See “Results of Operations—Consolidated—Use of Non-GAAP Financial Measures”. |
Diluted Net Income Per Share. The changes in diluted net income per share across all periods presented are primarily due to the changes in net income. The change in net income from 2016 to 2017 was partially offset by the decrease in average diluted shares from 229.3 million shares in 2016 to 220.4 million shares for 2017. See “Results of Operations—Consolidated—Net Income” for more information on the changes in net income. The decrease in average diluted shares for 2017 compared to 2016 is primarily due to the full-year impact of the series of capital and liquidity actions completed in 2016, which included: (i) the purchases of portions of our Convertible Senior Notes due 2017 and 2019, and (ii) the purchase of 9.4 million shares of Radian Group common stock. In addition, in January 2017, we settled our obligations with respect to the remaining $68.0 million aggregate principal amount of our Convertible Senior Notes due 2019 which, as of the settlement date, resulted in a decrease of an additional 6.4 million diluted shares for purposes of determining diluted net income per share. Adjusted diluted net operating income per share. The increase in adjusted diluted net operating income per share for 2018, compared to 2017, is primarily due to the increase in our Mortgage Insurance segment’s adjusted pretax operating income, which increased to $772.6 million in 2018, from $651.0 million in 2017. The increase in adjusted diluted net operating income
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
per share for 2018 as compared to 2017 was also impacted by the reduction in the company’s federal statutory tax rate from 35% to 21%, which was effective on January 1, 2018. AmortizationThe increase in adjusted diluted net income per share for 2017, compared to 2016, is primarily due to the increase in our Mortgage Insurance segment’s adjusted pretax operating income, which increased to $651.0 million in 2017, from $561.9 million in 2016. The increase in adjusted diluted net operating income per share for 2017 as compared to 2016 was also impacted by the decrease in average diluted shares, as discussed above.
See “Results of Operations—Mortgage Insurance—Adjusted Pretax Operating Income” for more information on our Mortgage Insurance segment’s results. Book Value Per Share. The increase in book value per share, from $13.90 at December 31, 2017 to $16.34 at December 31, 2018, is primarily due to net income, partially offset by a decrease of $0.41 per share due to unrealized losses in our available for sale securities, recorded in accumulated other comprehensive income. The increase in book value per share, from $13.39 at December 31, 2016 to $13.90 at December 31, 2017, is primarily due to our net income and Impairmentan increase in unrealized gains in other comprehensive income, partially offset by the equity impact of Intangible Assets. Amortizationthe series of capital and liquidity actions completed in 2017, as discussed above. The amount of goodwill and other acquired intangible assets representsincluded in book value per share decreased significantly, from $1.29 per share at December 31, 2016 to $0.30 per share at December 31, 2017 and $0.28 per share at December 30, 2018, primarily due to the periodic expense required to amortize the costimpairment of goodwill and other acquired intangible assets, over their estimated useful lives. The periodic review of intangible assets for potential impairment may also impact consolidated results. Our intangible assets primarily relatein each case related to the acquisitionServices segment, as shown in the chart below. Return on equity. The changes in return on equity across all periods presented are primarily due to the changes in net income and, to a lesser extent, increases in stockholders’ equity. See “Results of Clayton,Operations—Consolidated—Net Income” for more information on the changes in net income. Adjusted net operating return on equity. The increases in adjusted net operating return on equity across all periods presented are primarily due to the increases in our adjusted pretax operating income, partially offset by increases in stockholders’ equity. The increases in our adjusted pretax operating income primarily reflect the increases in our Mortgage Insurance segment’s adjusted pretax operating income. See “Results of Operations—Mortgage Insurance—Adjusted Pretax Operating Income” for more information on our Mortgage Insurance segment’s results. The increase in adjusted net operating return on equity for 2018 as compared to 2017 was also impacted by the reduction in the company’s federal statutory tax rate from 35% to 21%, which was effective on January 1, 2018.
Part II Item 7. Management’s Discussion and their valuation is based on management’s assumptions, which are inherently subject to risksAnalysis of Financial Condition and uncertainties. See Note 7Results of Notes to Consolidated Financial Statements for additional information.Operations
Results of Operations—Consolidated Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. Our consolidated operating results for 20162018 primarily reflect the financial results and performance of our two business segments—Mortgage Insurance and Services. See Note 4 of Notes to Consolidated Financial Statements for information regarding the basis of our segment reporting, including the related allocations. See “Results of Operations—Mortgage Insurance,” and “Results of Operations—Services” for the operating results of these business segments. In addition to the results of our operating segments, pretax income (loss) is also affected by “Otherother factors. See “Key Factors Affecting Our Results—Other Factors Affecting Consolidated Results” described above.Results.” See “—Use of Non-GAAP Financial MeasureMeasures” below for more information regarding items that are excluded from the operating results of our operating segments. We allocate to our Mortgage Insurance segment: (i) corporate expenses based on an allocated percentage of time spent on the Mortgage Insurance segment; (ii) all interest expense except for interest expense related to the Senior Notes due 2019 that were issued to fund our purchase of Clayton; and (iii) all corporate cash and investments.
We allocate to our Services segment: (i) corporate expenses based on an allocated percentage of time spent on the Services segment and (ii) all interest expense related to the Senior Notes due 2019, the proceeds of which were used to fund our acquisition of Clayton. No corporate cash or investments are allocated to the Services segment. We have included Clayton’s results of operations from the June 30, 2014 date of acquisition.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table highlights selected information related to our consolidated results of operations for the years ended December 31, 2016, 20152018, 2017 and 2014:2016: | | | | | | $ Change | | | $ Change | | | Year Ended December 31, (1) | | Favorable (Unfavorable) | Year Ended December 31, | | Favorable (Unfavorable) | | ($ in millions, except per-share amounts) | 2016 | | 2015 | | 2014 (2) | | 2016 vs. 2015 | | 2015 vs. 2014 | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 | | Pretax income from continuing operations | $ | 483.7 |
| | $ | 437.8 |
| | $ | 407.2 |
| | $ | 45.9 |
| | $ | 30.6 |
| | | Net income from continuing operations | 308.3 |
| | 281.5 |
| | 1,259.6 |
| | 26.8 |
| | (978.1 | ) | | | Income (loss) from discontinued operations, net of tax | — |
| | 5.4 |
| | (300.1 | ) | | (5.4 | ) | | 305.5 |
| | | Pretax income | | $ | 684.2 |
| | $ | 346.7 |
| | $ | 483.7 |
| | $ | 337.5 |
| | $ | (137.0 | ) | | Net income | 308.3 |
| | 286.9 |
| | 959.5 |
| | 21.4 |
| | (672.6 | ) | 606.0 |
| | 121.1 |
| | 308.3 |
| | 484.9 |
| | (187.2 | ) | | Diluted net income per share | $ | 1.37 |
| | $ | 1.22 |
| | $ | 4.16 |
| | $ | 0.15 |
| | $ | (2.94 | ) | | | Book value per share at December 31 | $ | 13.39 |
| | $ | 12.07 |
| | $ | 10.98 |
| | $ | 1.32 |
| | $ | 1.09 |
| | | | | | | | | | | | | | | | | | | | | | | Net premiums earned—insurance | $ | 921.8 |
| | $ | 915.9 |
| | $ | 844.5 |
| | $ | 5.9 |
| | $ | 71.4 |
| $ | 1,014.0 |
| | $ | 932.8 |
| | $ | 921.8 |
| | $ | 81.2 |
| | $ | 11.0 |
| | Services revenue | 168.9 |
| | 157.2 |
| | 78.0 |
| | 11.7 |
| | 79.2 |
| 145.0 |
| | 155.1 |
| | 168.9 |
| | (10.1 | ) | | (13.8 | ) | | Net investment income | 113.5 |
| | 81.5 |
| | 65.7 |
| | 32.0 |
| | 15.8 |
| 152.5 |
| | 127.2 |
| | 113.5 |
| | 25.3 |
| | 13.7 |
| | Net gains (losses) on investments and other financial instruments | 30.8 |
| | 35.7 |
| | 80.0 |
| | (4.9 | ) | | (44.3 | ) | (42.5 | ) | | 3.6 |
| | 30.8 |
| | (46.1 | ) | | (27.2 | ) | | Provision for losses | 202.8 |
| | 198.6 |
| | 246.1 |
| | (4.2 | ) | | 47.5 |
| 104.6 |
| | 135.2 |
| | 202.8 |
| | 30.6 |
| | 67.6 |
| | Policy acquisition costs | 23.5 |
| | 22.4 |
| | 24.4 |
| | (1.1 | ) | | 2.0 |
| | | Cost of services | 114.2 |
| | 93.7 |
| | 44.7 |
| | (20.5 | ) | | (49.0 | ) | 98.1 |
| | 104.6 |
| | 114.2 |
| | 6.5 |
| | 9.6 |
| | Other operating expenses | 244.9 |
| | 242.4 |
| | 251.2 |
| | (2.5 | ) | | 8.8 |
| 280.8 |
| | 267.3 |
| | 244.9 |
| | (13.5 | ) | | (22.4 | ) | | Restructuring and other exit costs | | 6.1 |
| | 17.3 |
| | — |
| | 11.2 |
| | (17.3 | ) | | Interest expense | 81.1 |
| | 91.1 |
| | 90.5 |
| | 10.0 |
| | (0.6 | ) | 61.5 |
| | 62.8 |
| | 81.1 |
| | 1.3 |
| | 18.3 |
| | Loss on induced conversion and debt extinguishment | 75.1 |
| | 94.2 |
| | — |
| | 19.1 |
| | (94.2 | ) | — |
| | 51.5 |
| | 75.1 |
| | 51.5 |
| | 23.6 |
| | Amortization and impairment of intangible assets | 13.2 |
| | 13.0 |
| | 8.6 |
| | (0.2 | ) | | (4.4 | ) | | | Income tax provision (benefit) | 175.4 |
| | 156.3 |
| | (852.4 | ) | | (19.1 | ) | | (1,008.7 | ) | | | Impairment of goodwill | | — |
| | 184.4 |
| | — |
| | 184.4 |
| | (184.4 | ) | | Amortization and impairment of other acquired intangible assets | | 12.4 |
| | 27.7 |
| | 13.2 |
| | 15.3 |
| | (14.5 | ) | | Income tax provision | | 78.2 |
| | 225.6 |
| | 175.4 |
| | 147.4 |
| | (50.2 | ) | | | | | | | | | | | | | | | | | | | | | Adjusted pretax operating income (3) | $ | 541.8 |
| | $ | 510.9 |
| | $ | 342.4 |
| | $ | 30.9 |
| | $ | 168.5 |
| | Adjusted pretax operating income (1) | | $ | 745.5 |
| | $ | 617.2 |
| | $ | 541.8 |
| | $ | 128.3 |
| | $ | 75.4 |
|
______________________ | | | (1) | For all periods presented, reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue and cost of services have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. See Notes 2 and 4 of Notes to Consolidated Financial Statements.
|
| | (2) | Includes the results of Clayton’s operations from the June 30, 2014 acquisition date. |
| | (3) | See “—Use of Non-GAAP Financial MeasureMeasures” below. |
Net Income. As discussed in more detail below, our net income increased for 2018, compared to 2017, primarily reflect: (i) the impairment of goodwill and other acquired intangible assets related to our Services segment recognized in the three months ended June 30, 2017; (ii) a lower effective income tax rate in 2018 (see “—Income Tax Provision” below); (iii) an increase in net premiums earned; (iv) a decrease in loss on induced conversion and debt extinguishment; (v) a decrease in provision for losses and (vi) an increase in net investment income. Partially offsetting these items is an increase in net losses on investments and other financial instruments. See “Results of Operations—Mortgage Insurance” and “Results of Operations—Services” for more information on our segment results.
For 2018, revenue increased compared to 2017, primarily driven by increases of 8% in mortgage insurance net premiums earned. Other operating expenses increased by 5% in 2018 compared to 2017. See “—Other Operating Expenses,” below.
As discussed in more detail below, our results for 2017 compared to 2016 primarily reflect: (i) the impairment of goodwill and other acquired intangible assets related to the Services segment; (ii) additional tax expense related to the remeasurement of our net deferred tax assets as a result of the TCJA; (iii) a decrease in net gains on investments and other financial instruments;
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Income from Continuing Operations. As discussed in more detail below, our results for 2016 compared to 2015 reflect: (i)(iv) an increase in net investment income;other operating expenses; and (v) restructuring and other exit costs associated with our plan to restructure the Services business. These items were partially offset by, among other things: (i) a decrease in provision for losses; (ii) a decrease in loss on induced conversion and debt extinguishment; (iii) a decrease in interest expense; and (iv) modestly higher net premiums earned—insurance. These items were partially offset by: (i) lower gross profit on Services; (ii) a decrease in net gains (losses) on investments and other financial instruments; and (iii) an increase in the provision for losses.
Our results for 2015 compared to 2014 reflect: (i) an income tax provision in 2015 in contrast to a significant income tax benefit in 2014 that had resulted primarily from the reversal of substantially all of our deferred tax valuation allowance in 2014; (ii) a loss on induced conversion and debt extinguishment; and (iii) lower net gains on investments and other financial instruments. These items were partially offset by: (i) an increase in net premiums earned on insurance and (ii) a reduction in the provision for losses. Our results for 2015 also reflect a full year of operations for Clayton, which we acquired on June 30, 2014, compared to a partial year in 2014.interest expense.
Income (Loss) from Discontinued Operations, Net of Tax. There were no amounts recorded in 2016 related to discontinued operations. In 2015, we recorded total net income from discontinued operations of $5.4 million, consisting primarily of the recognition of investment gains previously deferred and recorded in AOCI and recognized as a result of the completion of the sale of Radian Asset Assurance to Assured on April 1, 2015, as well as adjustments to estimated transaction costs and taxes.
Based upon the Radian Asset Assurance Stock Purchase Agreement, Radian Asset Assurance was accounted for as held for sale and discontinued operations at December 31, 2014. As a result, in 2014, we recognized a $467.5 million pre-tax impairment charge reported as loss from discontinued operations. We have also reclassified the related operating results as discontinued operations for all periods presented in our consolidated statements of operations. No general corporate overhead or interest expense was allocated to discontinued operations in 2015 or 2014.
The loss from discontinued operations consists of three components: (i) loss on classification as held for sale for the year ended December 31, 2014; (ii) income or loss from operations of businesses held for sale; and (iii) income tax provision. The divestiture of our financial guaranty business was part of our strategy to focus our business on the real estate and mortgage finance markets and also accelerated Radian Guaranty’s ability to comply with the PMIERs Financial Requirements.
For additional information related to discontinued operations, see Note 18 of Notes to Consolidated Financial Statements.
Diluted Net Income Per Share. The increase in diluted net income per share for 2016, compared to 2015, is primarily due to the increase in net income from continuing operations, as discussed above, combined with the decrease in average diluted shares. The average diluted shares decreased from 246.3 million shares for 2015 to 229.3 million shares for 2016. This decrease in average diluted shares is primarily due to the impact of the June 2015 repurchase of $389.1 million of our Convertible Senior Notes due 2017, combined with the impact of the series of 2016 capital management transactions described above, included as of their effective dates. See “Overview—2016 and Other Recent Capital Management Developments” above.
The net decrease in diluted shares (used for purposes of determining diluted net income per share) resulting from the transactions described above, in each case as of the date of the completion of the respective transaction, was approximately 23.3 million. This net decrease reflects: (i) the impact of the completed share repurchase program and (ii) that the number of dilutive shares related to the purchased Convertible Senior Notes due 2017 and 2019 (which shares had been included in the calculations of dilutive shares, in accordance with GAAP) exceeded the net increase in shares issued as a result of these transactions. Although these transactions resulted in a net decrease in diluted shares outstanding, the actual shares outstanding increased at December 31, 2016 from December 31, 2015.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Book Value Per Share. The increase in book value per share from $12.07 at December 31, 2015 to $13.39 at December 31, 2016 is primarily due to net income and the equity impact of the series of 2016 capital management transactions described above, partially offset by a net increase in the number of shares outstanding, as shown below.
______________________
| | (1) | All book value per share items above are calculated based on 206.9 million shares outstanding as of December 31, 2015, except for: |
| | (a) | the net increase in shares outstanding, which represents the difference between: (i) total equity as of December 31, 2016 divided by the shares outstanding as of December 31, 2016 and (ii) total equity as of December 31, 2016 divided by the shares outstanding as of December 31, 2015; and |
| | (b) | the December 31, 2016 book value per share, which was calculated based on 214.5 million shares outstanding as of December 31, 2016. |
| | (2) | Includes the impact, net of related tax expense, of loss on induced conversion and debt extinguishment related to the series of capital management transactions completed in 2016, as further described in “—Overview—2016 and Other Recent Capital Management Developments.” |
| | (3) | Reflects the combined net impact on equity and shares, respectively, from the series of capital management transactions completed in 2016, as further described in “—Overview—2016 and Other Recent Capital Management Developments.” The impact on equity shown above includes the impact of: (i) the extinguishment of Convertible Senior Notes due 2017 and 2019; (ii) the termination of the portion of the capped call transactions related to the purchased Convertible Senior Notes due 2017; and (iii) the shares repurchased under the completed share repurchase program, and excludes the loss on induced conversion and debt extinguishment, which is included in net income.
|
Services Revenue and Cost of Services.Services revenue and cost of services all relate to our Services segment. See “Results of Operations—Services” for more information.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Gains (Losses) on Investments and Other Financial Instruments. The increase in net losses on investments and other financial instruments for 2018, as compared to 2017, is primarily due to the increase in unrealized losses in our trading portfolio related to changes in fair value resulting from increased interest rates. The decrease in net gains on investments and other financial instruments in 2017 as compared to 2016 is primarily due to: (i) the decrease in net realized gains attributable to sales and redemptions of fixed-maturities available for sale and trading securities and (ii) the decrease in unrealized gains on investments and other financial instruments in 2017, as compared to 2016, primarily related to the change in fair value of trading securities and other investments. The components of the net gains (losses) on investments and other financial instruments for the periods indicated are as follows: | | | | Year Ended December 31, | Year Ended December 31, | | (In millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Net unrealized gains (losses) related to change in fair value of trading securities and other investments | $ | 27.2 |
| | $ | (27.0 | ) | | $ | 92.2 |
| | Net unrealized gains (losses) related to change in fair value of trading securities and other investments (1) | | $ | (27.3 | ) | | $ | 13.2 |
| | $ | 27.2 |
| | Net realized gains (losses) on investments | 4.3 |
| | 62.1 |
| | (8.3 | ) | (12.1 | ) | | (8.6 | ) | | 4.3 |
| | Other-than-temporary impairment losses | (0.5 | ) | | — |
| | — |
| (1.7 | ) | | (1.4 | ) | | (0.5 | ) | | Net gains (losses) on other financial instruments | (0.2 | ) | | 0.6 |
| | (3.9 | ) | (1.4 | ) | | 0.4 |
| | (0.2 | ) | | Net gains (losses) on investments and other financial instruments | $ | 30.8 |
| | $ | 35.7 |
| | $ | 80.0 |
| $ | (42.5 | ) | | $ | 3.6 |
| | $ | 30.8 |
| | | | | | | | | | | | |
______________________ | | | (1) | These amounts include unrealized gains (losses) on investment securities other than securities available for sale. For 2017 and 2016, the unrealized gains (losses) on investments exclude the net change in unrealized gains and losses on equity securities. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. |
Other Operating Expenses. Other operating expenses for 2016,2018 increased as compared to 2015, increased2017, primarily as a result of: (i)higher compensation expense in 2018, including variable and incentive-based compensation and (ii) an increase due to the acquisition of EnTitle Direct on March 27, 2018, and the resulting inclusion of its operating expenses. These effects were partially offset by an increase in ceding commissions in 2018, primarily due to the 2018 Single Premium QSR Agreement and the increased cession percentage on the 2016 Single Premium QSR Agreement. In addition to these items, 2018, as compared to 2017, also included: (i) lower expenses associated with retirement and consulting agreements entered into in February 2017 with our former Chief Executive Officer and (ii) lower accrued legal expenses related to defending and resolving certain outstanding legal matters. Other operating expenses resulting from the acquisitionsfor 2017 increased as compared to 2016, primarily due to: (i) $6.6 million of Red Bellexpenses associated with retirement and ValuAmerica, which Clayton acquiredconsulting agreements entered into in March 2015 and October 2015, respectively, and the increaseFebruary 2017 with our former Chief Executive Officer; (ii) increases in technology expenses associated with a significant investment in upgrading our systems. Compensation expense for 2016 also included severance costs of $5.3 million, which primarily relatesystems; (iii) expenses accrued to expense reduction initiatives.defend and resolve certain outstanding legal matters; and (iv) a decrease in ceding commissions. The increase in other operating expenses for 2016 was substantially offset by the increase in ceding commissions from the Single Premium QSR Transaction. Our other operating expenses also included compensation expense associated with incentive compensation programs. During 2015 and 2014 our expense was impacted by changes in the estimated fair value of certain cash-settled long-term incentive awards that were valued, in large part, based on the stock price of Radian Group’s common stock. During 2015, our expense related to these awards was $22.6 million compared to $43.9 million for 2014. Substantially all of these awards vested in June 2014 and June 2015. Therefore, although these awards had produced significant expense volatility in the past due to their valuation relative to Radian Group’s common stock price, the expense volatility associated with these awards will not continue in the future.
The decrease in other operating expenses in 2015 as compared to 2014 was also partially due to the settlement expenses that we incurred in 2014 on remedies related to contract underwriting services provided on our Legacy Portfolio for which we incurred no similar expenses in 2015. The decrease in other operating expenses in 2015 as compared to 20142017 was partially offset by a full yearlower compensation expense in 2017, including variable incentive-based compensation.
Restructuring and other exit costs. For 2018, we recognized $3.6 million of other operating expensesexit costs associated with impairment of internal-use software. Restructuring and other exit costs for Clayton2018 also include the remaining charges associated with our plan to restructure the Services business. See Note 1 of Notes to Consolidated Financial Statements for more information. For 2017, restructuring and other exit costs represent charges associated with our plan to restructure the Services business. Charges are primarily due to severance and related benefit costs and impairment of long-lived assets and loss from the sale of a business line. See Note 7 of Notes to Consolidated Financial Statements for more information on our review of the strategic
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
direction of the Services segment, which resulted in 2015 compared to six months in 2014.these charges, as well as charges for impairment of goodwill and other intangible assets. Interest Expense. Interest expense for 20162018 and 2017 decreased, as compared to 2015.2016. This decrease was primarily due to reductions in interest expense from:from our: (i) August 2016 redemption of the March 2016 and June 2015 purchasesremaining $195.5 million outstanding principal amount of aggregate principal amounts of $30.1 million and $389.1 million, respectively, of Convertibleour Senior Notes due 2017; (ii) January 2017 settlement of the remaining $68.0 million outstanding principal amount of our Convertible Senior Notes due 2019; and (iii) purchases during 2016 purchases of $322.0 million aggregate principal amount of Convertible Senior Notes due 2019; and (iii) the August 2016 redemption of the remaining $195.5 million aggregate principal amount of our Senior Notes due 2017. These reductions were partially offset by increased interest expense from the March 2016 issuance of $350 million aggregate principal amount of 7.000% Senior Notes due 2021 and the June 2015 issuance of $350 million aggregate principal amount of 5.250% Senior Notes due 2020.2019. The slight increase in interest expense in 2015 as compared to 2014 was primarily due to debt issuances in 2014 and 2015, offset by a decrease in interest expense primarily due to the purchases in 2015 of $389.1 million aggregate principal amount of our Convertible Senior Notes due 2017. See Note 12 of Notes to Consolidated Financial Statements for additional information.
Loss on induced conversion and debt extinguishment. During 2018, we had no induced conversion or debt extinguishment activities. During 2017, pursuant to cash tender offers, we purchased aggregate principal amounts of $141.4 million, $115.9 million and $152.3 million of our Senior Notes due 2019, 2020 and 2021, respectively, resulting in a loss on induced conversion and debt extinguishment of $45.8 million. During 2017, we also purchased an aggregate principal amount of $21.6 million of our outstanding Convertible Senior Notes due 2017 and settled our obligations on the remaining Convertible Senior Notes due 2019, resulting in losses on debt extinguishment of $1.2 million and $4.5 million, respectively. During 2016, our purchases of Convertible Senior Notes due 2017 and 2019 and redemption of Senior Notes due 2017 resulted in a loss on induced conversion and debt extinguishment of $75.1 million consisting of: (i) a market premium of $41.8 million, representing the excess of the fair value of the total consideration delivered to the sellers of the Convertible Senior Notes due 2017 and 2019 over the fair value of the common stock issuable pursuant to the original conversion terms of the purchased notes; (ii) a loss on debt extinguishment of $17.2 million, representing the difference between the fair value and the carrying value, net of unamortized issuance costs, of the liability component of the purchased Convertible Senior Notes due 2017 and 2019; (iii) a loss on debt extinguishment of $15.0 million on the redemption of the Senior Notes due 2017; and (iv) expenses totaling $1.1 million for transaction costs. The loss on induced conversion and debt extinguishment of $94.2 million for the year ended December 31, 2015 was primarily related to the purchases in the second quarter of 2015 of Convertible Senior Notes due 2017. See Note 12 of Notes to Consolidated Financial Statements for information on our extinguishment of debt.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Amortization and Impairment of Other Acquired Intangible Assets. Assets and Impairment of Goodwill. In 2018, there was no impairment of goodwill or other acquired intangible assets. The amortization and impairment of intangible assets primarily reflects the amortization of intangible assets acquired as part of the Clayton acquisition. In 2014,During the second quarter of 2017, we also recorded a $2.1goodwill impairment charge of $184.4 million, as well as an impairment charge for other acquired intangible assets of a portion of our goodwill$15.8 million, in each case related to a small subsidiary within our Services segment, which had beensegment. These charges were primarily due to changes in expectations regarding the future growth of certain Services business lines, resulting from changes in our business strategy, combined with market trends observed during the second quarter of 2017 that we expected would persist. As a result, as of December 31, 2017, the remaining balances of goodwill and other acquired intangible assets reported in 2013.our consolidated balance sheet were $10.9 million and $53.3 million, respectively. See Note 7 of Notes to Consolidated Financial Statements for additional information. Income Tax Provision (Benefit). Provision. The TCJA significantly changed the U.S. tax system and, among other things, reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. Our effective tax rate from continuing operations was 11.4% for 2018, compared to 65.1% for 2017 and 36.3% for 2016, compared2016. The difference in our effective tax rates in comparison to 35.7%the federal statutory rates were primarily the result of Discrete Items. Our 2018 effective tax rate was lower than the federal statutory tax rate of 21% primarily as a result of the tax benefit recorded related to the settlement of our IRS Matter. The increase in our effective tax rate for 20152017 above the 35% federal statutory tax rate was primarily due to the impact of the TCJA, which resulted in a $102.6 million reduction of our net deferred tax assets, recorded as additional income tax provision. See “Overview—Operating Environment—Tax Cuts and a benefitJobs Act” and Note 10 of 209.4%Notes to Consolidated Financial Statements for 2014. additional information on the TCJA. Our 2016 effective tax rate was slightly higher than the federal statutory rate of 35%, primarily as a result of the non-deductible portion of the purchase premium relating to our Convertible Senior Notes due 2017 and 2019. The increase was partially offset by the income tax benefit resulting from our return-to-provision adjustment. For 2015, the additional expense related to the accounting for uncertainty of income taxes and the impact of state and local income taxes was substantially offset by the tax benefit from the deductible portion of the premium associated with the purchases of Convertible Senior Notes due 2017. The change from our statutory tax rate of 35% for 2014 was primarily due to the reversal of substantially all of our valuation allowance. Use of Non-GAAP Financial Measure. Measures. In addition to the traditional GAAP financial measures, we have presented “adjusted pretax operating income,” a“adjusted diluted net operating income per share” and “adjusted net operating return on equity,” which are non-GAAP financial measuremeasures for the consolidated company and are among our key performance indicators to evaluateused in evaluating our fundamental financial performance. ThisThese non-GAAP financial measure alignsmeasures align with the way our business performance is evaluated by both management and by our board of directors. This measure hasThese measures have been established in order to increase transparency for the purposes of evaluating our core operating trends and enabling more meaningful comparisons with our peers. Although on a consolidated basis “adjusted pretax operating income” is aincome,” “adjusted diluted net operating income per share” and “adjusted net operating return on equity” are non-GAAP financial measure,measures, for the reasons discussed above we
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
believe this measure aidsthese measures aid in understanding the underlying performance of our operations. Our senior management, including our Chief Executive Officer (Radian’s chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of ourthe Company’s business segments and to allocate resources to the segments. Adjusted pretax operating income is defined as GAAP consolidated pretax income from continuing operations, excluding the effects ofof: (i) net gains (losses) on investments and other financial instruments,instruments; (ii) loss on induced conversion and debt extinguishment,extinguishment; (iii) acquisition-related expenses,expenses; (iv) amortization andor impairment of goodwill and other acquired intangible assetsassets; and (v) net impairment losses recognized in earnings.earnings and losses from the sale of lines of business. Adjusted diluted net operating income per share is calculated by dividing (i) adjusted pretax operating income attributable to common stockholders, net of taxes computed using the company’s statutory tax rate, by (ii) the sum of the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Interest expense on convertible debt, share dilution from convertible debt and the impact of share-based compensation arrangements have been reflected in the per share calculations consistent with the accounting standard regarding earnings per share, whenever the impact is dilutive. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, net of taxes computed using the company’s statutory tax rate, by average stockholders’ equity, based on the average of the beginning and ending balances for each period presented. Although adjusted pretax operating income (loss) excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (i) not viewed as part of the operating performance of our primary activities or (ii) not expected to result in an economic impact equal to the amount reflected in consolidated pretax income (loss) from continuing operations.income. These adjustments, along with the reasons for their treatment, are described below. | | | (1) | Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses. |
Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses.losses and changes in fair value of other financial instruments. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss). However, we include the change in expected economic loss or recovery associated with our consolidated VIEs, if any, in the calculation of adjusted pretax operating income (loss). | | | (2) | Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss). |
| | | (3) | Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss). |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | (4) | Amortization andor impairment of goodwill and other acquired intangible assets. Amortization of acquired intangible assets represents the periodic expense required to amortize the cost of acquired intangible assets over their estimated useful lives. IntangibleAcquired intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss). |
| | | (5) | Net impairment losses recognized in earnings and losses from the sale of lines of business. The recognition of net impairment losses on investments and the impairment of other long-lived assets does not result in a cash payment and can vary significantly in both sizeamount and timing,frequency, depending on market credit cycles.cycles and other factors. Losses from the sale of lines of business are highly discretionary as a result of strategic restructuring decisions, and generally do not occur in the normal course of our business. We do not view these impairment losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).t |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
hem from our calculation of adjusted pretax operating income (loss). Total adjusted pretax operating income, isadjusted diluted net operating income per share, and adjusted net operating return on equity are not a measuremeasures of total profitability, and therefore should not be considered in isolation or viewed as a substitutesubstitutes for GAAP pretax income.income, diluted net income per share, or return on equity. Our definitiondefinitions of adjusted pretax operating income, adjusted diluted net operating income per share, and adjusted net operating return on equity may not be comparable to similarly-named measures reported by other companies. The following table provides a reconciliationtables provide reconciliations of the most comparable GAAP measure,measures of consolidated pretax income, from continuing operations,diluted net income per share and return on equity, to our non-GAAP financial measuremeasures for the consolidated company of adjusted pretax operating income:income, adjusted diluted net income per share and adjusted net operating return on equity, respectively: | | | | | | | | | | | | | | Reconciliation of Consolidated Non-GAAP Financial Measure | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Consolidated pretax income from continuing operations | $ | 483,686 |
| | $ | 437,829 |
| | $ | 407,156 |
| | Less income (expense) items: | | | | | | Net gains (losses) on investments and other financial instruments (1) | 30,751 |
| | 35,693 |
| | 80,102 |
| | Loss on induced conversion and debt extinguishment | (75,075 | ) | | (94,207 | ) | | — |
| Acquisition-related expenses (2) | (519 | ) | | (1,565 | ) | | (6,680 | ) | | Amortization and impairment of intangible assets | (13,221 | ) | | (12,986 | ) | | (8,648 | ) | Total adjusted pretax operating income (3) | $ | 541,750 |
|
| $ | 510,894 |
| | $ | 342,382 |
| | | | | | | |
| | | | | | | | | | | | | | Reconciliation of Consolidated Pretax Income to Adjusted Pretax Operating Income | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Consolidated pretax income | $ | 684,186 |
| | $ | 346,737 |
| | $ | 483,686 |
| | Less income (expense) items: | | | | | | | Net gains (losses) on investments and other financial instruments | (42,476 | ) | | 3,621 |
| | 30,751 |
| | Loss on induced conversion and debt extinguishment | — |
| | (51,469 | ) | | (75,075 | ) | Acquisition-related expenses (1) | (881 | ) | | (105 | ) | | (519 | ) | | Impairment of goodwill | — |
| | (184,374 | ) | | — |
| | Amortization and impairment of other acquired intangible assets | (12,429 | ) | | (27,671 | ) | | (13,221 | ) | Impairment of other long-lived assets and loss from the sale of a business line (2) | (5,523 | ) | | (10,440 | ) | | — |
| Total adjusted pretax operating income (3) | $ | 745,495 |
|
| $ | 617,175 |
|
| $ | 541,750 |
| | | | | | | |
______________________ | | | (1) | The change in expected economic loss or recovery associated with our previously owned VIEs is included in adjusted pretax operating income above for the year ended December 31, 2014, although it represents amounts that are not included in net income. Therefore, for purposes of this reconciliation, net gains (losses) on investments and other financial instruments has been adjusted by income of $0.1 million for the year ended December 31, 2014, to reverse this item. |
| | (2) | Acquisition-related expenses represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses. |
| | | (2) | All amounts are included within restructuring and other exit costs on the consolidated statements of operations, except for $1.6 million in 2018 related to the impairment of other long-lived assets, included in other operating expenses. |
| | | (3) | Total adjusted pretax operating income on a consolidated basis consists of adjusted pretax operating income (loss) for each segment as follows:our |
Mortgage Insurance segment and our Services segment, as further detailed in Note 4 of Notes to Consolidated Financial Statements. | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Adjusted pretax operating income (loss): | | | | | | Mortgage insurance (a) | $ | 561,911 |
| | $ | 511,048 |
| | $ | 347,840 |
| Services (a) | (20,161 | ) | | (154 | ) | | (5,458 | ) | | Total adjusted pretax operating income | $ | 541,750 |
| | $ | 510,894 |
| | $ | 342,382 |
| | | | | | | |
______________________
| | (a) | Includes inter-segment expenses and revenues as disclosed in Note 4 of Notes to Consolidated Financial Statements. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | | | | | | | | | Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Diluted net income per share | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | | | | | | | | Less per-share impact of debt items: | | | | | | | Loss on induced conversion and debt extinguishment | — |
| | (0.23 | ) | | (0.33 | ) | Income tax provision (benefit) (1) | — |
| | (0.08 | ) | | (0.07 | ) | | Per-share impact of debt items | — |
| | (0.15 | ) | | (0.26 | ) | | | | | | | | | Less per-share impact of reconciling income (expense) items: | | | | | | | Net gains (losses) on investments and other financial instruments | (0.19 | ) | | 0.02 |
| | 0.14 |
| | Impairment of goodwill | — |
| | (0.84 | ) | | — |
| | Amortization and impairment of other acquired intangible assets | (0.06 | ) | | (0.13 | ) | | (0.06 | ) | | Impairment of other long-lived assets and loss from the sale of a business line | (0.03 | ) | | (0.05 | ) | | — |
| Income tax provision (benefit) on other income (expense) items (1) | (0.06 | ) | | (0.35 | ) | | 0.03 |
| Difference between statutory and effective tax rate (2) | 0.30 |
| | (0.47 | ) | | 0.02 |
| | Per-share impact of other income (expense) items | 0.08 |
| | (1.12 | ) | | 0.07 |
| Adjusted diluted net operating income per share (1) | $ | 2.69 |
| | $ | 1.82 |
| | $ | 1.56 |
| | | | | | | |
______________________ | | | (1) | Calculated using the company’s federal statutory tax rates of 21% for 2018 and 35% for 2017 and 2016. Any permanent tax adjustments and state income taxes on these items have been deemed immaterial and are not included. |
| | | (2) | For 2018, includes $0.34 of tax benefit related to the settlement of the IRS Matter, which includes both the impact of the settlement with the IRS as well as the reversal of certain related previously accrued state and local tax liabilities. All of the 2017 amount represents additional tax expense related to the remeasurement of our net deferred tax assets as a result of the TCJA enacted in December 2017. |
| | | | | | | | | | Reconciliation of Return on Equity to Adjusted Net Operating Return on Equity (1) | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | Return on Equity (1) | 18.7 | % | | 4.1 | % | | 11.5 | % | Less impact of reconciling income (expense) items: (2) | | | | | | | Net gains (losses) on investments and other financial instruments | (1.3 | ) | | 0.1 |
| | 1.1 |
| | Loss on induced conversion and debt extinguishment | — |
| | (1.8 | ) | | (2.8 | ) | | Impairment of goodwill | — |
| | (6.3 | ) | | — |
| | Amortization and impairment of other acquired intangible assets | (0.4 | ) | | (0.9 | ) | | (0.5 | ) | | Impairment of other long-lived assets and loss from the sale of a business line | (0.2 | ) | | (0.4 | ) | | — |
| Income tax provision (benefit) on reconciling income (expense) items (3) | (0.4 | ) | | (3.2 | ) | | (0.8 | ) | Difference between statutory and effective tax rate (3) (4) | 2.0 |
| | (3.5 | ) | | (0.2 | ) | | Impact of reconciling income (expense) items | 0.5 |
| | (9.6 | ) | | (1.6 | ) | | Adjusted net operating return on equity | 18.2 | % | | 13.7 | % | | 13.1 | % | | | | | | | |
______________________ | | | (1) | Calculated by dividing net income by average stockholders’ equity. |
| | | (2) | As a percentage of average stockholders’ equity. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | (3) | Calculated using the company’s federal statutory tax rates of 21% for 2018 and 35% for 2017 and 2016. Any permanent tax adjustments and state income taxes on these items have been deemed immaterial and are not included. |
| | | (4) | The difference in 2018 includes the tax benefit related to the settlement of the IRS Matter, which includes both the impact of the settlement with the IRS as well as the reversal of certain related previously accrued state and local tax liabilities. All of the 2017 amount represents additional tax expense related to the remeasurement of our net deferred tax assets as a result of the TCJA enacted in December 2017. |
Results of Operations—Mortgage Insurance During 2016,2018, we continued our strategy of growing our mortgage insurance portfolio by writing insurance on mortgages with stronghigh credit characteristics.quality. At December 31, 2016,2018, we had $183$221.4 billion in IIF compared to $176$200.7 billion in IIF at December 31, 2015.2017. We also expanded our risk distribution strategy and continued to focus on effectively managing our capital and liquidity positions. See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries” and Note 1 of Notes to Consolidated Financial Statements for additional information. The following table summarizes our Mortgage Insurance segment’s results of operations for the years ended December 31, 2016, 20152018, 2017 and 2014:2016: | | | | | | $ Change | | | | $ Change | | | Year Ended December 31, (1) | | Favorable (Unfavorable) | | Year Ended December 31, | | Favorable (Unfavorable) | | (In millions) | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 | Adjusted pretax operating income (2) | $ | 561.9 |
| | $ | 511.0 |
| | $ | 347.8 |
| | $ | 50.9 |
| | $ | 163.2 |
| | | Net premiums written—insurance (3) | 733.8 |
| | 968.5 |
| | 925.2 |
| | (234.7 | ) | | 43.3 |
| | | Adjusted pretax operating income (1) | | $ | 772.6 |
| | $ | 651.0 |
| | $ | 561.9 |
| | $ | 121.6 |
| | $ | 89.1 |
| Net premiums written—insurance (2) | | 991.0 |
| | 818.4 |
| | 733.8 |
| | 172.6 |
| | 84.6 |
| | (Increase) decrease in unearned premiums | 187.9 |
| | (52.6 | ) | | (80.7 | ) | | 240.5 |
| | 28.1 |
| | 15.7 |
| | 114.4 |
| | 187.9 |
| | (98.7 | ) | | (73.5 | ) | | Net premiums earned—insurance | 921.8 |
| | 915.9 |
| | 844.5 |
| | 5.9 |
| | 71.4 |
| | 1,006.7 |
| | 932.8 |
| | 921.8 |
| | 73.9 |
| | 11.0 |
| | Net investment income | 113.5 |
| | 81.5 |
| | 65.7 |
| | 32.0 |
| | 15.8 |
| | 152.1 |
| | 127.2 |
| | 113.5 |
| | 24.9 |
| | 13.7 |
| | Provision for losses | 204.2 |
| | 198.4 |
| | 246.9 |
| | (5.8 | ) | | 48.5 |
| | 104.5 |
| | 136.2 |
| | 204.2 |
| | 31.7 |
| | 68.0 |
| Other operating expenses (3) | 185.8 |
| | 195.0 |
| | 213.4 |
| | 9.2 |
| | 18.4 |
| | 215.5 |
| | 206.4 |
| | 185.8 |
| | (9.1 | ) | | (20.6 | ) | | Interest expense | 63.4 |
| | 73.4 |
| | 81.6 |
| | 10.0 |
| | 8.2 |
| | 43.7 |
| | 45.0 |
| | 63.4 |
| | 1.3 |
| | 18.4 |
|
______________________ | | | (1) | For all periods presented, reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue, cost of services and operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. See Note 4 of Notes to Consolidated Financial Statements. |
| | (2) | Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of our business segments. See Note 4 of Notes to Consolidated Financial Statements for more information. |
| | (3)(2) | Net of ceded premiums written under the QSR Transactions andProgram, the Single Premium QSR Transaction.Program and the Excess-of-Loss Program. See Note 8 of Notes to Consolidated Financial Statements for more information. |
| | | (3) | Includes allocation of corporate operating expenses of $80.1 million, $55.4 million and $45.2 million for 2018, 2017 and 2016, respectively. |
Adjusted Pretax Operating Income. Our Mortgage Insurance segment’s adjusted pretax operating income for 20162018 was $561.9$772.6 million, compared to $511.0$651.0 million for 20152017 and $347.8$561.9 million for 2014. Our results2016. The increase in our adjusted pretax operating income for 20162018, compared to 2015 primarily reflect an increase in net investment income and a decrease in interest expense, partially offset by the net impact of the Single Premium QSR Transaction. The improvement in the results for 2015 compared to 20142017, primarily reflects: (i) an increase in net premiums earned; (ii) a reductiondecrease in provision for losses; and (iii) an increase in net investment income. Our results for 2017 compared to 2016 primarily reflect a reductiondecrease in the provision for losses and to a lesser extent, a decrease in interest expense. These increases in adjusted pretax operating income were partially offset by higher other operating expenses.
NIW, IIF, RIF
A key component of our current business strategy is to grow our mortgage insurance business by writing insurance on high credit quality mortgages in the U.S. Consistent with this objective, we wrote $50.5 billion of primary new mortgage insurance in 2016, compared to $41.4 billion of NIW in 2015. The NIW written on a Flow Basis in 2016 was Radian’s highest volume in its history.
The increase in NIW of 22% for 2016 compared to 2015 is primarily attributable to increases both in mortgage originations overall and in the penetration rate of private mortgage insurance for home purchases. During this time period, mortgage originations were higher due to favorable economic conditions that supported increased home purchase mortgage volume and low interest rates that continued to support refinance activity at higher levels in 2016 than in 2015.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
TheNIW, IIF, RIF
A key component of our current business strategy is to write profitable mortgage insurance industryon high credit quality mortgages in the U.S. Consistent with this objective, we wrote $56.5 billion of primary new mortgage insurance in 2018, compared to $53.9 billion of NIW in 2017. The NIW written on a Flow Basis in 2018 was Radian’s highest volume in its history. The combination of our NIW and a higher Persistency Rate resulted in an increase in IIF, from $200.7 billion at December 31, 2017 to $221.4 billion at December 31, 2018, as shown in the chart below. ______________________ | | | (1) | Policy years represent the original policy years, and have not been adjusted to reflect subsequent HARP refinancing activity. |
| | | (2) | If adjusted to reflect subsequent HARP refinancing activity, this percentage would decrease to 6.0%, 8.4%, and 12.1% as of December 31, 2018, December 31, 2017 and December 31, 2016, respectively. |
Our IIF is highly competitiveone of the primary drivers of future premiums that we expect to earn over time. Although not reflected in the current period financial statements, nor in our reported book value, we expect our IIF to generate substantial earnings in future periods, due to the high credit quality of our current mortgage insurance portfolio and private mortgage insurers compete with each other and alsoexpected persistency over multiple years. Additionally, as a result of the TCJA, the economic value of our existing IIF increased significantly as of December 31, 2017, due to the increase in expected future net cash flows associated with the FHAreduction in expected tax payments. See “Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” for more information. We implemented pricing changes during the first half of 2018 that we estimate will result in an overall relative premium rate decrease on NIW. The changes are expected to gradually affect our results over time, as existing IIF is replaced with NIW at current pricing. These changes, however, do not affect the value or future returns on our IIF written prior to 2018; therefore, the impact of these pricing actions on near-term revenue is expected to be limited. As an example, assuming our current NIW levels, mix and VA,persistency levels remain constant, we estimate that it would take approximately three years for approximately one-half of our IIF to reflect our current pricing structure. However, the ultimate results of the changes will be influenced by many other factors, including with respectthe amount of NIW, changes in the product and credit profile mix of both NIW and policy cancellations, the impact of interest rates and product mix on persistency, and the amount of reinsurance we use. See “Overview—Competition and Pricing—Radian’s Pricing” for additional information.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The 4.9% increase in NIW for 2018 compared to price. In January 2015, the FHA reduced its annual2017 is primarily attributable to increases in mortgage insurance premiumpenetration and overall purchase mortgage originations, partially offset by 50 basis points to approximately 85 basis points per year. The FHA’s annual mortgage insurance premium reductiondecreases in 2015 made its pricing more competitive for certain high-LTV loans to borrowers with FICO scores below 720. Following this price reduction in 2015, the FHA’srefinance originations and our share of the mortgage insurance market. We believe total mortgage origination volume was lower for 2018, as compared to 2017, primarily due to a decrease in refinance mortgage originations resulting from the slightly higher interest rate environment, partially offset by a modest increase in purchase originations. Mortgage insurance penetration in the purchase origination market has gradually increased relative toover the combined market share of private mortgage insurerspast few years, and because the FHA (excluding VA), from approximately 43% in 2014 to approximately 52% in 2015. In February 2016, we announced updated premium ratespenetration rate for our mortgage insurance businessis generally three to provide increased risk-based granularity to our pricing and to better align our pricing withfive times higher on purchase originations than on refinancing transactions, we believe that even though the capital requirements under the PMIERs and with privatetotal mortgage insurance industry trends. Following our pricing change and similar changes from other private mortgage insurance companies in 2016,origination volume was lower, the private mortgage insurance industry has regained market share relativewas larger in 2018, compared to the FHA, with the FHA’s market share decreasing, relative to the combined market share of private mortgage insurers and the FHA (excluding the VA), to approximately 49% in 2016. In addition, we believe that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans are factors that continue to provide a competitive advantage for private mortgage insurers. See “Key Factors Affecting Our Results—Mortgage Insurance—NIW.”2017. We expect price competition to continue throughout the mortgage insurance industry and future price reductions from private mortgage insurers or the FHA could impact our ability to compete. See “Item 1. Business—Mortgage Insurance—Competition” for more information about the current competitive environment and our pricing strategies.
We monitor competitive and economic factors while seeking to balance both profitability and market share considerations in developing our pricing and origination strategies. Although it is difficult to project future volumes, industry sources expect the total mortgage origination market in 20172019 to decline approximately 20% comparedbe comparable to 2016,the market in 2018, driven by a decline in refinance originations of approximately 50%11% as a result of higher anticipated interest rates, partially offset by an expected increase in purchase originations of approximately 5%4%. With private mortgage insuranceGiven our expected penetration on purchase originations three to four times higher than on refinance originations,rates, we expect the private mortgage insurance market in 2019 to be only modestly smaller in 2017 comparedcomparable to 2016. As a result,2018. Based on industry forecasts and our projections, we expect our NIW in 20172019 to be comparable to our $50.5 billionin the range of NIW written in 2016.$50 billion.
Virtually allConsistent with the market trends described above, during 2018 the level of our Post-legacy new mortgage insurance written has been prime business. These loans possess significantly improved credit characteristicspurchase origination volume increased and our refinance origination volume decreased (each as a percentage of our total NIW), as compared to 2017. As a percentage of our Legacy Portfolio. FICO scores fortotal NIW, the borrowersvolume of these insured mortgages are higher, and there are fewerour NIW on mortgage loans with LTVs greater than 95%, as also increased during 2018, compared to mortgages2017. During 2018, in comparison to 2017, we also continued to experience an increased percentage of our Legacy Portfolio.total NIW on mortgage loans to borrowers with higher debt-to-income ratios, including debt-to-income ratios greater than 45%. See “Overview—Operating Environment” for additional information.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Notwithstanding this recent shift toward loans with higher LTVs and borrowers with higher debt-to-income ratios, the mortgage loans underlying our RIF originated after 2008 possess significantly improved credit characteristics compared to our portfolio originated prior to and including 2008. For example, FICO scores for the borrowers of our current portfolio of insured mortgages are higher, and notwithstanding the recent increase in loans with higher LTVs, there are fewer loans with LTVs greater than 95%. In addition, we have limited loans subject to layered risk that combines multiple higher-risk attributes within the same loan, specifically low FICO scores combined with other higher risk characteristics. For example, a de minimis amount of our primary RIF originated after 2008 relates to mortgages with (i) FICO scores less than 680 combined with cash-out refinancings or original LTVs greater than 95% or (ii) FICO scores less than or equal to 720 on an investment property or second home. The table below illustrates the improved composition of our direct primary mortgage insurance RIF at December 31, 20162018 compared to selected prior years, based on various risk characteristics.FICO score and LTV.   Although in our overall portfolio thereHistorical loan data indicates that credit scores and underwriting quality are currently fewer loans with LTVs greater than 95% as compared to mortgages in our Legacy Portfolio,key drivers of credit performance. As illustrated by the percentage of recent NIW with LTVs greater than 95% is beginning to increase. Forpreceding chart, the years ended December 31, 2016 and 2015, the percentage of primary NIW with LTVs greater than 95% was 5.7% and 3.0%, respectively. Factors influencing the recent increases include: (i) GSE program enhancements and guideline changes; (ii) FHA regulatory enforcement actions that are causing lenders to choose GSE execution over the FHA; (iii) mortgage insurance pricing changes effective in the first half of 2016; and (iv) recent lender response to market demands and each lender’s appetite for mortgage origination volume.
In addition to the improved compositionFICO scores of our mortgage insurance portfolio with respect to specific individual credit attributes, such as FICO scores and LTVs, more stringent underwriting requirements have also led to fewer loans from our Post-legacy Portfolio that combine multiple higher-risk attributes within the same loan, such as a low FICO score with an investment property, or a low FICO score with a cash-out refinancing. These changes have contributed to theprimary RIF has significantly improved credit quality of our overall mortgage insurance portfolio, as illustrated below, asin business written after 2008. As of December 31, 2016.2018, our portfolio of business written subsequent to 2008, including HARP refinancings, represented approximately 94% of our total primary RIF. The high volume of insurance that we have written on high credit quality loans has led to an improved portfolio mix and, together with favorable credit trends, has had a significant positive impact on our results of operations. For additional information, see the tables that follow, including the table, “Total Primary RIF by Policy Year.”
| | | | | | | | | Primary RIF Distribution | Layered Risk (1) | | 2005-08 | | 2009+ | | FICO <680 and Cash-out Refinance | | 7.6 | % | | 0.0 | % | | FICO <680 and Original LTV >95 | | 9.4 | % | | 0.2 | % | | Investment/Second Home and FICO <=720 | | 2.3 | % | | 1.8 | % |
______________________
| | (1) | Layered risk exists when multiple high-risk attributes are combined within the same loan. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The chart below illustrates the composition of our direct primary mortgage insurance RIF at December 31, 2016, based on origination vintages.
______________________
| | (1) | In 2009, the GSEs began offering HARP, which allows a borrower who is not delinquent to refinance a mortgage if the borrower has been unable to take advantage of lower interest rates because the borrower’s home has decreased in value. We exclude HARP loans from our NIW for the period in which the refinance occurs. During 2016, new HARP loans accounted for $202.9 million of newly refinanced loans that were not included in Radian Guaranty’s NIW for the period, compared to $681.9 million for 2015. The HARP program deadline for refinancing is September 30, 2017. See “Item 1. Business—Regulation—Federal Regulation—Homeowner Assistance Programs” for more information.
|
Our Post-legacy Portfolio represents 80.5% of our total portfolio and continues to increase in proportion to our total primary RIF. The growth of our Post-legacy Portfolio, together with continued improvement in the portfolio as a result of HARP refinancings, among other things, has contributed to the significant improvement in the credit quality of our overall mortgage insurance portfolio. Refinancings under the HARP programs (discussed below) also have had a positive impact on the overall credit quality and composition of our mortgage insurance portfolio because the refinancing generally results in terms under which a borrower has a greater ability to pay and more financial flexibility to cover the loan obligations. As shown in the chart above, the sum of our Post-legacy Portfolio and our HARP refinancings accounted for approximately 88% of our total primary RIF at December 31, 2016, compared to 84% at December 31, 2015. Because our expected future losses on our Post-legacy Portfolio and ourportfolios written after 2008, together with HARP refinancings, are significantly lower than those experienced on our Legacy Portfolio, the improved credit quality of our overall mortgage insurance portfolio has ledNIW prior to improvement in our Mortgage Insurance segment’s operating profitability.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The charts and table below show the growth in RIF written in 2009 and later, as well as the improved performance of our mortgage insurance portfolios written since 2009.
The improvement in the credit quality of our mortgage insurance portfolio is demonstrated by improved default trends for our Post-legacy mortgage insurance policies. Our expected future losses on our Post-legacy Portfolio, including HARP refinancings, are significantly lower than those experienced on our Legacy Portfolio.2008. The following charts illustrate the improved trends of our cumulative incurred loss ratios by year of origination and development year.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
______________________ | | | (1) | Represents inception-to-date losses incurred as a percentage of premium revenue.net premiums earned on mortgage insurance. |
In April 2016, the FHFA announced a new Principal Reduction Modification program, with the objective of benefiting borrowers whose mortgages were severely delinquent as of March 1, 2016. The program was a one-time offering, and the servicers of eligible mortgages were required to solicit eligible borrowers by October 15, 2016. This program did not affect a material number of our defaulted loans. | | | (2) | Incurred losses in 2017 were slightly elevated due to the impact of Hurricanes Harvey and Irma. See “Overview— Operating Environment—Hurricanes” for additional information. |
| | | (3) | Radian’s stochastic modeling, used for pricing, indicates an approximate 20% through-the-cycle loss ratio on newly originated mortgage insurance business. |
The following tables provide selected information as of and for the periods indicated related to mortgage insurance NIW, RIF and IIF. Policy years represent the original policy years, and have not been adjusted to reflect subsequent HARP refinancing activity. Primary RIF and IIF amounts at December 31, 2016 include $274 million and $1.09 billion, respectively, related to loans that are subject to the Freddie Mac Agreement. Although we no longer have future claim liability on these loans, we continue to receive premiums on the related loans and the insurance remains in force, and therefore these loans are included in our primary RIF and IIF. Throughout this report, unless otherwise noted, RIF is presented on a gross basis and includesbefore consideration of the amount ceded under reinsurance. NIW, RIF and IIF for Directdirect Single Premiums include policies written on an individual basis (as each loan is originated) and on an aggregated basis (in which each individual loan in a group of loans is insured in a single transaction, typically after the loans have been originated). | | | | Year Ended December 31, | Year Ended December 31, | | ($ in millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Total primary NIW by FICO score | | | | | | | | | | | | | | Total Primary NIW by FICO Score | | | | | | | | | | | | | | >=740 | $ | 31,426 |
| | 62.2 | % | | $ | 25,683 |
| | 62.0 | % | | $ | 23,043 |
| | 61.7 | % | $ | 34,209 |
| | 60.5 | % | | $ | 32,928 |
| | 61.1 | % | | $ | 31,426 |
| | 62.2 | % | | 680-739 | 16,001 |
| | 31.7 |
| | 12,954 |
| | 31.3 |
| | 11,737 |
| | 31.4 |
| 18,250 |
| | 32.3 |
| | 17,641 |
| | 32.7 |
| | 16,001 |
| | 31.7 |
| | 620-679 | 3,103 |
| | 6.1 |
| | 2,774 |
| | 6.7 |
| | 2,569 |
| | 6.9 |
| 4,088 |
| | 7.2 |
| | 3,336 |
| | 6.2 |
| | 3,103 |
| | 6.1 |
| | Total Primary NIW | $ | 50,530 |
| | 100.0 | % | | $ | 41,411 |
| | 100.0 | % | | $ | 37,349 |
| | 100.0 | % | $ | 56,547 |
| | 100.0 | % | | $ | 53,905 |
| | 100.0 | % | | $ | 50,530 |
| | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | Year Ended December 31, | Year Ended December 31, | | ($ in millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Percentage of primary NIW | | | | | | | | Percentage of Primary NIW | | | | | | | | Borrower-paid | | 90 | % | | 78 | % | | 75 | % | | Premium Type | | | | | | | | Direct Monthly and Other Premiums | 73 | % | | 69 | % | | 72 | % | 79 | % | | 77 | % | | 73 | % | | Direct Single Premiums | 27 | % | | 31 | % | | 28 | % | | | | | | | Lender-paid | | 9 | % | | 21 | % | | 25 | % | Borrower-paid (1) | | 12 | % | | 2 | % | | 2 | % | | Total Primary NIW | | 100.0 | % | | 100.0 | % | | 100.0 | % | | | | | | | | | | | | | Net Single Premiums (1) | 18 | % | | 31 | % | | 28 | % | | Net Single Premiums (2) | | 8 | % | | 15 | % | | 18 | % | | | | | | | | | | | | | | Refinances | 22 | % | | 21 | % | | 17 | % | | | NIW for Purchases | | 94 | % | | 89 | % | | 78 | % | | | | | | | | | | NIW for Refinances | | 6 | % | | 11 | % | | 22 | % | | | | | | | | | | | | | | LTV | | | | | | | | | | | | 95.01% and above | 5.7 | % | | 3.0 | % | | 0.4 | % | 16.7 | % | | 13.2 | % | | 5.7 | % | | 90.01% to 95.00% | 47.5 | % | | 49.8 | % | | 52.9 | % | 44.4 | % | | 46.0 | % | | 47.5 | % | | 85.01% to 90.00% | 32.0 | % | | 34.0 | % | | 33.8 | % | 27.6 | % | | 28.5 | % | | 32.0 | % | | 80.00% and below | 14.8 | % | | 13.2 | % | | 12.9 | % | | | 85.00% and below | | 11.3 | % | | 12.3 | % | | 14.8 | % | | | | | | | | | | | | | | Primary risk written | $ | 12,538 |
| | $ | 10,435 |
| | $ | 9,448 |
| $ | 14,264 |
| | $ | 13,569 |
| | $ | 12,538 |
|
______________________ | | | (1) | In 2016, representsBorrower-paid Single Premium Policies have lower Minimum Required Assets under PMIERs as compared to lender-paid Single Premium Policies. See “Overview—Competition and Pricing—Radian’s Pricing” for additional information. |
| | | (2) | Represents the percentage of direct single premiumsSingle Premium Policies written, after consideration ofgiving effect to the 35% Single Premium NIW ceded under the Single Premium QSR Transaction.Program (for NIW after the effective dates of the respective agreements). See Note 8 of Notes to Consolidated Financial Statements for additional information.information about these arrangements. |
| | | | December 31, | December 31, | | | ($ in millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | | Primary IIF | | | | | | | | | | | | | Direct Monthly and Other Premiums | 68 | % | | 69 | % | | 71 | % | 70 | % | | 69 | % | | 68 | % | | | Direct Single Premiums | 32 | % | | 31 | % | | 29 | % | 30 | % | | 31 | % | | 32 | % | | | | | | | | | | | | | | | Net Single Premiums (1) | 25 | % | | 31 | % | | 29 | % | 17 | % | | 20 | % | | 25 | % | | | | | | | | | | | | | | | | Total Primary IIF | $ | 183,450 |
| | $ | 175,584 |
| | $ | 171,810 |
| $ | 221,443 |
| | $ | 200,724 |
| | $ | 183,450 |
| | | | | | | | | | | | | | | Persistency Rate (12 months ended) | 76.7 | % | (2) | 78.8 | % | | 84.2 | % | 83.1 | % | | 81.1 | % | (2) | 76.7 | % | (3) | Persistency Rate (quarterly, annualized) (3) | 76.8 | % | (4) | 81.8 | % | | 83.3 | % | | Persistency Rate (quarterly, annualized) (4) | | 85.5 | % | | 79.4 | % | (2) | 76.8 | % | |
______________________ | | | (1) | Represents the percentage of single premiumSingle Premium IIF, after giving effect to all quota-share reinsurance ceded. See Note 8 of Notes to Consolidated Financial Statements for additional information about reinsurance transactions. |
| | | (2) | The Persistency Rate in the fourth quarter of 2017 was reduced by an increase in cancellations of Single Premium Policies due to increased cancellations identified through our ongoing servicer monitoring process for Single Premium Policies. |
| | | (3) | The Persistency Rate for the 12 months ended December 31, 2016 decreased from 2015,was less than in subsequent years, primarily due to increased refinancing activity and the cancellations of Single Premium Policies.Policies in 2016. See“—Net Premiums Written and Earned” below. |
| | (3)(4) | The Persistency Rate on a quarterly, annualized basis is calculated based on loan level detail for the fourth quarter of each year shown. It may be impactedaffected by seasonality or other factors, and may not be indicative of full-year trends. |
| | (4) | The Persistency Rate annualized based on the quarter ended December 31, 2016 decreased from 2015, primarily due to the volume of Single Premium Policies that were cancelled during the fourth quarter of 2016, which increased as compared to the same quarter in 2015. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | December 31, | December 31, | | ($ in millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Primary RIF by Premium Type | | | | | | | | | | | | | | | | | | | | | | | | Direct Monthly and Other Premiums | $ | 32,136 |
| | 68.8 | % | | $ | 30,940 |
| | 69.3 | % | | $ | 30,786 |
| | 71.2 | % | $ | 39,894 |
| | 70.3 | % | | $ | 35,452 |
| | 69.1 | % | | $ | 32,136 |
| | 68.8 | % | | Direct Single premiums | 14,605 |
| | 31.2 |
| | 13,687 |
| | 30.7 |
| | 12,453 |
| | 28.8 |
| | | Total Primary RIF | $ | 46,741 |
| | 100.0 | % | | $ | 44,627 |
| | 100.0 | % | | $ | 43,239 |
| | 100.0 | % | | | Direct Single Premiums | | 16,834 |
| | 29.7 |
| | 15,836 |
| | 30.9 |
| | 14,605 |
| | 31.2 |
| | Total primary RIF | | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | Net Single Premiums (1) | $ | 10,161 |
| | 24.5 | % | | $ | 12,846 |
| | 30.2 | % | | $ | 11,463 |
| | 28.3 | % | $ | 8,182 |
| | 17.2 | % | | $ | 8,320 |
| | 19.3 | % | | $ | 10,161 |
| | 24.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Primary RIF by Risk Grade | | | | | | | | | | | | | | Primary RIF by Internal Risk Grade | | | | | | | | | | | | | | Prime | $ | 44,708 |
| | 95.6 | % | | $ | 42,170 |
| | 94.5 | % | | $ | 40,326 |
| | 93.3 | % | $ | 55,374 |
| | 97.6 | % | | $ | 49,674 |
| | 96.9 | % | | $ | 44,708 |
| | 95.6 | % | | Alt-A | 1,168 |
| | 2.5 |
| | 1,427 |
| | 3.2 |
| | 1,720 |
| | 4.0 |
| | | A minus and below | 865 |
| | 1.9 |
| | 1,030 |
| | 2.3 |
| | 1,193 |
| | 2.7 |
| | | Alt-A and A minus and below | | 1,354 |
| | 2.4 |
| | 1,614 |
| | 3.1 |
| | 2,033 |
| | 4.4 |
| | Total primary RIF | $ | 46,741 |
| | 100.0 | % | | $ | 44,627 |
| | 100.0 | % | | $ | 43,239 |
| | 100.0 | % | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | |
______________________ | | | (1) | Represents the dollar amount and percentage, respectively, of RIF on Single Premium RIF,Policies, after giving effect to all quota-share reinsurance ceded. |
| | | | | | | | | | | | | | | | | | | | | | | | December 31, | | ($ in millions) | 2016 | | 2015 | | 2014 | | Total primary RIF by FICO score | | | | | | | | | | | | | >=740 | $ | 26,939 |
| | 57.6 | % | | $ | 25,467 |
| | 57.1 | % | | $ | 24,511 |
| | 56.7 | % | | 680-739 | 14,497 |
| | 31.0 |
| | 13,543 |
| | 30.3 |
| | 12,817 |
| | 29.6 |
| | 620-679 | 4,620 |
| | 9.9 |
| | 4,806 |
| | 10.8 |
| | 4,973 |
| | 11.6 |
| | <=619 | 685 |
| | 1.5 |
| | 811 |
| | 1.8 |
| | 938 |
| | 2.1 |
| | Total primary RIF | $ | 46,741 |
| | 100.0 | % | | $ | 44,627 |
| | 100.0 | % | | $ | 43,239 |
| | 100.0 | % | | | | | | | | | | | | | | Primary RIF on defaulted loans (1) | $ | 1,363 |
| | | | $ | 1,625 |
| | | | $ | 2,089 |
| | | | | | | | | | | | | | | |
______________________ | | (1) | Excludes risk related to loans subject to the Freddie Mac Agreement. |
| | | | | | | | | | | | | | | | | | | | | | | | December 31, | | ($ in millions) | 2018 | | 2017 | | 2016 | | Total primary RIF by FICO score | | | | | | | | | | | | | >=740 | $ | 33,703 |
| | 59.4 | % | | $ | 30,225 |
| | 58.9 | % | | $ | 26,939 |
| | 57.6 | % | | 680-739 | 17,941 |
| | 31.6 |
| | 16,097 |
| | 31.4 |
| | 14,497 |
| | 31.0 |
| | 620-679 | 4,626 |
| | 8.2 |
| | 4,425 |
| | 8.6 |
| | 4,620 |
| | 9.9 |
| | <=619 | 458 |
| | 0.8 |
| | 541 |
| | 1.1 |
| | 685 |
| | 1.5 |
| | Total primary RIF | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % | | | | | | | | | | | | | | | Primary RIF on defaulted loans | $ | 1,032 |
| | | | $ | 1,389 |
| | | | $ | 1,363 |
| | | | | | | | | | | | | | | |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | December 31, | December 31, | | ($ in millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Total primary RIF by LTV | | | | | | | | | | | | | | | | | | | | | | | | 95.01% and above | $ | 3,447 |
| | 7.4 | % | | $ | 3,249 |
| | 7.3 | % | | $ | 3,547 |
| | 8.2 | % | $ | 6,591 |
| | 11.6 | % | | $ | 4,704 |
| | 9.2 | % | | $ | 3,447 |
| | 7.4 | % | | 90.01% to 95.00% | 24,439 |
| | 52.3 |
| | 22,479 |
| | 50.4 |
| | 20,521 |
| | 47.5 |
| 30,132 |
| | 53.1 |
| | 27,276 |
| | 53.2 |
| | 24,439 |
| | 52.3 |
| | 85.01% to 90.00% | 15,208 |
| | 32.5 |
| | 15,184 |
| | 34.0 |
| | 15,307 |
| | 35.4 |
| 16,464 |
| | 29.0 |
| | 15,719 |
| | 30.6 |
| | 15,208 |
| | 32.5 |
| | 85.00% and below | 3,647 |
| | 7.8 |
| | 3,715 |
| | 8.3 |
| | 3,864 |
| | 8.9 |
| 3,541 |
| | 6.3 |
| | 3,589 |
| | 7.0 |
| | 3,647 |
| | 7.8 |
| | Total primary RIF | $ | 46,741 |
| | 100.0 | % | | $ | 44,627 |
| | 100.0 | % | | $ | 43,239 |
| | 100.0 | % | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of primary RIF | | | | | | | | | | | | | | Refinances | 21 | % | | | | 23 | % | | | | 26 | % | | | | | Loan Type: | | | | | | | | | | | | | | Fixed | 97.0 | % | | | | 96.1 | % | | | | 95.1 | % | | | | Adjustable rate mortgages (fully indexed) (1) | 2.2 |
| | | | 2.7 |
| | | | 3.3 |
| | | | | Mortgages with interest only or potential negative amortization | 0.8 |
| | | | 1.2 |
| | | | 1.6 |
| | | | | Total | 100.0 | % | | | | 100.0 | % | | | | 100.0 | % | | | | | | | | | | | | | | | | | | | Total primary RIF by policy year | | | | | | | | | | | | | | | | | | | | | | | | 2005 and prior | $ | 2,236 |
| | 4.8 | % | | $ | 2,823 |
| | 6.3 | % | | $ | 3,540 |
| | 8.2 | % | | | 2006 | 1,369 |
| | 2.9 |
| | 1,666 |
| | 3.7 |
| | 2,001 |
| | 4.6 |
| | | 2007 | 3,279 |
| | 7.0 |
| | 3,891 |
| | 8.7 |
| | 4,592 |
| | 10.6 |
| | | 2008 | 2,259 |
| | 4.8 |
| | 2,798 |
| | 6.3 |
| | 3,394 |
| | 7.9 |
| | | 2008 and prior | | $ | 5,749 |
| | 10.1 | % | | $ | 7,159 |
| | 14.0 | % | | $ | 9,143 |
| | 19.5 | % | | 2009 | 468 |
| | 1.0 |
| | 736 |
| | 1.7 |
| | 1,081 |
| | 2.5 |
| 199 |
| | 0.4 |
| | 298 |
| | 0.6 |
| | 468 |
| | 1.0 |
| | 2010 | 417 |
| | 0.9 |
| | 616 |
| | 1.4 |
| | 925 |
| | 2.1 |
| 170 |
| | 0.3 |
| | 264 |
| | 0.5 |
| | 417 |
| | 0.9 |
| | 2011 | 917 |
| | 2.0 |
| | 1,294 |
| | 2.9 |
| | 1,809 |
| | 4.2 |
| 465 |
| | 0.8 |
| | 682 |
| | 1.3 |
| | 917 |
| | 2.0 |
| | 2012 | 3,734 |
| | 8.0 |
| | 5,010 |
| | 11.2 |
| | 6,534 |
| | 15.1 |
| 2,094 |
| | 3.7 |
| | 2,830 |
| | 5.5 |
| | 3,734 |
| | 8.0 |
| | 2013 | 5,902 |
| | 12.6 |
| | 8,056 |
| | 18.1 |
| | 10,265 |
| | 23.8 |
| 3,504 |
| | 6.2 |
| | 4,557 |
| | 8.9 |
| | 5,902 |
| | 12.6 |
| | 2014 | 5,607 |
| | 12.0 |
| | 7,646 |
| | 17.1 |
| | 9,098 |
| | 21.0 |
| 3,464 |
| | 6.1 |
| | 4,356 |
| | 8.5 |
| | 5,607 |
| | 12.0 |
| | 2015 | 8,469 |
| | 18.1 |
| | 10,091 |
| | 22.6 |
| | — |
| | — |
| 5,806 |
| | 10.2 |
| | 7,096 |
| | 13.8 |
| | 8,469 |
| | 18.1 |
| | 2016 | 12,084 |
| | 25.9 |
| | — |
| | — |
| | — |
| | — |
| 9,544 |
| | 16.8 |
| | 10,992 |
| | 21.4 |
| | 12,084 |
| | 25.9 |
| | Total primary RIF | $ | 46,741 |
| | 100.0 | % | | $ | 44,627 |
| | 100.0 | % | | $ | 43,239 |
| | 100.0 | % | | | 2017 | | 11,958 |
| | 21.1 |
| | 13,054 |
| | 25.5 |
| | — |
| | — |
| | 2018 | | 13,775 |
| | 24.3 |
| | — |
| | — |
| | — |
| | — |
| Total primary RIF (1) | | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | |
______________________ | | | (1) | “Fully Indexed” refersAt December 31, 2018, 2017 and 2016, consists of 97.7%, 97.3% and 97.0%, respectively, of RIF related to loans where payment adjustments are equal to mortgage interest-rate adjustments.fixed-rate mortgages. |
Net Premiums Written and Earned. Despite the increase in NIW in 2016 compared to 2015, net premiums written decreased in 2016 compared to 2015, primarily due to $233.2 million of ceded premiums written under the Single Premium QSR Transaction. The Single Premium QSR Transaction was effective as of January 1, 2016. Net premiums written and earned for 2018 increased in 2015 compared to 20142017, primarily due to an increase in NIWour IIF related to an increase in 2015,our Monthly Premium Policies. This increase was partially offset by the increased cession percentage on the Single Premium QSR Program. Net premiums written in 2017 increased compared to 2014. In addition,2016, primarily due to a decrease in ceded premiums written, combined with the volume of Single Premium Policies writtenincrease in 2015 increased as a percentage of our total NIW, as Single Premium Policies were 31% compared to 28% for 2014.IIF. Net premiums earned increased in 2016,2017, compared to 2015,2016, primarily as a result of the impact of the accelerated recognition of premiums earned on Single Premium Policies that were cancelled during the year, which was higher than in 2015. This increase was partially offset by increased IIF and decreased ceded premiums, net of profit commission, primarily associated with thecommissions, partially offset by less accelerated revenue recognition due to fewer Single Premium QSR Transaction. Net premiums earned were also impacted by our increased level of IIF in 2016, as compared to 2015.Policy cancellations during 2017.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NetThe table below provides additional information about the components of mortgage insurance net premiums earned increased for 2015 comparedthe periods indicated.
| | | | | | | | | | | | | | (in thousands) | 2018 | | 2017 | | 2016 | | | | | | | | | Net premiums earned—insurance: | | | | | | | Direct | | | | | | | Premiums earned, excluding revenue from cancellations | $ | 1,018,874 |
| | $ | 929,668 |
| | $ | 902,269 |
| | Single Premium Policy cancellations | 47,990 |
| | 60,348 |
| | 96,824 |
| | Direct premiums earned | 1,066,864 |
| | 990,016 |
| | 999,093 |
| | | | | | | | | Ceded | | | | | | | Premiums earned, excluding revenue from cancellations | (85,357 | ) | | (63,406 | ) | | (70,714 | ) | Single Premium Policy cancellations (1) | (13,726 | ) | | (11,734 | ) | | (21,886 | ) | Profit commission—other (2) | 32,036 |
| | 17,869 |
| | 15,241 |
| | Ceded premiums, net of profit commission | (67,047 | ) | | (57,271 | ) | | (77,359 | ) | | | | | | | | | Assumed premiums earned | 6,904 |
| (3) | 28 |
| | 35 |
| | Total net premiums earned—insurance | $ | 1,006,721 |
| | $ | 932,773 |
| | $ | 921,769 |
| | | | | | | |
______________________ | | | (1) | Includes the impact of related profit commissions. |
| | | (2) | The amounts represent the profit commission on the Single Premium QSR Program, excluding impact of Single Premium Policy cancellations. |
| | | (3) | Includes premiums earned from our participation in certain Front-end and Back-end credit risk transfer programs. |
The impact of the level of mortgage prepayments on the mix of business we write affects the revenue ultimately produced by our mortgage insurance business. We believe that writing a mix of Single Premium Policies and Monthly Premium Policies has the potential to 2014, primarily as a resultmoderate the overall impact on our results if actual prepayments are significantly different from expectations. However, this moderating effect may depend on the amount of reinsurance we obtain on portions of our portfolio, with the Single Premium QSR Program currently reducing the proportion of retained Single Premium Policies in our portfolio. As of December 31, 2018, the impact of the accelerationall of the recognition of premiums earnedour third-party quota share reinsurance programs reduced our RIF on Single Premium Policies that were cancelled during 2015 due to: (i) increased refinance activityas a percentage of total RIF from 29.7% to 17.2%. See “Overview—Operating Environment” as well as “Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” above for more information. We experienced a decrease in 2015 and (ii) prepayments that servicers had not previously reported to Radian. In addition, the increase in net premiums earned in 2015 compared to 2014 was also driven by an increase in the overall level of our IIF. Refinancing transactions that utilize mortgage insurance frequently are conducted using Single Premium Policies. Our total mix of Single Premium Policies decreased to 27%21% of our NIW for 2016,2018, compared to 31%23% for 2015. A portion of the decline in the percentage of2017 and 27% for 2016. We expect our production level for Single Premium Policies was due to a shiftfluctuate over time based on various factors, which include risk/return considerations and market conditions.
Net Premiums Written and Earned—Ceded. We use third-party reinsurance in mix toward Monthly Premium Policies dueour mortgage insurance business to industry pricing changes. The decrease also was attributable to our deliberate actions related to pricing, including our disciplined approach to offering customized pricing levels. We believe our current production level of Single Premium Policies can be absorbed into our portfolio while maintaining an appropriate balance between risk and returns, which has been further enhanced by the Single Premium QSR Transaction, as further discussed below. Historically, we have entered into reinsurance transactions as part of ourmanage capital and risk management activities, includingin an effort to manage Radian Guaranty’s Risk-to-capitaloptimize the amounts and more recently its position undertypes of capital and risk distribution deployed against insured risk. When we enter into a reinsurance agreement, the PMIERs Financial Requirements. Inreinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. While these arrangements have the first quarterimpact of 2016, Radian Guaranty entered into the Single Premium QSR Transaction with a panel of third-party reinsurers in order to proactively manage the risk and return profile of Radian Guaranty’s insured portfolio and to manage its position under the PMIERs Financial Requirements. Radian Guaranty began ceding business under this agreement effective January 1, 2016. The Single Premium QSR Transaction isreducing our earned premiums, they are expected to increase Radian Guaranty’s return on required capital for its Single Premium Policies. In future quarters, the related policies. The impact of the Single Premium QSR Transactionthese programs on our financial results will vary depending on the level of ceded RIF, as well as the levels of prepayments and incurred losses on the reinsured portfolio,portfolios, among other factors.
The Single Premium QSR Transaction had the following impact on Radian’s 2016 financial results:
A decrease to net premiums earned of $29.8 million, net of accrued profit commission;
A decrease to operating expenses of $14.6 million, related to the ceding commission;
A decrease to provision for losses See “Key Factors Affecting Our Results—Mortgage Insurance—Third-Party Reinsurance” and amortization of deferred acquisition costs totaling $3.0 million; and
A net decrease to pretax income from continuing operations (and to adjusted pretax operating income) of $12.2 million.
The following table provides information related to the premium impact of our reinsurance transactions. See Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance transactions, including the ceded amountstransactions.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides information related to the QSR Transactions. See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs” for more information aboutpremium impact of our Single Premium QSR Transaction.reinsurance transactions. | | | | | | | | | | | | At or For the Year Ended December 31, | | | 2016 | | 2015 | | 2014 | | Initial and Second QSR Transactions | | | | | | | % of direct premiums written | 2.8 | % | | 3.0 | % | | 4.5 | % | | % of total direct premiums earned | 4.3 | % | | 4.8 | % | | 5.2 | % | | | | | | | | | Single Premium QSR Transaction | | | | | | | % of total direct premiums written | 23.4 | % | | N/A |
| | N/A |
| | % of total direct premiums earned | 3.0 | % | | N/A |
| | N/A |
| | | | | | | | | First-Lien Captives | | | | | | | % of total direct premiums written | 0.4 | % | | 1.0 | % | | 1.3 | % | | % of total direct premiums earned | 0.4 | % | | 1.0 | % | | 1.4 | % |
| | | | | | | | | | | | At or For the Year Ended December 31, | | | 2018 | | 2017 | | 2016 | | QSR Program | | | | | | | % of direct and assumed premiums written | 1.2 | % | | 1.9 | % | | 2.8 | % | | % of total direct and assumed premiums earned | 1.8 | % | | 2.9 | % | | 4.3 | % | | | | | | | | | Single Premium QSR Program | | | | | | | % of direct and assumed premiums written | 6.8 | % | | 18.8 | % | | 23.4 | % | | % of total direct and assumed premiums earned | 4.1 | % | | 2.8 | % | | 3.0 | % | | | | | | | | | Excess-of-Loss Program | | | | | | | % of direct and assumed premiums written | 0.8 | % | | — | % | | — | % | | % of total direct and assumed premiums earned | 0.2 | % | | — | % | | — | % |
Net Investment Income. Increasing yields from higher interest rates, combined with higher average investment balances, resulted in increases in investment income for 2018, compared to 2017. Our higher investment balances were primarily a result of investing our positive cash flow from operations. For 2016,2017, net investment income increased compared to 2015. As2016, as we have progressed towardrefined our investment and liquidity targets we extended the duration of investmentsand cash management strategies, consistent with rising short-term rates and an increased book yield in our portfolio and increased our investment yields. Net investment income increased in 2015 compared to 2014, primarily due to increases in investment portfolio balances at Radian Guaranty from the proceeds of the sale of our financial guaranty business.portfolio. All periods include an allocation to the Mortgage Insurance segment of net investment income from investments held at Radian Group.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Provision for Losses. The following table details the financial impact of the significant components of our provision for losses for the periods indicated (including amounts related to the change in PDR on Second-liens):indicated: | | | | Year Ended December 31, | Year Ended December 31, | | (In millions) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | Current year defaults (1) | $ | 206.4 |
| | $ | 229.1 |
| | $ | 351.2 |
| $ | 135.3 |
| | $ | 185.5 |
| | $ | 206.4 |
| Prior year defaults (2) | (3.5 | ) | | (29.7 | ) | | (105.6 | ) | (31.7 | ) | | (49.3 | ) | | (3.5 | ) | | Second-lien PDR and other | 1.3 |
| | (1.0 | ) | | 1.3 |
| | | Second-lien mortgage loan PDR and other | | 0.9 |
| | 0.0 |
| | 1.3 |
| | Provision for losses | $ | 204.2 |
| | $ | 198.4 |
| | $ | 246.9 |
| $ | 104.5 |
| | $ | 136.2 |
| | $ | 204.2 |
| | | | | | | | | | | | | Loss ratio (3) | | 10.4 | % | | 14.6 | % | | 22.2 | % | | | | | | | | |
______________________ | | | (1) | Related to defaulted loans with a most recent default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default would be considered a current year default. |
| | | (2) | Related to defaulted loans with a default notice dated in a year earlier than the year indicated, which have been continuously in default since that time. |
| | | (3) | Provision for losses as a percentage of net premiums earned. |
Our mortgage insurance provision for losses for 2016 increased2018 decreased by $5.8$31.7 million as compared to 2015.2017. Reserves established for new default notices were the primary driver of our total incurred losses for 20162018 and 2015.2017. Current yearperiod new primary defaults decreased by 4.9% for 2016,12.9% in 2018, compared to 2015. In addition, our2017. Our gross Default to Claim Rate assumption for new primary defaults, was 12%8% at December 31, 2018, compared to 10% as of December 31, 2016, compared to 13% as of December 31, 2015.2017. This reduction in the estimated gross Default to Claim Rates,Rate assumption, which was based on observed claim development trends, contributed to the reduction in the portion of our provision for losses related to new defaults in 2016, as2018, compared to 2015.2017. In addition to the positive trends in our provision for losses for current year defaults for 2018 and 2017, we experienced positive reserve development on prior year defaults, primarily due to reductions in certain Default to Claim Rate assumptions based on observed trends of higher Cures than were previously estimated on those prior year defaults. As expected, Radian Guaranty experienced an increase in reported delinquencies in FEMA Designated Areas associated with Hurricanes Harvey and Irma during the third and fourth quarters of 2017, followed by cure rates for these delinquencies
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
that are higher than the rates for the rest of our portfolio. These incremental hurricane-related defaults did not result in a material increase in our incurred losses or paid claims. Although the number of incremental defaults associated with areas impacted by recent or future natural disasters may become somewhat elevated, consistent with our past experience, we do not expect these incremental defaults to result in a material increase in our incurred losses or paid claims, given the limitations on our coverage related to property damage. However, the future reserve impact of incremental defaults from these or other natural disasters may differ from our previous experience due to overall economic conditions, the pace of economic recovery in the affected areas or other factors. See Note 11 of Notes to Consolidated Financial Statements. Our mortgage insurance provision for losses for 20152017 decreased by $48.5$68.0 million as compared to 2014. This decrease was driven primarily2016. Reserves established for new default notices were the primary driver of our total incurred losses for 2017 and 2016. Current year primary defaults increased by a decline5.9% for 2017, compared to 2016, due to elevated new default notices in 2017 in the numberFEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two natural disasters, which occurred during the third quarter of new current year defaults2017. Due to exclusions in our Master Policies for physical damage, including damage caused by floods or other natural disasters, and based on our past experience with similar natural disasters, we assumed a decrease in the3% gross Default to Claim Rate assumptions appliedfor new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to such defaults. Duringthose two natural disasters. See “Overview—Operating Environment—Hurricanes” for additional information. For all areas other than FEMA Designated Areas associated with Hurricanes Harvey and Irma, the year ended December 31, 2015, we reducednumber of total new primary mortgage insurance defaults in our insured portfolio decreased by 7.2%, as compared to 2016. Our gross Default to Claim Rate assumption for new primary defaults, from 16%excluding the new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to 13%,those two natural disasters, was 10% as of December 31, 2017, compared to 12% as of December 31, 2016. This reduction in estimated gross Default to Claim Rate assumptions, which was based on continued improvement observed trends, contributed to the reduction in actual claim development trends.the portion of our provision for losses related to new defaults in 2017, compared to 2016. In addition, the 2017 provision on current year defaults includes $14 million related to pool commutations. The impact ofIn addition to the reductionspositive trends in our provision for losses for current year defaults infor 2017 and 2016, and 2015 was partially offset by a decline in the favorablewe experienced positive reserve development from prior year defaults, which, although still positive, provided significantly less of a benefit to our provision for losses in 2016 as compared to 2015 and 2014. The favorable development on prior year defaults, observedprimarily due to reductions in all three years was driven primarily by a decrease in our actual and estimatedcertain Default to Claim Rate assumptions based on prior year defaults, as a resultobserved trends of higher Cures than were previously estimated partially offset by a decline in our estimates for future Rescissions and Claim Denials.on those prior year defaults.
Our primary default rate at December 31, 20162018 was 3.2%2.1% compared to 4.0%2.9% at December 31, 2015.2017. Our primary defaulted inventory comprised 29,10521,093 loans at December 31, 2016,2018, compared to 35,30327,922 loans at December 31, 2015,2017, representing a 17.6% decrease.decrease of 24.5%. The reduction in our primary defaulted inventory is the result of the total number of defaulted loans: (i) that have cured;cured or (ii) for which claim payments have been made; and (iii) that have resulted in net insurance Rescissions and Claim Denials,made, collectively, exceeding the total number of new defaults on insured loans. Consistent with typical default seasoning patterns, the shift in our portfolio composition toward more recent vintages is expected to result in slightly increased levels of new defaults in our total portfolio for 2019 as compared to 2018, because we do not expect that the reductions in new defaults from our portfolio of insurance written prior to and including 2008 will continue to outpace the anticipated increases from more recent vintages.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In order to provide a longer-term, historical perspective, the following chart demonstrates default rate trends for the past 10 years. (1)
______________________
| | (1) | Insured loans subject to the Freddie Mac Agreement are included in the denominator for all periods, and loans in default subject to the Freddie Mac Agreement are excluded from the numerator beginning in 2013, because since that time we no longer have claims exposure on those loans. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table shows the number of primary loans that we have insured, the number of primary and pool loans in default and the percentage of primary loans in default as of the dates indicated: | | | | December 31, | December 31, | | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Default Statistics—Primary Insurance: | | | | | | | | | | | | Total primary insurance | | | | | | | | | | | | Prime | | | | | | | | | | | | Number of insured loans | 849,227 |
| | 816,797 |
| | 797,436 |
| 986,704 |
| | 913,408 |
| | 849,227 |
| | Number of loans in default | 19,101 |
| | 22,223 |
| | 28,246 |
| 15,402 |
| | 20,269 |
| | 19,101 |
| | Percentage of loans in default | 2.25 | % | | 2.72 | % | | 3.54 | % | 1.56 | % | | 2.22 | % | | 2.25 | % | | Alt-A | | | | | | | | Number of insured loans | 26,536 |
| | 32,411 |
| | 38,953 |
| | | Number of loans in default | 4,193 |
| | 5,813 |
| | 8,136 |
| | | Percentage of loans in default | 15.80 | % | | 17.94 | % | | 20.89 | % | | | A minus and below | | | | | | | | Alt-A and A minus and below | | | | | | | | Number of insured loans | 27,115 |
| | 31,902 |
| | 36,688 |
| 35,906 |
| | 42,318 |
| | 53,651 |
| | Number of loans in default | 5,811 |
| | 7,267 |
| | 8,937 |
| 5,691 |
| | 7,653 |
| | 10,004 |
| | Percentage of loans in default | 21.43 | % | | 22.78 | % | | 24.36 | % | 15.85 | % | | 18.08 | % | | 18.65 | % | | Total primary insurance | | | | | | | | | | | Number of insured loans (1) | 902,878 |
| | 881,110 |
| | 873,077 |
| | Number of loans in default (2) | 29,105 |
| | 35,303 |
| | 45,319 |
| | | Number of insured loans | | 1,022,610 |
| | 955,726 |
| | 902,878 |
| Number of loans in default (1) | | 21,093 |
| | 27,922 |
| | 29,105 |
| | Percentage of loans in default | 3.22 | % | | 4.01 | % | | 5.19 | % | 2.06 | % | | 2.92 | % | | 3.22 | % | | | | | | | | | | Default Statistics—Pool Insurance: | | | | | | | | | | | | Number of loans in default | 4,286 |
| | 5,796 |
| | 8,297 |
| 1,713 |
| | 2,117 |
| (2) | 4,286 |
|
______________________ | | | (1) | Includes 5,850; 7,353; and 9,101 insured loans subject to the Freddie Mac AgreementIncluded in this amount at December 31, 2018 and December 31, 2017 are the defaults in the FEMA Designated Areas associated with Hurricanes Harvey and Irma, which occurred during the third quarter of 2017. At December 31, 2018, 2017 and 2016, 2015defaults in these areas were 2,627; 7,051; and 2014,3,321, respectively. |
| | | (2) | Excludes 1,639; 2,821; and 4,467 loansDecrease primarily due to pool commutations that are in default at December 31, 2016, 2015 and 2014, respectively, subject totook place during the Freddie Mac Agreement, and for which we no longer have claims exposure.year. |
The number of new primary mortgage insurance defaults declined by 4.9% in 2016, compared to an 11.2% decrease in 2015 and an 18.1% decrease in 2014. We currently expect total new defaults for 2017 to continue to decrease, although the rate of decrease may continue to moderate. This is due, in part, to the shift in our portfolio composition toward more recent vintages for which we expect increasing levels of new defaults, consistent with typical default seasoning patterns.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table shows a rollforward of the number of our primary loans in default, including new defaults from our Legacy Portfolioinsurance written in years: (i) prior to and Post-legacy Portfolio:including 2008 and (ii) after 2008: | | | | | | | | | | | | Year Ended December 31, | | | 2016 | | 2015 | | 2014 | | Beginning default inventory | 35,303 |
| | 45,319 |
| | 60,909 |
| | Plus: New defaults | | | | | | | Legacy Portfolio new defaults | 29,772 |
| | 35,168 |
| | 42,978 |
| | Post-legacy Portfolio new defaults | 10,731 |
| | 7,439 |
| | 4,998 |
| | Total new defaults | 40,503 |
| | 42,607 |
| | 47,976 |
| | Less: Cures | 38,589 |
| | 40,607 |
| | 46,091 |
| Less: Claims paid (1) | 8,223 |
| | 13,492 |
| | 16,049 |
| Less: Rescissions and Claim Denials, net of (Reinstatements) (2) | (111 | ) | | 46 |
| | 610 |
| Less: Rescissions and Claim Denials, net of (Reinstatements), related to the BofA Settlement Agreement (3) | — |
| | (1,522 | ) | | 816 |
| | Ending default inventory | 29,105 |
| | 35,303 |
| | 45,319 |
| | | | | | | |
| | | | | | | | | | | | Year Ended December 31, | | | 2018 | | 2017 | | 2016 | | Beginning default inventory | 27,922 |
| | 29,105 |
| | 35,303 |
| Plus: New defaults on insurance written in years: (1) | | | | | | | Prior to and including 2008 | 19,629 |
| | 25,300 |
| | 29,772 |
| | After 2008 | 17,740 |
| | 17,588 |
| | 10,731 |
| | Total new defaults | 37,369 |
| | 42,888 |
| | 40,503 |
| Less: Cures (1) | 39,799 |
| | 37,464 |
| | 38,589 |
| Less: Claims paid (2) | 4,322 |
| | 6,477 |
| | 8,223 |
| Less: Rescissions and Claim Denials, net of (Reinstatements) (3) | 77 |
| | 130 |
| | (111 | ) | | Ending default inventory | 21,093 |
| | 27,922 |
| | 29,105 |
| | | | | | | |
______________________ | | | (1) | Included in this amount for the years ended December 31, 2018 and 2017 are the new defaults and Cures in the FEMA Designated Areas associated with Hurricanes Harvey and Irma, which occurred during the third quarter of 2017. Forthe years ended December 31, 2018, 2017 and 2016, new defaults and Cures in these areas were as follows: |
| | | | | | | | | | | | Year Ended December 31, | | | 2018 | | 2017 | | 2016 | | New defaults | 3,776 |
| | 8,862 |
| | 3,852 |
| | Cures | 7,723 |
| | 4,366 |
| | 3,727 |
|
| | | (2) | Includes those charged to a deductible or captive and, for 2015, claim payments related to the BofA Settlement Agreement.reinsurance transactions, as well as commutations. |
| | (2)(3) | Net of any previous Rescission and Claim Denials that were reinstated during the period (excluding activity related to the BofA Settlement Agreement).period. Such reinstated Rescissions and Claim Denials may ultimately result in a paid claim. |
| | (3) | Includes Rescissions, Claim Denials and Reinstatements on the population of loans subject to the BofA Settlement Agreement. Rescissions and Claim Denials, net of (Reinstatements), related to the BofA Settlement Agreement prior to the Implementation Date represent such activities on loans that subsequently became subject to the BofA Settlement Agreement. |
Our aggregate weighted average net Default to Claim Rate assumption for our primary loans used in estimating our reserve for losses, which is net of estimated Claim Denials and Rescissions, was approximately 42%, 46% and 52%, at December 31, 2016, 2015 and 2014, respectively. We develop our Default to Claim Rate estimates on defaulted loans based on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. Our gross Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans, as measured by the progress toward foreclosure sale and the number of months in default. Our gross Default to Claim Rate assumption for new primary defaults was reduced from 10% at December 31, 2017, to 8% at December 31, 2018. As of December 31, 2016,2018, our gross Default to Claim Rate assumptions on our primary portfolio ranged from 12%8% for new defaults, up to 68% for defaults not in foreclosure stage, and 75% for Foreclosure Stage Defaults. As of December 31, 2017, these gross Default to Claim Rate assumptions for our primary portfolio, other than for new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two natural disasters, ranged from 10% for new defaults, up to 62% for other defaults not in foreclosure stage, and 81% for Foreclosure Stage Defaults. As of December 31, 2015, these gross Default to Claim Rate assumptions were 13% for new defaults, up to 65% for other defaults not in foreclosure stage, and 81% for Foreclosure Stage Defaults.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following tables show additional information about our primary loans in default as of the dates indicated: | | | | December 31, 2016 | December 31, 2018 | | | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve | | ($ in thousands) | # | | % | | # | | % | | $ | | % | # | | % | | # | | % | | $ | | % | | Missed payments: | | | | | | | | | | | | | | | | | | | | | | | | Three payments or less | 10,116 |
| | 34.7 | % | | 166 |
| | 29.6 | % | | $ | 100,649 |
| | 15.8 | % | 10,038 |
| | 47.6 | % | | 148 |
| | 33.2 | % | | $ | 83,540 |
| | 23.1 | % | | Four to eleven payments | 7,763 |
| | 26.7 |
| | 534 |
| | 18.9 |
| | 121,636 |
| | 19.1 |
| | | Twelve payments or more | 10,034 |
| | 34.5 |
| | 2,696 |
| | 5.1 |
| | 355,005 |
| | 55.8 |
| | | Four to 11 payments | | 5,905 |
| | 28.0 |
| | 422 |
| | 24.7 |
| | 87,210 |
| | 24.1 |
| | 12 payments or more | | 4,468 |
| | 21.2 |
| | 1,365 |
| | 6.5 |
| | 156,808 |
| | 43.4 |
| | Pending claims | 1,192 |
| | 4.1 |
| | N/A |
| | 2.2 |
| | 59,030 |
| | 9.3 |
| 682 |
| | 3.2 |
| | N/A |
| | 4.3 |
| | 34,130 |
| | 9.4 |
| | Total | 29,105 |
| | 100.0 | % | | 3,396 |
| |
|
| | 636,320 |
| | 100.0 | % | 21,093 |
| | 100.0 | % | | 1,935 |
| |
|
| | 361,688 |
| | 100.0 | % | | IBNR and other | | | | | | | | | 71,107 |
| | | | | | | | | | | 13,864 |
| | | | LAE | | | | | | | | | 18,630 |
| | | | | | | | | | | 10,271 |
| | | | Total primary reserves | | | | | | | | | $ | 726,057 |
| | | | | | | | | | | $ | 385,823 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2016 | | | December 31, 2018 | | December 31, 2018 | Key Reserve Assumptions | | Gross Default to Claim Rate % | | Net Default to Claim Rate % | | Claim Severity % (1) | | Net Default to Claim Rate % | | Claim Severity % | | 45% | | 42% | | 101% | | | 35% | | | 33% | | 96% |
| | | | December 31, 2015 | December 31, 2017 | | | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve | | ($ in thousands) | # | | % | | # | | % | | $ | | % | # | | % | | # | | % | | $ | | % | | Missed payments: | | | | | | | | | | | | | | | | | | | | | | | | Three payments or less | 10,742 |
| | 30.4 | % | | 187 |
| | 29.0 | % | | $ | 107,632 |
| | 13.1 | % | 13,004 |
| | 46.6 | % | | 172 |
| | 31.7 | % | | $ | 89,412 |
| | 19.3 | % | | Four to eleven payments | 8,481 |
| | 24.0 |
| | 541 |
| | 16.2 |
| | 127,183 |
| | 15.5 |
| | | Twelve payments or more | 13,731 |
| | 38.9 |
| | 3,160 |
| | 4.2 |
| | 473,440 |
| | 57.6 |
| | | Four to 11 payments | | 7,528 |
| | 27.0 |
| | 426 |
| | 20.9 |
| | 99,759 |
| | 21.5 |
| | 12 payments or more | | 6,651 |
| | 23.8 |
| | 1,933 |
| | 6.3 |
| | 234,895 |
| | 50.6 |
| | Pending claims | 2,349 |
| | 6.7 |
| | N/A |
| | 1.5 |
| | 113,570 |
| | 13.8 |
| 739 |
| | 2.6 |
| | N/A |
| | 3.1 |
| | 40,144 |
| | 8.6 |
| | Total | 35,303 |
| | 100.0 | % | | 3,888 |
| | | | 821,825 |
| | 100.0 | % | 27,922 |
| | 100.0 | % | | 2,531 |
| | | | 464,210 |
| | 100.0 | % | | IBNR and other | | | | | | | | | 83,066 |
| | | | | | | | | | | 16,021 |
| | | | LAE | | | | | | | | | 26,108 |
| | | | | | | | | | | 13,349 |
| | | | Total primary reserves | | | | | | | | | $ | 930,999 |
| | | | | | | | | | | $ | 493,580 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2015 | | | December 31, 2017 | | December 31, 2017 | Key Reserve Assumptions | | Gross Default to Claim Rate % | | Net Default to Claim Rate % | | Claim Severity % (1) | | Net Default to Claim Rate % | | Claim Severity % | | 48% | | 46% | | 101% | | | 33% | | | 31% | | 98% |
______________________ N/A – Not applicable | | (1) | Factors that impact the severity of a claim include, but are not limited to: (i) the size of the loan; (ii) the amount of mortgage insurance coverage placed on the loan; (iii) the amount of time between default and claim during which we are expected to cover interest (capped at two years under our Prior Master Policy and capped at three years under our 2014 Master Policy) and certain expenses; and (iv) the impact of certain loss management activities with respect to the loan. |
Part II Item 7. Management’s DiscussionOur aggregate weighted-average net Default to Claim Rate assumption for our primary loans used in estimating our reserve for losses, which is net of estimated Claim Denials and AnalysisRescissions, was approximately 33%, 31% and 42%, at December 31, 2018, 2017 and 2016, respectively. The change in our Default to Claim Rate in 2017 resulted primarily from the lower Default to Claim Rate of Financial Condition3% on new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Results of Operations
Irma subsequent to those two natural disasters and through February 2018. Our net Default to Claim Rate and loss reserve estimate incorporates our expectations with respect to future Rescissions, Claim Denials and Claim Curtailments. Our estimate
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
of such net future Loss Mitigation Activities, inclusive of claim withdrawals, reduced our loss reserve as of December 31, 20162018 and 20152017 by approximately $39$32 million and $53$31 million, respectively. These expectations are based primarily on recent claim withdrawal activity and our recent experience with respect to the number of claims that have been denied due to the policyholder’s failure to submit sufficient documentation to perfect a claim within the time period permitted under our Master Policies and also our recent experience with respect to the number of insurance certificates that have been rescinded due to fraud, underwriter negligence or other factors. Our assumptions also reflect the estimated impact of the BofA Settlement Agreement. See Note 11 of Notes to Consolidated Financial Statements. The impact to our mortgage insurance reserves due to estimated future Rescissions, Claim Denials and Claim Curtailments incorporates our expectations regarding the number of policies that we expect to reinstate as a result of our claims rebuttal process. The level of Loss Mitigation Activities has been declining in recent periods as our defaulted Legacy Portfolio continues to decline, and we expect this trend to continue.
Our reported Rescission, Claim Denial and Claim Curtailments activity in any given period is subject to challenge by our lender and servicer customers through our claims rebuttal process. In addition, we are at times engaged in discussions with our lender and servicer customers regarding our Loss Mitigation Activities. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. In accordance with the accounting standard regarding contingencies, we accrue for an estimated loss when we determine that the loss is probable and can be reasonably estimated. On September 16, 2014, Radian Guaranty entered into the BofA Settlement Agreement in order to resolve various actual and potential claims or disputes related to the parties’ respective rights and duties as to mortgage insurance coverage on the Subject Loans. The consent of the GSEs required to implement the BofA Settlement Agreement was received in December 2014, and implementation of the agreement for Subject Loans owned by the GSEs or held in portfolio by the Insureds commenced on February 1, 2015. See Note 11 of Notes to Consolidated Financial Statements for additional information about the BofA Settlement Agreement.
We expect that a portion of previously rescinded policies will be reinstated and previously denied claims will be resubmitted with the required documentation and ultimately paid; therefore, we have incorporated this expectation into our IBNR reserve estimate. Our IBNR reserve estimate was $14.3$11.3 million, $26.6$10.4 million and $163.6$14.3 million at December 31, 2018, 2017 and 2016, 2015respectively. Factors that impact the severity of a claim include, but are not limited to: (i) the size of the loan; (ii) the amount of mortgage insurance coverage placed on the loan; (iii) the amount of time between default and claim during which we are expected to cover interest (capped at two years under our Prior Master Policy and capped at three years under our 2014 respectively. The significant decrease in our IBNR reserve estimate since 2014 reflectsMaster Policy) and certain expenses; and (iv) the impact of the payment of claims pursuantcertain loss management activities with respect to the BofA Settlement Agreement.loan. The average Claim Severity experienced for loans covered by our primary insurance was 104.9% for 2018, compared to 104.7% in 2017 and 104.1% in 2016. Our mortgage insurance total loss reserve as a percentage of our mortgage insurance total RIF was 1.6%0.7% at December 31, 2016,2018, compared to 2.1%1.0% at December 31, 20152017 and 3.5%1.6% at December 31, 2014.2016. See Note 11 of Notes to Consolidated Financial Statements for information regarding our reserves for losses by category and a reconciliation of our Mortgage Insurance segment’s beginning and ending reserves for losses and LAE. Our primary reserve per default (calculated as primary reserve excluding IBNR and other reserves divided by the number of primary defaults) was $22,503, $24,019$17,634, $17,103 and $27,683$22,503 at December 31, 2018, 2017 and 2016, 2015respectively. The $17,103 primary reserve per default at December 31, 2017, includes the impact of reserves and 2014, respectively.defaults related to the FEMA Designated Areas associated with Hurricanes Harvey and Irma. Excluding the impact from new defaults received subsequent to Hurricanes Harvey and Irma in these FEMA Designated Areas, this amount would be approximately $20,500 at December 31, 2017. We considered the sensitivity of our loss reserve estimates at December 31, 2018 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate for primary loans. For example, assuming all other factors remain constant, for every one percentage point absolute change in primary Claim Severity (which we estimated to be 96% of our risk exposure at December 31, 2018), we estimated that our total loss reserve at December 31, 2018 would change by approximately $4 million. Assuming the portfolio mix and all other factors remain constant, for every one percentage point absolute change in our primary net Default to Claim Rate, we estimated a $10 million change in our primary loss reserve at December 31, 2018. In addition, as part of our claims review process, we assess whether defaulted loans were serviced appropriately in accordance with our insurance policies and servicing guidelines. To the extent a servicer has failed to satisfy its servicing obligations, our policies provide that we may curtail the claim payment for such default, and in some circumstances, cancel coverage or deny the claim. Before consideration of any subsequent challenges by our lender and servicer customers, Claim Curtailments due to servicer noncompliance with our insurance policies and servicing guidelines, which impact the severity of our claim payments, were $4.7 million for the year ended December 31, 2018, respectively, compared to $7.2 million for the same period in 2017. Total mortgage insurance claims paid in 20162018 of $417.6$215.9 million have decreased from claims paid of $764.7$390.4 million in 2015, primarily due to the completion of the reinstatement activities required by the BofA Settlement Agreement, which increased claims paid from February 2015 through December 31, 2015. Total mortgage insurance claims paid in 2015 of $764.7 million decreased from claims paid of $838.3 million in 2014, primarily due to the overall decline in defaulted loans and pending claims, partially offset by an increase2017. The decrease in claims paid due tois consistent with the BofA settlement agreement. We currently expectongoing decline in the outstanding default inventory. In addition, claims paid of approximately $325 million for the full year ended December 31, 2017 included the payment of $54.8 million made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017. Claims paid in both periods also include the impact of commutations. Although expected claims are included in our reserve for losses, the timing of claims paid is
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
subject to fluctuation from quarter to quarter, based on the rate that defaults cure and other factors (as described in “Item 1. Business—Mortgage Insurance—Defaults and Claims”) that make the timing of paid claims difficult to predict. The following table shows net claims paid by product and the average claimsclaim paid by product for the periods indicated: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | Net claims paid (1): | | | | | | | Prime | $ | 252,583 |
| | $ | 281,971 |
| | $ | 533,563 |
| | Alt-A | 91,170 |
| | 83,568 |
| | 132,752 |
| | A minus and below | 48,886 |
| | 55,664 |
| | 92,526 |
| | Total primary claims paid | 392,639 |
| | 421,203 |
| | 758,841 |
| | Pool | 22,120 |
| | 34,870 |
| | 64,191 |
| | Second-lien and other | (384 | ) | | (323 | ) | | 2,011 |
| | Subtotal | 414,375 |
| | 455,750 |
| | 825,043 |
| | Impact of captive terminations | (2,418 | ) | | (12,065 | ) | | (1,156 | ) | Impact of settlements (2) | 5,605 |
| | 320,983 |
| | 14,375 |
| | Total net claims paid | $ | 417,562 |
| | $ | 764,668 |
| | $ | 838,262 |
| | | | | | | | Average net claim paid (3): | | | | | | | Prime | $ | 47.5 |
| | $ | 46.4 |
| | $ | 46.4 |
| | Alt-A | 64.4 |
| | 58.7 |
| | 56.3 |
| | A minus and below | 38.7 |
| | 39.8 |
| | 38.2 |
| | Total average net primary claim paid | 49.1 |
| | 47.3 |
| | 46.6 |
| | Pool | 51.9 |
| | 58.5 |
| | 56.9 |
| | Total average net claim paid | $ | 48.9 |
| | $ | 47.8 |
| | $ | 47.0 |
| | | | | | | | Average direct primary claim paid (3) (4) | $ | 49.5 |
| | $ | 48.4 |
| | $ | 47.9 |
| Average total direct claim paid (3) (4) | $ | 49.3 |
| | $ | 48.8 |
| | $ | 48.3 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | Net claims paid: (1) | | | | | | | Prime | $ | 120,503 |
| | $ | 182,338 |
| | $ | 252,583 |
| | Alt-A and A minus and below | 67,136 |
| | 96,102 |
| | 140,056 |
| | Total primary claims paid | 187,639 |
| | 278,440 |
| | 392,639 |
| | Pool | 3,520 |
| | 10,687 |
| | 22,120 |
| Other (2) | 322 |
| | (1,937 | ) | | (384 | ) | | Subtotal | 191,481 |
| | 287,190 |
| | 414,375 |
| | Impact of captive terminations | (793 | ) | | 645 |
| | (2,418 | ) | Impact of commutations (3) | 25,260 |
| | 102,545 |
| | 5,605 |
| | Total net claims paid | $ | 215,948 |
| | $ | 390,380 |
| | $ | 417,562 |
| | | | | | | | Average net claim paid: (1) (4) | | | | | | | Prime | $ | 49.9 |
| | $ | 49.2 |
| | $ | 47.5 |
| | Alt-A and A minus and below | 62.4 |
| | 54.1 |
| | 52.3 |
| | Total average net primary claim paid | 53.7 |
| | 50.8 |
| | 49.1 |
| | | | | | | | Average direct primary claim paid (4) (5) | $ | 54.4 |
| | $ | 51.1 |
| | $ | 49.5 |
|
______________________ | | | (1) | Net of reinsurance recoveries and other recoveries. |
| | | (2) | For 2015, includes the impactNet of the BofA Settlement Agreement from the Implementation Date.recoveries collected on claims paid in prior years on second-lien mortgage loans. |
| | | (3) | Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans. For 2017, includes payments that, as expected, were made in connection with the final settlement of the Freddie Mac Agreement, as well as payments to commute mortgage insurance coverage on certain performing and non-performing loans on which we had Pool Insurance risk. |
| | | (4) | Calculated without giving effect to the impact of the termination of captive transactions and settlements.commutations. |
| | (4)(5) | Before reinsurance recoveries. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Notwithstanding historical trends, our Legacy Portfolioportfolio originated prior to and including 2008 experienced default and claim activity sooner and to a significantly greater extent than had been the case historically for our books of business prior to the financial crisis. For the periods indicated, the following tables show: (i) cumulative direct claims paid by us on our primary insured book of business at the end of each successive year after origination, expressed as a percentage of the cumulative premiums written by us in each year of origination and (ii) direct claims paid by policy origination year. Direct claims paid represent first-lien claims paid prior to reinsurance recoveries and captive termination payments, and exclude LAE expenses and settlement payments.LAE. | | Direct Claims Paid vs. Premiums Written—Primary Insurance | Year of Origination | | End of 1st year | | End of 2nd year | | End of 3rd year | | End of 4th year | | End of 5th year | | End of 6th year | | End of 7th year | | End of 8th year | | End of 9th year | | End of 10th year | | End of 1st year | | End of 2nd year | | End of 3rd year | | End of 4th year | | End of 5th year | | End of 6th year | | End of 7th year | | End of 8th year | | End of 9th year | | End of 10th year | | 2007 | | 0.5 | % | | 9.8 | % | | 33.6 | % | | 81.0 | % | | 124.2 | % | | 142.4 | % | | 162.6 | % | | 171.7 | % | | 178.8 | % | | 178.7 | % | | | 2008 | | 0.2 | % | | 5.0 | % | | 29.2 | % | | 61.2 | % | | 78.0 | % | | 97.8 | % | | 106.2 | % | | 111.8 | % | | 112.1 | % | | — |
| | | 2009 | | 0.0 | % | | 1.3 | % | | 3.9 | % | | 7.6 | % | | 11.7 | % | | 14.2 | % | | 15.3 | % | | 15.9 | % | | — |
| | — |
| | 0.0 | % | | 1.3 | % | | 3.9 | % | | 7.6 | % | | 11.7 | % | | 14.2 | % | | 15.3 | % | | 15.9 | % | | 16.4 | % | | 16.4 | % | | 2010 | | 0.0 | % | | 0.4 | % | | 1.3 | % | | 3.1 | % | | 4.9 | % | | 5.5 | % | | 6.0 | % | | — |
| | — |
| | — |
| | 0.0 | % | | 0.4 | % | | 1.3 | % | | 3.1 | % | | 4.9 | % | | 5.5 | % | | 6.0 | % | | 6.3 | % | | 6.4 | % | | — |
| | 2011 | | 0.0 | % | | 0.2 | % | | 1.1 | % | | 2.0 | % | | 2.7 | % | | 3.2 | % | | — |
| | — |
| | — |
| | — |
| | 0.0 | % | | 0.2 | % | | 1.1 | % | | 2.0 | % | | 2.7 | % | | 3.2 | % | | 3.6 | % | | 3.8 | % | | — |
| | — |
| | 2012 | | 0.0 | % | | 0.1 | % | | 0.5 | % | | 0.8 | % | | 1.2 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | 0.0 | % | | 0.1 | % | | 0.5 | % | | 0.8 | % | | 1.2 | % | | 1.5 | % | | 1.7 | % | | — |
| | — |
| | — |
| | 2013 | | 0.0 | % | | 0.1 | % | | 0.4 | % | | 0.9 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.0 | % | | 0.1 | % | | 0.4 | % | | 0.9 | % | | 1.3 | % | | 1.6 | % | | — |
| | — |
| | — |
| | — |
| | 2014 | | 0.0 | % | | 0.0 | % | | 0.6 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.0 | % | | 0.0 | % | | 0.6 | % | | 1.4 | % | | 2.0 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | 2015 | | 0.0 | % | | 0.1 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.0 | % | | 0.1 | % | | 0.6 | % | | 1.2 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2016 | | 0.0 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.0 | % | | 0.1 | % | | 0.4 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2017 | | | 0.0 | % | | 0.0 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2018 | | | 0.0 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | December 31, | | ($ in millions) | 2016 | | 2015 | | 2014 | | Direct claims paid by origination year (first-lien): | | | | | | | | | | | | | 2005 and prior | $ | 135 |
| | 32.8 | % | | $ | 218 |
| | 29.3 | % | | $ | 219 |
| | 27.0 | % | | 2006 | 74 |
| | 18.0 |
| | 154 |
| | 20.7 |
| | 163 |
| | 20.1 |
| | 2007 | 138 |
| | 33.5 |
| | 270 |
| | 36.2 |
| | 302 |
| | 37.1 |
| | 2008 | 46 |
| | 11.1 |
| | 88 |
| | 11.8 |
| | 107 |
| | 13.2 |
| | 2009 | 4 |
| | 1.0 |
| | 7 |
| | 0.9 |
| | 12 |
| | 1.5 |
| | 2010 | 2 |
| | 0.5 |
| | 2 |
| | 0.3 |
| | 4 |
| | 0.5 |
| | 2011 | 2 |
| | 0.5 |
| | 2 |
| | 0.3 |
| | 3 |
| | 0.3 |
| | 2012 | 3 |
| | 0.7 |
| | 2 |
| | 0.3 |
| | 2 |
| | 0.2 |
| | 2013 | 5 |
| | 1.2 |
| | 2 |
| | 0.2 |
| | 1 |
| | 0.1 |
| | 2014 | 3 |
| | 0.7 |
| | — |
| | — |
| | — |
| | — |
| | 2015 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2016 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Total direct claims paid (1) | $ | 412 |
| | 100.0 | % | | $ | 745 |
| | 100.0 | % | | $ | 813 |
| | 100.0 | % | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | December 31, | | ($ in thousands) | 2018 | | 2017 | | 2016 | | Direct claims paid by origination year (first-lien): | | | | | | | | | | | | | 2008 and prior | $ | 183,310 |
| | 89.5 | % | | $ | 358,067 |
| | 94.0 | % | | $ | 393,063 |
| | 95.5 | % | | 2009 | 1,623 |
| | 0.8 |
| | 3,970 |
| | 1.0 |
| | 4,156 |
| | 1.0 |
| | 2010 | 587 |
| | 0.3 |
| | 1,332 |
| | 0.3 |
| | 1,644 |
| | 0.4 |
| | 2011 | 1,020 |
| | 0.5 |
| | 1,484 |
| | 0.4 |
| | 1,835 |
| | 0.5 |
| | 2012 | 2,100 |
| | 1.0 |
| | 2,943 |
| | 0.8 |
| | 3,380 |
| | 0.8 |
| | 2013 | 3,126 |
| | 1.5 |
| | 4,638 |
| | 1.2 |
| | 4,561 |
| | 1.1 |
| | 2014 | 5,490 |
| | 2.7 |
| | 5,271 |
| | 1.4 |
| | 2,961 |
| | 0.7 |
| | 2015 | 4,856 |
| | 2.4 |
| | 3,143 |
| | 0.8 |
| | — |
| | — |
| | 2016 | 2,416 |
| | 1.2 |
| | 254 |
| | 0.1 |
| | — |
| | — |
| | 2017 | 253 |
| | 0.1 |
| | — |
| | — |
| | — |
| | — |
| | 2018 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Total direct claims paid (1) | $ | 204,781 |
| | 100.0 | % | | $ | 381,102 |
| | 100.0 | % | | $ | 411,600 |
| | 100.0 | % | | | | | | | | | | | | | |
______________________ | | | (1) | Represents total first-lien direct claims paid, excluding impact of reinsurance and LAE expenses and Freddie Mac Agreement.LAE. |
Other Operating Expenses. OtherThe increase in other operating expenses for 2016 decreased2018, as compared to 2015,2017, primarily reflects an increase in the proportion of corporate expenses allocated to the Mortgage Insurance segment, combined with higher total corporate expense. The increase in allocated expenses was partially offset by lower segment expenses in 2018 as compared to 2017, primarily as a result of the benefit ofincreases in (i) ceding commissions, fromdue to the 2018 Single Premium QSR Transaction, partially offset byAgreement and (ii) the cession percentage on the 2016 Single Premium QSR Agreement. See “Results of Operations—Consolidated—Other Operating Expenses.” Other operating expenses for 2017, as compared to 2016, reflect an increase primarily due to: (i) increases in compensation-related expense and technology expenses associated with a significant investment in upgrading our systems.systems; (ii) higher allocated corporate operating expenses, primarily due to expenses associated with the retirement and consulting agreements entered into with our former Chief Executive Officer; (iii) expenses accrued to defend and resolve certain outstanding legal matters; and (iv) a decrease in ceding
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
commissions. These increases were partially offset by lower compensation expense in 2017, including variable incentive-based compensation. Our expense ratio on a net premiums earned basis represents our Mortgage Insurance segment’s operating expenses (which include policy acquisition costs and other operating expenses, in 2015 as well as allocated corporate operating expenses), expressed as a percentage of net premiums earned. Our expense ratio was 23.9% for 2018, compared to 2014 decreased primarily as a result24.7% for 2017 and 22.7% for 2016. The increase in net premiums earned during 2018 was the primary driver of the reduced impact from increaseschange in the estimated fair value of cash-settled long-term incentive awards that were valued, in large part, based on the stock price of Radian Group’s common stock, combined with a decrease in other bonus compensation expense. This decrease in other operating expenses in 2015 as compared to 2014 was partially offset by the reduction in ceding commissions from the Initial and Second QSR Transactions.expense ratios between these periods. Interest Expense. These amounts reflect the allocated portion of interest on Radian Group’s long-term debt obligations allocated to our Mortgage Insurance segment, excluding the Senior Notes due 2019. The allocated interest decreased in 20162018 and 2017 compared to 2015, and in 2015 compared to 2014.2016. These decreases were primarily due to the capital management transactions describedand liquidity actions taken in “—Results2017 and 2016. See “Results of Operations—Consolidated—Interest Expense.Expense.”
Results of Operations—Services The following table summarizes our Services segment’s results of operations for the years ended December 31, 2016, 20152018, 2017 and 2014:2016: | | | | | | | | | | $ Change | | | | | | | $ Change | | | Year Ended December 31, (1) | | Favorable (Unfavorable) | Year Ended December 31, | | Favorable (Unfavorable) | | (In millions) | 2016 | | 2015 | | 2014 (2) | | 2016 vs. 2015 | | 2015 vs. 2014 | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 | Adjusted pretax operating income (loss) (3) | $ | (20.2 | ) | | $ | (0.2 | ) | | $ | (5.5 | ) | | $ | (20.0 | ) | | $ | 5.3 |
| | Adjusted pretax operating income (loss) (1) | | $ | (27.1 | ) | | $ | (33.8 | ) | | $ | (20.2 | ) | | $ | 6.7 |
| | $ | (13.6 | ) | | Net premiums earned—insurance | | 7.3 |
| | — |
| | — |
| | 7.3 |
| | — |
| | Services revenue | 177.2 |
| | 163.1 |
| | 78.9 |
| | 14.1 |
| | 84.2 |
| 148.2 |
| | 161.8 |
| | 177.2 |
| | (13.6 | ) | | (15.4 | ) | | Cost of services | 115.4 |
| | 97.3 |
| | 44.7 |
| | (18.1 | ) | | (52.6 | ) | 98.7 |
| | 105.8 |
| | 115.4 |
| | 7.1 |
| | 9.6 |
| | Gross profit on services | 61.8 |
| | 65.8 |
| | 34.2 |
| | (4.0 | ) | | 31.6 |
| 49.5 |
| | 56.0 |
| | 61.8 |
| | (6.5 | ) | | (5.8 | ) | | Other operating expenses | 64.3 |
| | 48.3 |
| | 32.1 |
| | (16.0 | ) | | (16.2 | ) | | | Interest expense | 17.7 |
| | 17.7 |
| | 8.9 |
| | — |
| | (8.8 | ) | | Other operating expenses (2) | | 65.2 |
| | 65.3 |
| | 64.3 |
| | 0.1 |
| | (1.0 | ) | Restructuring and other exit costs (3) | | 2.1 |
| | 6.8 |
| | — |
| | 4.7 |
| | (6.8 | ) |
______________________ | | | (1) | For all periods presented, reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue, cost of services and operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. See Note 4 of Notes to Consolidated Financial Statements. |
| | (2) | Reflects the results of operations of Clayton from the June 30, 2014 date of acquisition. |
| | (3) | Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of our business segments. See Note 4 of Notes to Consolidated Financial Statements. |
| | | (2) | Includes allocation of corporate operating expenses of $12.0 million, $14.3 million and $8.5 million for 2018, 2017 and 2016, respectively. |
| | | (3) | Does not include impairment of long-lived assets and loss from the sale of a business line, which are not components of adjusted pretax operating income. |
TheOur Services segment isoffers a fee-for-service business, with revenue derived from: (i) loan review, underwriting and due diligence services; (ii) surveillance services, including RMBS surveillance, loan servicer oversight, loan-level servicing compliance reviews and operational reviewsbroad array of mortgage, servicers and originators; (iii) real estate valuation and componenttitle services providing outsourcingto market participants across the mortgage and technology solutions forreal estate value chain, primarily through our subsidiaries, including Clayton, Green River Capital, Radian Settlement Services and Red Bell. In 2018, we also acquired the SFRbusinesses of EnTitle Direct (in March 2018) and Independent Settlement Services (in November 2018), as well as the assets of Five Bridges (in December 2018), to enhance our Services offerings. In connection with the restructuring of our Services business, we have refined our Services business strategy going forward to focus on our core mortgage, real estate and title services. These services provide mortgage lenders, financial institutions, mortgage and real estate investors and government entities, among others, with information and other resources that are used to originate, evaluate, acquire, securitize, service and monitor residential real estate markets;and loans secured by residential real estate. Effective with our acquisition of EnTitle Direct in March 2018, we provide title insurance to mortgage lenders as well as outsourced solutionsdirectly to borrowers.
The services that we no longer offer as a result of restructuring our Services business have not had a material impact on our consolidated cash flows or results of operations in recent periods. There was no material impact on our consolidated cash flows or results of operations from discontinuing these services. See Notes 1 and 7 of Notes to Consolidated Financial Statements and “Item 1. Business—Services—Services Business Overview” for appraisal, title and closing services offered through Red Bell and ValuAmerica; (iv) REO management services; and (v) services foradditional information regarding the United Kingdom and European mortgage markets through our EuroRisk operations.Services segment. Adjusted pretax operating income (loss). Our Services segment’s adjusted pretax operating loss for 2018 was $20.2$27.1 million, compared to an adjusted pretax operating loss of $33.8 million in 2016 compared to $0.2 million in 2015 and $5.5 million in 2014.2017. The increasedecrease in our adjusted pretax operating loss in 2016 as compared to 2015 was primarily driven by increases in other operating expenses, combined with decreases in gross profit, as discussed further below. Our results for 2015 as compared to 2014 reflect a full year of Clayton’s activity in 2015 compared to six months of activity in 2014, due to the June 30, 2014 acquisition of Clayton. As a percentage of Services revenue for the respective periods, the results for 2015 as compared to 2014 reflect a decrease in gross profit and an increase in other operating expenses. Services Revenue. Revenue increased in 2016 as compared to 2015, primarily due to the inclusion of a full year of operations in 2016 for Red Bell and ValuAmerica, which were acquired in March 2015 and October 2015, respectively. This increase was partially offset by decreased activity in the SFR securitization market. Revenue for 2015 increased as compared to 2014 primarily due to (i) a full year of Clayton operations in 2015 compared to six months in 2014 and (ii) the acquisitions during 2015 of Red Bell and ValuAmerica.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
loss for 2018, as compared to 2017, was driven by: (i) a decrease in compensation-related costs (exclusive of costs related to EnTitle Direct), primarily as a result of our restructuring activities in 2017 and (ii) a decrease in restructuring and other exit costs. These lower expenses were partially offset by the inclusion of the operating results of EnTitle Direct (acquired in March 2018). Our Services segment’s adjusted pretax operating loss was $33.8 million in 2017 compared to an adjusted pretax operating loss of $20.2 million in 2016. The increase in our adjusted pretax operating loss in 2017, as compared to 2016, was primarily driven by: (i) restructuring and other exit costs and (ii) decreased gross profit, primarily attributable to a shift in mix of services. Net premiums earned-insurance. Net premiums earned for 2018 increased compared to 2017, as a result of the March 2018 acquisition of EnTitle Direct and the inclusion of its operations. Services Revenue. Services revenue decreased for 2018, as compared to 2017, primarily due to a decline in mortgage and title services transaction volumes related primarily to lower volume from a large contract, which was substantially completed during the first half of 2018, partially offset by an increase in real estate services. This decrease in services revenue is generally in line with our expectations following our announced restructuring of our Services segment in late 2017, through which we are repositioning the segment to drive future profitability by focusing on the core products and services that we believe have higher growth potential, produce more predictable and recurring fee-based revenues, and better align with our customer needs. Revenue decreased in 2017, as compared to 2016, primarily due to the decline in volume in: (i) mortgage services related primarily to our transaction management business and our surveillance business and (ii) real estate services primarily driven by our REO business. The decrease in transaction management was primarily due to a decline in loan review volume driven by a decline in demand for outsourcing. Our surveillance business is transactional and the decrease in surveillance services volume was primarily due to fewer transactions and pricing changes with one of our top 10 Services customers. The decline in REO asset management volume was primarily driven by a decline in REO asset inflow reflecting market conditions. These decreases were partially offset by an increase in title services transaction volumes related to a large contract. For the year ended December 31, 2016,2018, the top 10 Services customers (which includesmay include our affiliates) generated approximately 52%42% of the Services segment’s revenues,services revenue, as compared to 48%49% for 20152017 and 62%52% for 2014.2016. Approximately 5%2%, 4% and 1%5% of services revenue on a segment basis for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively, related to sales to our affiliates, and has been eliminated in our consolidated results. The largest single customer generated approximately 11%15% of the services revenue for the year ended December 31, 2016 and 9% for the year ended December 31, 2015. For the year ended December 31, 2014, services revenue included a significant loan review and due diligence project for a single client which represented approximately 13% of services revenue. The project continued in 2015, although at a reduced level. The increased burden on loan originators2018 as compared to implement and comply with TRID, which went into effect in the fourth quarter of 2015, resulted in a slowdown in the volume of newly originated loans and also had a negative margin impact on our loan review, underwriting and due diligence revenues, due to delays in the closing of mortgage loans. Real estate valuation and component services revenue11% for the years ended December 31, 2016, 20152017 and 2014 includes revenue from SFR securitizations as well as revenue from financial institutions that extend loans to institutional investors to fund purchases of homes. Approximately 14%, 18% and 20% of services revenue in 2016, 2015 and 2014 respectively, was related to the SFR market, including SFR securitizations. The overall decrease in activity related to the SFR market, compared to prior years, was driven by a decline in the pace of home purchases by institutional investors and a slowdown in SFR securitizations during 2015 and the first half of 2016, which negatively impacted our revenue in both years. We have since then experienced a modest increase in SFR securitization and related activity, and we expect this level of activity to continue through 2017.December 31, 2016.
The chart below provides the composition of services revenue on an annual basis for periods subsequent to the June 30, 2014 acquisition of Clayton.
Cost of Services.Our cost of services is primarily affected by our level of services revenue.revenue and the mix of services provided. Our cost of services primarily consists of employee compensation and related payroll benefits, including the cost of billable labor assigned to revenue-generating activities and, to a lesser extent, other costs of providing services such as travel and related expenses incurred in providing client services and costs paid to outside vendors, data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. The level of these costs may fluctuate if market rates of compensation change, or if there is decreased availability or a loss of qualified employees.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Profit on Services. For the years ended December 31, 2016, 2015 and 2014 our gross profit on services represented 35%, 40% and 43% of total services revenue, respectively. These decreases in gross profit margin were primarily due to: (i) a decrease in real estate valuation and component services revenue associated with the decrease in SFR securitizations and non-agency securitizations (which generally have relatively higher gross profit margins); (ii) a decline in loan review, underwriting and due diligence gross profit; and (iii) a shift in the mix of services. Slightly offsetting the decrease in 2016 was improved REO Management gross profit margin due to higher volumes and the mix of customers.
As a percentage of revenue, loan review, underwriting and due diligence gross profit margins decreased by 10% from 2015 to 2016 and by 9% from 2014 to 2015. These decreases in gross profit margin were primarily related to higher than anticipated costs of services due to increased TRID documentation requirements implemented in the fourth quarter of 2015. Additionally, gross profit on services was also impacted in 2015 by increased variable costs as a change in scope occurred on a single client’s loan review and due diligence project, as noted above.
Other Operating Expenses. Other operating expenses primarily consist of compensation costs not classified as cost of services because they are related to employees, such as sales and corporate employees, who are not directly involved in providing client services. Compensation-related costs for 20162018 represented 55%50% of the segment’s other operating expenses, compared to 57%50% and 55% for 2015. Although2017 and 2016, respectively. Other operating expenses for 2018 were impacted by the acquisition of EnTitle Direct in March 2018 and the resulting inclusion of its other operating expenses from the date of acquisition. The inclusion of EnTitle Direct is the primary driver of the increase in compensation-related costs for 20162018, compared to 2015the same period in 2017, partially offset by decreases resulting from our restructuring actions taken in 2017. Compensation-related costs for 2017 compared to 2016 decreased as a percentage of other operating expenses, primarily due to expensebecause of a reduction initiatives undertaken during 2016, the decrease was offset by increased expensesin force in 2016, associatedcombined with ValuAmerica and Red Bell which were acquiredthe restructuring actions taken in October 2015 and March 2015, respectively, as well as, to a lesser extent, an increase in contract underwriting expenses. 2017. Other operating expenses also include other selling, general and administrative expenses, depreciation, and allocations of corporate general and administrative expenses. Other operating expenses for 2016 included2018 include allocations of corporate operating expenses of $8.5$12.0 million, compared to $4.8$14.3 million and $8.5 million for 2015. For2017 and 2016, respectively. This decrease in 2018, as compared to 2017, is primarily due to a decrease in the year ended December 31, 2014, compensation-related costs represented 36%proportion of the segment’s operating expenses. Other operatingcorporate expenses in 2014 included losses related to contract underwriting remedies of $11.2 million related to settlement of remedies for services provided on legacy business. Excluding the expense relatedallocated to the settlement, compensation-related costsServices segment, partially offset by higher total corporate expenses. The increase in 2017, as a percentagecompared to 2016, is primarily due to an increase in
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
the segment’s operating expenses were 55%. Other operating expenses for the year ended 2014 also included an allocationproportion of corporate expenses allocated to the Services segment combined with an increase in total corporate expenses. See “Results of Operations—Consolidated—Other Operating Expenses.” Restructuring and other exit costs. Restructuring and other exit costs were incurred in 2018 and 2017 and include charges associated with our plan to restructure the Services business. The portion of these charges that are included in adjusted pretax operating expensesincome are primarily due to severance and related benefit costs. See Notes 1 and 7 of $1.1 million. Interest Expense. Interest expense represents all of the interest expense relatedNotes to our Senior Notes due 2019, the proceeds of which were used to fund Radian Group’s acquisition of Clayton.
Consolidated Financial Statements for additional details.
Contractual Obligations and Commitments We have various contractual obligations that are recorded as liabilities in our consolidated financial statements. Other items, including payments under operating lease agreements, are not recorded onin our consolidated balance sheets as liabilities but represent a contractual commitment to pay.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table summarizes certain of our contractual obligations and commitments, including our expected claim payments on insurance policies and interest payments on debt obligations, as of December 31, 2016,2018, and the future periods in which such obligations are expected to be settled in cash. Additional details regarding these obligations are provided in the narrative following the table and in the Notes to Consolidated Financial Statements that are referenced in the table. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payments Due by Period | | | (In thousands) | Total | | 2017 | | 2018-2019 | | 2020-2021 | | Thereafter | | Uncertain | | Long-term debt obligations (principal and interest) (Note 12) (1) | $ | 1,348,783 |
| | $ | 192,345 |
| (2) | $ | 410,500 |
| (3) | $ | 745,938 |
| (4) | $ | — |
| | $ | — |
| | Lease obligations (Note 13) (5) | 88,826 |
| | 7,222 |
| | 11,097 |
| | 14,078 |
| | 56,429 |
| | — |
| | Reserve for losses and LAE (Note 11) (6) | 760,269 |
| | 325,254 |
| | 435,015 |
| | — |
| | — |
| | — |
| | | Purchase obligations | 18,694 |
| | 8,658 |
| | 8,889 |
| | 1,147 |
| | — |
| | — |
| | | Unrecognized tax benefits (Note 10) | 186,488 |
| | — |
| | — |
| | — |
| | — |
| | 186,488 |
| (7) | | Total | $ | 2,403,060 |
| | $ | 533,479 |
| | $ | 865,501 |
| | $ | 761,163 |
| | $ | 56,429 |
| | $ | 186,488 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Payments Due by Period | | | (In thousands) | Total | | 2019 | | 2020-2021 | | 2022-2023 | | Thereafter | | | Senior notes (principal and interest) (Note 12) | $ | 1,219,300 |
| | $ | 209,363 |
| (1) | $ | 499,187 |
| (2) | $ | 40,500 |
|
| $ | 470,250 |
| (3) | Lease obligations (Note 14) (4) | 108,990 |
| | 11,310 |
| | 21,013 |
| | 20,350 |
| | 56,317 |
| | Reserve for losses and LAE (Note 11) (5)(6) | 398,057 |
| | 154,521 |
| | 217,939 |
| | 25,597 |
| | — |
| | | Purchase obligations | 4,361 |
| | 1,735 |
| | 2,328 |
| | 298 |
| | — |
| | Unrecognized tax benefits (Note 10) (7) | — |
| | — |
| | — |
| | — |
| | — |
| | | Total | $ | 1,730,708 |
| | $ | 376,929 |
| | $ | 740,467 |
| | $ | 86,745 |
| | $ | 526,567 |
| | | | | | | | | | | | | |
______________________ | | | (1) | In November 2016, we announced our intent to exercise our redemption option for the remaining Convertible Senior Notes due 2019, of which $68.0 million aggregate principal was outstanding at December 31, 2016 and is reflected in the table above as an expected payment in 2017. The redemption was settled on January 27, 2017. Radian elected to redeem all of the notes surrendered for conversion or redemption with cash from available liquidity. Settlement of the obligation was funded with $110.1 million in cash. See Note 21 of Notes to Consolidated Financial Statements for additional details. |
| | (2) | For our Convertible Senior Notes due 2017, excludes the conversion premium amount that may be settled upon conversion in cash, shares of our common stock or a combination thereof, at our election. |
| | (3) | Includes $300$158.6 million of Senior Notes due 2019 that may be redeemed, in whole or in part at any time prior to maturity. |
| | | (2) | Includes $234.1 million and $197.7 million of Senior Notes due 2020 and 2021 that may be redeemed, in whole or in part at any time prior to maturity. |
| | | (3) | Includes $450 million of Senior Notes due 2024 that may be redeemed, in whole or in part at any time prior to maturity. |
| | | (4) | Includes $350 million and $350 million of Senior Notes due 2020 and 2021, respectively, that may be redeemed, in whole or part at any time prior to maturity. |
| | (5) | Represents contractual payments for operating leases, with the exception of $0.2 million included for capital lease payment obligations in 2017.through 2020. |
| | (6)(5) | Our reserve for losses and LAE reflects the application of accounting policies described below in “Critical Accounting Policies—Reserve for Losses and LAE.LAE.” The payments due by period are based on management’s estimates and assume that all of the loss reserves included in the table will result in claim payments, net of expected recoveries. |
| | | (6) | Excludes IBNR reserves of $3.3 million relating to the Services business, as the timing or magnitude of any potential payments is unknown. |
| | | (7) | We have approximately $33.6 million in potential additional liabilities associated with uncertain tax positions as of December 31, 2018. The timing or magnitude of theseany potential payments is uncertain given the nature of the obligations.unknown. |
Other Contractual Obligations and Commitments In addition to the contractual obligations set forth in the table above, we have the following material contractual obligations and commitments. Affiliate Guaranty/Indemnification Agreements.We and certain of our subsidiaries have entered into the following intercompany guarantees: Radian Guaranty and RMAIRadian Mortgage Assurance were parties to a cross-guaranty agreement that was terminated effective July 1, 2016. However, it remains in effect for insurance written prior to the termination date. This agreement provides that if either party fails to make a payment to a policyholder, then the other party will step in and make the payment. The obligations of both parties are unconditional and irrevocable; however, no payments may be made without prior approval by the Pennsylvania Insurance Department. Radian Group and RMAI are parties to a guaranty agreement, which provides that Radian Group will make sufficient funds available to RMAI to ensure that RMAI has a minimum of $5 million of statutory policyholders’ surplus every calendar quarter. RMAI had $8.6 million of statutory policyholders’ surplus and no RIF exposure as of December 31, 2016.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Radian Group and Radian Mortgage Assurance are parties to a guaranty agreement, which provides that Radian Group will make sufficient funds available to Radian Mortgage Assurance to ensure that Radian Mortgage Assurance has a minimum of $5 million of statutory policyholders’ surplus every calendar quarter. Radian Mortgage Assurance had $8.7 million of statutory policyholders’ surplus and no RIF exposure as of December 31, 2018. To allow our mortgage insurance customers to comply with applicable securities regulations for issuers of ABS (including MBS)mortgage-backed securities), we have been required, depending on the amount of credit enhancement we were providing, to provide: (i) audited financial statements for the insurance subsidiary participating in these transactions or (ii) a full and unconditional holding-company level guarantee for our insurance subsidiaries’ obligations in such transactions. Radian Group has guaranteed two structured transactions for Radian Guaranty with approximately $110.2$87.8 million of aggregate remaining credit exposure as of December 31, 2016.2018. Radian Group and RGRIRadian Guaranty Reinsurance are parties to an Assumption and Indemnification Agreement with regard to RGRI’s portion of the Deficiency Amounts relatingobligations under our tax-sharing arrangements. Pursuant to the IRS litigation. This indemnificationthis agreement, was made in lieu of an immediate capital contributionRadian Group is required to RGRIassume certain obligations that otherwise would have been required for RGRI to maintain its minimum statutory policyholders’ surplus requirements in light of the remeasurementarise as of December 31, 2011 of uncertain tax positions related to the portfolio of REMIC residual interests. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the IRS matter. We can provide no assurance regarding the outcome of this IRS matter, which may take several years to resolve. As such, there remains significant uncertainty with regard to the amount and timing of any potential payments under the indemnity agreement described above. See “Item 1A. Risk Factors—Resolutiona result of our dispute with the IRS could adversely affect us.” tax-sharing arrangements.In the ordinary course of business, Radian enters into agreements pursuant to which we may be obligated under specified circumstances or upon the occurrence of certain events to indemnify the counterparties with respect to certain matters. The terms and amount of indemnification are negotiated on a transaction by transaction basis, but generally the circumstances of the transaction and/or the contract provisions are such that we believe the exposure to material liability is remote. Off-Balance Sheet Arrangements None.As of December 31, 2018, we had not entered into any material off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K, other than those below:
Securities Lending Agreements
We participate in securities lending agreements for the purpose of increasing the yield on our investment securities portfolio with minimal incremental risk. Pursuant to these agreements, we loan to Borrowers certain securities that are held as part of our investment portfolio. For a complete discussion of our securities lending agreements, including the effect of these agreements on our liquidity and risks related to these agreements, see Note 6 of Notes to Consolidated Financial Statements and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”
Variable Interest Entity
113In November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an initial RIF of $9.1 billion. Radian Guaranty and its affiliates have retained the first-loss layer of $204.9 million of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amount. Eagle Re is a special purpose variable interest entity that is not consolidated in our consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to its economic performance. See Note 8 of Notes to Consolidated Financial Statements for further information.
Segregated Funds Held for Others
Through EnTitle Insurance, we maintain escrow deposits as a service to our customers. Amounts held in escrow and excluded from assets and liabilities in our consolidated balance sheets totaled $4.7 million as of December 31, 2018. These amounts were held at third-party financial institutions and not considered assets of the Company. Should one or more of the financial institutions at which escrow deposits are maintained fail, there is no guarantee that we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage or otherwise. In the event of any such failure, we could be held liable for the disposition of these funds owned by third parties.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources Radian Group—Short-Term Liquidity Needs Radian Group serves as the holding company for our insurance and other subsidiaries and does not have any operations of its own. At December 31, 2016,2018, Radian Group had available, either directly or through an unregulated subsidiary, unrestricted
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
cash and liquid investments of approximately $460$714.1 million. This amount includes $89 million deposited with the IRS (but which may be recalled by us at any time) in connection with our dispute with the IRS related to the Deficiency Amount from the IRS’s examination of our 2000 through 2007 consolidated federal income tax returns, and excludes certain additional cash and liquid investments that have been advanced to Radian Group from our subsidiaries for corporate expenses and interest payments. Of the $460 million of availableTotal liquidity held as of December 31, 2016, $110.12018 was $981.6 million, was used in January 2017and includes our undrawn $267.5 million unsecured revolving credit facility as of that time. See “—Sources of Liquidity” below. Subject to redeem the remaining Convertible Senior Notes due 2019, as discussed below. During 2016, we completed a series of transactions to strengthen our financial position. The combination of these actions had the impact of decreasing our diluted shares and improving Radian Guaranty’s positioncertain limitations, borrowings under the PMIERs Financial Requirements. The purchases of Convertible Senior Notes due 2017credit facility may be used for working capital and 2019 during 2016, combined with the early redemption of the Senior Notes due 2017 and the issuance of the Senior Notes due 2021, also improvedgeneral corporate purposes, including, without limitation, capital contributions to Radian Group’s debt maturity profile by increasing the time to maturity for our long-term debtinsurance and by limiting the aggregate amount of debt maturing in any calendar year. This series of capital management transactions is summarizedreinsurance subsidiaries as follows:
| | CAPITAL AND DEBT MATURITY MANAGEMENT | •
Issued $350 million aggregate principal amount of Senior Notes due 2021 for net proceeds of $343.4 million; | •
Purchased aggregate principal amounts of $30.1 million and $322.0 million, respectively, of our outstanding Convertible Senior Notes due 2017 and 2019, for a combination of $235.0 million in cash and 17.0 million shares of Radian Group common stock; | •
Terminated the portion of the capped call transactions related to the purchased Convertible Senior Notes due 2017, and received consideration of 0.2 million shares of Radian Group common stock; | •
Completed the share repurchase program announced in January 2016, by purchasing an aggregate of 9.4 million shares of Radian Group common stock for $100.2 million, including commissions; | •
Entered into the Single Premium QSR Transaction, which had the effect of increasing the amount by which Radian Guaranty’s Available Assets exceed its Minimum Required Assets under the PMIERs Financial Requirements; and | •
Completed an early redemption of the remaining $195.5 million aggregate principal amount of our Senior Notes due 2017 for $211.3 million in cash (including accrued interest through the redemption date). |
In June 2016, Radian Guaranty repaid in full the $325 million Surpluswell as growth initiatives. See Note due to Radian Group that was issued in December 2015. On June 29, 2016, Radian Group’s board of directors authorized a new share repurchase program to spend up to $125 million to repurchase Radian Group common stock. As of February 27, 2017, the full purchase authority remained available under this share repurchase program, which expires on June 30, 2017. See Notes 8, 12, and 1413 of Notes to Consolidated Financial Statements for additional information ondetails.
Radian Group’s liquidity increased as a result of Radian Guaranty’s return of $450 million in capital to Radian Group in December 2018, as approved by the individual transactions. In November 2016, we announcedPennsylvania Insurance Department. This distribution of capital is part of our intentlong-term capital plan, which is designed to exerciseimprove our redemption optionfinancial flexibility. A portion of the proceeds is expected to be used for the remaining Convertiblepayment of $159 million principal amount of our outstanding Senior Notes due 2019,2019.
During 2018, available holding company liquidity also increased by $169 million as a result of which $68.0 million aggregate principalpayments made to Radian Group under tax-sharing arrangements with its subsidiaries, in excess of Radian Group’s consolidated federal tax payment obligation. During the same period, available holding company liquidity was outstanding at December 31, 2016. The redemption was settled on January 27, 2017. Radian elected to redeem allreduced by: (i) the completion of the notes surrendered for conversion or redemption with cash from available liquidity. TheCompany’s previous share repurchase program described below; (ii) the impact of finalizing the settlement of the obligation was funded with $110.1IRS Matter; (iii) the acquisitions of EnTitle Direct, Independent Settlement Services and the assets of Five Bridges; and (iv) subsequent capital contributions of $24.0 million to the acquired companies. See “Overview—Other 2018 Developments ” for additional information on our 2018 acquisitions. On August 9, 2017, Radian Group’s board of directors authorized the Company to repurchase up to $50 million of its common stock. The Company completed this program during the first half of 2018 by purchasing 3.0 million shares, at an average price of $16.56 per share, including commissions. On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock in cash.the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. Radian plans to utilize a Rule 10b5-1 plan, which would permit the Company to purchase shares, at pre-determined price targets, when it may otherwise be precluded from doing so. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program, which expires on July 31, 2019. See Note 2115 of Notes to Consolidated Financial Statements for additional details. In addition to the potential use of up to $125 million to repurchase Radian Group common stock pursuant to the existingdetails on our share repurchase programprograms.
The chart below shows our debt maturity profile at December 31, 2018 and the $110.1 million that we usedimprovement in JanuaryRadian’s debt-to-capital ratio from 27.1% at December 31, 2016 to 25.5% at December 31, 2017 to redeem the Convertible Senior Notes due 2019, Radian Group’s principal liquidity demands for the next 12 months are also expected to include the payment of $22.2 million principal amount to settle our obligations under our Convertible Senior Notes due 2017 (which must be settled in cash in November 2017, plus any related conversion premium which may,and 22.8% at our option, be settled in cash, common shares or a combination thereof) and the following items in the ordinary course of our business: (i) the payment of corporate expenses; (ii) interest payments on our outstanding long-term debt; and (iii) the payment of dividends on our common stock.December 31, 2018.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Radian Group’s principal liquidity demands for the next 12 months are: (i) the payment of corporate expenses, including taxes; (ii) the payment of $159 million principal amount of our outstanding Senior Notes due 2019; (iii) interest payments on our outstanding debt obligations; and (iv) the payment of dividends on our common stock. Radian Group’s liquidity demands for the next 12 months or in future periods could also include: (i) additional conversion settlements,the potential use of up to $100 million to repurchase Radian Group common stock pursuant to the existing share repurchase authorization; (ii) capital support for Radian Guaranty and our other insurance subsidiaries (if needed); (iii) repayments, repurchases or early redemptions of portions of our long-term debt; (ii)debt obligations; and (iv) potential investments to support our strategy of growing our businesses; and (iii) potential payments to the U.S. Treasury resulting from our ongoing dispute with the IRS relating to the examination of our 2000 through 2007 consolidated federal income tax returns, as discussed below. These items could result in liquidity demands in the next 12 months or in future periods.business strategy. Long-Term Debt. On a quarterly basis, we evaluate whether the conversion threshold requirements for our outstanding convertible debt securities have been met. As of December 31, 2016, the holders of our Convertible Senior Notes due 2017 are not eligible to exercise their conversion rights during the three-month period ending March 31, 2017. As discussed above, we elected to redeem all of the Convertible Senior Notes due 2019 surrendered for conversion or redemption with cash from available liquidity and settled the obligations in January 2017. See Notes 12 and 21 of Notes to Consolidated Financial Statements for further information about our Convertible Senior Notes due 2017 and 2019.
Corporate Expenses and Interest Expense. Radian Group has expense-sharing arrangements in place with its principal operating subsidiaries that require those subsidiaries to pay their allocated share of certain holding-company-levelholding-company expenses, including interest payments on most of ourRadian Group’s outstanding long-term debt.debt obligations. Payments of suchthese corporate expenses for the next 12 months, excluding interest payments on our long-termRadian Group’s debt, are expected to be approximately $55$85 million to $100 million. For the same period, payments of interest on Radian Group’s debt obligations are expected to be approximately $51 million. We expect most of which is expectedthese holding company expenses to be reimbursed by our subsidiaries under our existing expense-sharing arrangements. For the same period, payments of interest on our long-term debt are expected to be approximately $60 million, a significant portion of which is expected to be reimbursed by our subsidiaries under our existing expense-sharing arrangements. See “—“—Radian Group—Group—Long-Term Liquidity Needs—Needs—Services.” The expense-sharing arrangements between Radian Group and our insurance subsidiaries, as amended, have been approved by the Pennsylvania Insurance Department,applicable insurance departments, but such approval may be modified or revoked at any time. Capital Support for Subsidiaries.Subsidiaries. Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain eligibleapproved insurers of loans purchased by the GSEs. The PMIERs became effective on December 31, 2015. See Note 1 in Notes to Consolidated Financial Statements and “Overview—Operating Environment and Business Strategy” for additional information. Radian Guaranty currently is an approved mortgage insurer under the PMIERs, and is in compliance with the PMIERs Financial Requirements.financial requirements. At December 31, 2016,2018, Radian Guaranty’s Available Assets under the PMIERs totaled approximately $4.0$3.5 billion, resulting in excess available resources or a “cushion” of $567 million, or 19%, over its Minimum Required Assets of $2.9 billion. See Note 19 of Notes to Consolidated Financial Statements for additional details regarding the capital requirements of our subsidiaries.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The chart below summarizes our “cushion” under the PMIERs as of December 31, 2016, 2017 and 2018, as well as Radian’s excess available resources as of December 31, 2018, calculated as if the PMIERs 2.0 requirements were in effect. Our excess available resources include our unsecured revolving credit facility and holding company liquidity, which may be utilized to enhance Radian Guaranty’s PMIERs cushion. ______________________ | | | (1) | Represents Radian Group’s Liquidity, net of the $35 million minimum liquidity requirement under the unsecured revolving credit facility. Radian Group’s Liquidity as of December 31, 2018 includes $450 million from the December 2018 distribution of capital to our holding company from its mortgage insurance subsidiary, as approved by the Pennsylvania Insurance Department. See Note 19 of Notes to Consolidated Financial Statements. |
| | | (2) | Represents Radian Guaranty’s excess of Available Assets over its Minimum Required Assets, calculated in accordance with the PMIERs financial requirements. |
| | | (3) | Represents Radian’s PMIERs excess available resources as of December 31, 2018, calculated as if the PMIERs 2.0 requirements were in effect. |
| | | (4) | Percentages represent the values shown as a percentage of Minimum Required Assets under the PMIERs. |
The amendment to the 2016 Single Premium QSR Agreement which became effective as of December 31, 2017, and the $100 million of cash and marketable securities that Radian Group transferred to Radian Guaranty in December 2017 in exchange for a Surplus Note both had the effect of increasing the amount of Radian Guaranty’s cushion under the PMIERs financial requirements from December 31, 2016 to December 31, 2017. These increases were partially offset by the temporarily elevated level of Minimum Required Assets at December 31, 2017, due to the increase in reported delinquencies from hurricane-affected areas, as discussed below. See Note 19 of Notes to Consolidated Financial Statements for additional details. Available Assets also increased due to net cash provided by operating activities. The PMIERs require Radian to maintain significantly more Minimum Required Assets for delinquent loans than for performing loans. Therefore, the increase in new primary defaults received during 2017 from areas affected by Hurricanes Harvey and Irma required us to maintain an elevated level of Minimum Required Assets at December 31, 2017, compared to levels prior to these hurricanes. As of December 31, 2018, the impact of these hurricanes on our level of our Minimum Required Assets has substantially decreased, consistent with our expectation that most of the hurricane-related defaults would cure during 2018, and these incremental defaults did not result in a material increase in our incurred losses or paid claims. See Note 11 of Notes to Consolidated Financial Statements. After the March 31, 2019 effective date of PMIERs 2.0, subject to certain requirements, defaulted loans in FEMA-declared major disaster areas will require a reduced level of Minimum Required
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Assets, which we expect to help reduce the future volatility of our Minimum Required Asset levels upon the occurrence of a similar event. The two reinsurance agreements we entered into in November 2018 as part of our Excess-of-Loss Program reduced our level of Minimum Required Assets by $455.4 million. This benefit was approximately offset by the distribution of capital from Radian Guaranty to Radian Group in December 2018, which reduced Radian Guaranty’s Available Assets by $450 million. Net cash provided by operating activities also increased Available Assets during 2017 and 2018. See Notes 8 and 19 of Notes to Consolidated Financial Statements and “Overview—Other 2018 Developments” for additional information. The GSEs may amend the PMIERs at any time, although the GSEs have communicated that for material changes, including material changes affecting Minimum Required Assets, they will generally provide written notice 180 days prior to the effective date. The GSEs also have broad discretion to interpret the PMIERs, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. Radian expects to comply with PMIERs 2.0 and maintain a significant excess of Available Assets over Minimum Required Assets as of the effective date. If applied as of December 31, 2018, these changes would not have resulted in a material change in Radian’s Minimum Required Assets, but, as shown in the chart above, would have reduced Radian’s PMIERs cushion. The reduction in Radian Guaranty’s PMIERs cushion is primarily due to a reduction in Available Assets of approximately $215 million as a result of the elimination in PMIERS 2.0 of any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. If Radian Guaranty’s Available Assets and Minimum Required Assets were calculated as if the PMIERs 2.0 requirements were in effect, Radian Guaranty’s Available Assets at December 31, 2018 would have resulted in an excess or “cushion” of approximately $210.0$340 million, or 12%, over its Minimum Required Assets of approximately $3.8 billion. Based on our current projections and the current requirements under the PMIERs, we expect to maintain Radian Guaranty’s Available Assets at a level no less than approximately 5% above its Minimum Required Assets. While the amount of this cushion could fluctuate on a quarterly basis, we expect it to increase over time based, in part on our expectations regarding the future financial performance of Radian Guaranty, including our projected NIW, and expected decrease in defaults. Based on our projections, Radian Guaranty is not expected to require any additional capital contributions to remain in compliance with the current requirements under the PMIERs Financial Requirements.defaults and risk distribution strategy. See “Item 1A. Risk Factors—Radian Guaranty may fail to maintain its eligibility status with the GSEs.” In the first quarter of 2016, in order to proactively manage the riskNotes 1 and return profile of Radian Guaranty’s insured portfolio and continue managing its position under the PMIERs Financial Requirements in a cost-effective manner, Radian Guaranty entered into the Single Premium QSR Transaction with a panel of third-party reinsurers. The Single Premium QSR Transaction had the effect of increasing the amount of Radian Guaranty’s cushion under the PMIERs Financial Requirements.
The amount of credit that we receive under the PMIERs Financial Requirements for our third-party reinsurance transactions, including our QSR Transactions and our Single Premium QSR Transaction, is established by the GSEs at the time of each transaction based on terms generally prescribed in the PMIERs Financial Requirements as well as the GSEs’ view of the specific transaction. This credit is subject to periodic review by the GSEs. In December 2016, the GSEs issued interim guidance for the industry that negatively impacted the amount of credit that we receive for our Single Premium QSR Transaction, but also gave credit to certain liquid investments that are readily available to pay claims that previously were not permitted to be included in our Available Assets. This interim guidance did not affect Radian Guaranty’s compliance with the PMIERs Financial Requirements. The PMIERs also specifically provide for the factors that are applied to calculate and determine a mortgage insurer’s Minimum Required Assets to be updated every two years, with the next review scheduled to take place in 2017. See Note 18 of Notes to Consolidated Financial Statements for additional information.information about the PMIERs and our reinsurance programs, respectively. Additionally, notwithstanding our cushions under both the current PMIERs and PMIERs 2.0, our holding company liquidity of $714.1 million and our $267.5 million unsecured revolving credit facility (both as of December 31, 2018) may be utilized to enhance Radian Guaranty’s PMIERs cushion, as necessary, subject to a $35 million minimum liquidity requirement under our unsecured revolving credit facility. See Note 13 of Notes to Consolidated Financial Statements for additional information on the unsecured revolving credit facility.
Radian Guaranty’s Risk-to-capital as of December 31, 20162018 was 13.513.9 to 1. See Note 19 of Notes to Consolidated Financial Statements for more information. Our combined Risk-to-capital, which represents the consolidated Risk-to-capital measure for all of our Mortgage Insurancemortgage insurance subsidiaries, was 13.612.8 to 1 as of December 31, 2016.2018. Radian Guaranty is not expected to need additional capital to satisfy state insurance regulatory requirements in their current form.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and has been considering changes to the Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers. The process for developing this framework is ongoing. While the timing and outcome of this process is not known, in the event the NAIC adopts changes to the Model Act, we expect that the capital requirements in states that adopt the new Model Act may increase as a result of the changes. However, we continue to believe the changes to the Model Act will not result in financial requirements that require greater capital than the level currently required under the PMIERs Financial Requirements.financial requirements. Title insurance companies, including EnTitle Insurance, are subject to comprehensive state regulations, including minimum net worth requirements. EnTitle Insurance was in compliance with its respective minimum net worth requirements at December 31, 2018. In the event the cash flow from operations of the Services segment is not adequate to fund all of its needs, including the regulatory capital needs of EnTitle Insurance, Radian Group may provide additional funds to the Services segment in the form of aan intercompany note or other capital contribution, or an intercompany note.subject to the approval of the Ohio Department of Insurance, if needed. See also “—Radian Group—Long-Term Liquidity Needs-Services.Services.” Additional capital support may also be required for potential investments in new business initiatives by our subsidiaries to support our strategy of growing our businesses. Dividends. Our quarterly common stock dividend currently is $0.0025 per share and, based on our current outstanding shares of common stock, we would require approximately $2.1 million in the aggregate to pay our quarterly dividends for the next 12 months. Radian Group is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation’s capital surplus or (subject to certain limitations) recent net profits. As of December 31, 2016,2018, our capital surplus was $2.9$3.5 billion, representing our dividend limitation under Delaware law.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
IRS Matter. In addition to the items discussed above, in the eventJuly 2018, Radian finalized a final judgment or compromised settlement agreement is reached in Radian Group’s ongoing dispute with the IRS related to the Deficiency Amount from the examination of our 2000 through 2007 consolidated federal income tax returns, Radian Group may be required to make a payment to the U.S. Treasury. During 2016, we held several meetings with the IRS in an attempt to reach a compromised settlement on the issues presented in our dispute. In January 2017, the parties informed the Tax Court that they believe they have reached a basis for a compromised settlement on the primary issues present in the case. The resolution must be reported to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. If we are unable to complete a compromised settlement, then the ongoing litigation could take several years to resolve and may result in substantial legal expenses. We can provide no assurance regarding the outcome of any such litigation or whether a compromised settlement with the IRS will ultimately be reached. As such, there remains significant uncertainty with regardwhich resolved the issues and concluded all disputes related to the amountIRS Matter. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and timingin 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit. Radian Group will not be reimbursed for any portion of anythis potential payments.settlement under the tax-sharing arrangements with its subsidiaries. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the IRS matter.Matter. Radian Group and RGRI are parties to an Assumption and Indemnification Agreement with regard to a portion of these Deficiency Amounts. This indemnification agreement was made in lieu of an immediate capital contribution to RGRI that otherwise would have been required for RGRI to maintain its minimum statutory policyholders’ surplus requirements in light of the remeasurement as of December 31, 2011 of uncertain tax positions related to the portfolio of REMIC residual interests.
Sources of Liquidity. In June 2016, Radian Guaranty repaid in full the $325 million Surplus Note due to Radian Group, which increased our holding company liquidity at June 30, 2016 by $325 million. We have since used a portion of this holding company liquidity in connection with our capital management transactions. In addition to existing available cash and marketable securities, Radian Group’s principal sources of cash to fund future short-term liquidity needs include: (i)include payments made to Radian Group under expense-sharing arrangements with our subsidiaries, as discussed above; (ii) payments made to Radian Group underexpense- and tax-sharing arrangements with our subsidiaries, as discussed below; and (iii) to the extent available, potential dividends from our Services segment, if any, in excess of payments due under tax- and expense-sharing arrangements.its subsidiaries. See also “—“—Radian Group—Long-Term Liquidity Needs—Needs” and “—Services.” Under Pursuant to our tax-sharing agreements, our operating subsidiaries pay Radian Group an amount equal to any federal income tax the subsidiary would have paid on a standalone basis if they were not part of our consolidated tax return. As a result, from time to time, under the provisions of itsour tax-sharing agreement with its subsidiaries,agreements, Radian Group may receive cash as a result of certain of ourfrom its operating subsidiaries generating tax liabilities and related payments that areis in excess of Radian Group’s consolidated federal tax payment obligation. In 2018, we made no estimated consolidated federal tax payments to the IRS relating to our 2018 tax year, due to the utilization of certain tax attributes, which included NOLs, AMT credits and research and development tax credits. In 2018, under the provisions of our tax-sharing agreements, Radian Group received cash payments from certain of its subsidiaries that were $222 million in excess of Radian Group’s 2018 consolidated federal tax payment obligations. This amount includes $53 million of taxes receivable from subsidiaries that had been included in our liquidity as of December 31, 2017. For 2019, these excess tax payments from our subsidiaries are not expected to exceed Radian Group’s federal tax payment obligation to the U.S. Treasury.same extent as in 2018. See “—IRS Matter,” above.
In addition to the primary sources of liquidity listed above, on October 16, 2017, Radian Group entered into a three-year, $225.0 million unsecured revolving credit facility with a syndicate of bank lenders. Effective October 26, 2018, Radian increased the amount of total commitments under the credit facility by $42.5 million, bringing the aggregate unsecured revolving credit facility from $225.0 million to $267.5 million. At December 31, 2018, the full $267.5 million remains undrawn and available under the facility. See Note 13 of Notes to Consolidated Financial Statements for additional information. If Radian Group’s current sources of liquidity are insufficient for Radian Group to fund its obligations during the next 12 months, or if we otherwise decide to increase our liquidity position, Radian Group may seek additional capital, including by incurring additional debt, by issuing additional equity, or by selling assets, which we may not be able to do on favorable terms, if at all.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We regularly evaluate opportunities, based on market conditions, to finance our operations by accessing the capital markets or entering into other types of indebtednessfinancing arrangements with institutional and other lenders and financing sources, and consider various measures to improve our capital and liquidity positions, as well as to strengthen our balance sheet and improve Radian Group’s debt maturity profile. In the past, we have repurchased and exchanged, prior to maturity, some of our outstanding debt, and in the future, we may, from time to time, seek to redeem, repurchase or exchange for other securities, or otherwise restructure or refinance some or all of our outstanding debt, prior to maturity, in the open market, through other public or private transactions, including pursuant to one or more tender offers, or through any combination of the foregoing, as circumstances may allow. The timing or amount of any potential transactions will depend on a number of factors, including market opportunities and our views regarding our capital and liquidity positions and potential future needs. There can be no assurance that any such transactions will be completed on favorable terms, or at all. Radian Group—Long-Term Liquidity Needs In addition to our short-term liquidity needs discussed above, our most significant needs for liquidity beyond the next 12 months are: | | | (1) | the repayment of our outstanding long-term debt,senior notes, consisting of: |
$300 million principal amount of outstanding debt due in June 2019; $350234.1 million principal amount of outstanding debt due in June 2020;
$350197.7 million principal amount of outstanding debt due in March 2021; $450.0 million principal amount of outstanding debt due in October 2024; and | | | (2) | potential additional capital contributions to our subsidiaries. |
As of December 31, 2016,2018, certain of our subsidiaries have incurred federal NOLs that could not be carried-back and utilized on a separate company tax return basis. As a result, we are not currently obligated under our tax-sharing agreement to reimburse these subsidiaries for their separate company federal NOL carryforward. However, if in a future period, our consolidated NOL is fully utilized before a subsidiary has utilizedone of these subsidiaries utilizes its share of federal NOL carryforwardcarryforwards on a separate entity basis, then Radian Group may be obligated to
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
fund such subsidiary’s share of our consolidated tax liability to the IRS. Certain subsidiaries, including Clayton, currently have federal NOLs on a separate entity basis that are available for future utilization. However, we do not expect to fund material obligations related to these subsidiary NOLs. See also “—Radian Group—Short-Term Liquidity Needs—Sources of Liquidity.” We expect to meet the long-term liquidity needs of Radian Group with a combination of: (i) available cash and marketable securities; (ii) private or public issuances of debt or equity securities, which we may not be able to do on favorable terms, if at all; (iii) cash received under tax- and expense-sharing arrangements with our subsidiaries; and (iv) to the extent available, dividends or returns of capital from our subsidiaries.subsidiaries; and (v) any amounts that Radian Guaranty is able to successfully repay under the Surplus Note. Under Pennsylvania’s insurance laws, ordinary dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year. Despite the fact that Radian Guaranty and Radian Reinsurance maintained significant positive statutory policyholders’ surplus balances, Radian Guaranty and Radian Reinsurance had negative unassigned surplus at December 31, 20162018 of $691.3$701.9 million and therefore,$84.8 million, respectively. Therefore, no ordinary dividends or other distributions can be paid from Radian Guarantyby these subsidiaries in 2017.2019. Due in part to the need to set aside contingency reserves, we do not expect that Radian Guaranty or Radian Reinsurance will have positive unassigned surplus, and therefore we expect that they will not have the ability to pay ordinary dividends, for the foreseeable future. Under Pennsylvania’s insurance laws, an insurer may request an extraordinary dividend or distribution, but payment is subject to the approval of the Pennsylvania Insurance Commissioner. Radian Guaranty received such approval to return capital by paying an Extraordinary Distribution to Radian Group in 2018. See Note 19 of Notes to Consolidated Financial Statements for additional information. There can also be no assurance that our Services segment will generate sufficient cash flow to pay dividends. See “—Services” below. Mortgage Insurance As of December 31, 2016,2018, our Mortgage Insurance segment maintained claims paying resources of $4.2$4.3 billion on a statutory basis, which consists of contingency reserves, statutory policyholders’ surplus, Unearned Premium Reservespremiums received but not yet earned and loss reserves. The principal demands for liquidity in our mortgage insurance business includeinclude: (i) the payment of claims and potential claim settlement transactions, net of reinsurance; (ii) operating expenses (including those allocated from Radian Group) and (iii) taxes. In addition, Radian Guaranty’s Surplus Note to Radian Group has a due date of December 31, 2027. The Surplus Note may be redeemed at any time upon 30 days prior notice, subject to the approval of the Pennsylvania Insurance Department. In August 2016, Radian Guaranty and Radian Reinsurance became members of the FHLB. As members, they may borrow from the FHLB, subject to certain conditions, which include the need to post collateral and the requirement to maintain a minimum investment in FHLB stock. Advances from the FHLB may be used to provide low-cost, supplemental liquidity for various purposes, including to fund incremental investments. Radian’s current strategy includes using FHLB advances as financing to purchase additional investment securities that have similar durations, for the purpose of generating additional earnings from our investment securities portfolio with minimal incremental risk. As of December 31, 2018, there were $82.5 million of FHLB advances outstanding. The principal sources of liquidity in our mortgage insurance business currently include insurance premiums, net investment income and cash flows from (i) investment sales and maturities and, potentially,maturities; (ii) FHLB advances; or (iii) capital contributions from Radian Group. We believe that the operating cash flows generated by each of our mortgage insurance subsidiaries will provide these subsidiaries with a substantial portion of the funds necessary to satisfy their claim payments, operating expenses and taxes for the foreseeable future.
Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain approved insurers of loans purchased by the GSEs. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements. See “—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries” and Note 1 of Notes to Consolidated Financial Statements for additional information.
Securities Lending Agreements. Radian Guaranty and Radian Reinsurance from time to time enter into certain short-term securities lending agreements with third-party Borrowers for the purpose of increasing the yield on our investment securities portfolio with minimal incremental risk. Under our securities lending program, Radian Guaranty and Radian Reinsurance loan certain securities in their investment portfolios to these Borrowers for short periods of time in exchange for collateral consisting of cash and other securities. We have the right to request the return of the loaned securities at any time.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In August 2016, Radian GuarantyUnder our securities lending agreements, the Borrower generally may return the loaned securities to us at any time, which would require us to return the cash and Radian Reinsurance became membersother collateral within the standard settlement period for the loaned securities on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with the cash collateral by maintaining the cash collateral in a short-term money-market fund with daily availability.
The counterparty risk under these programs is reduced by the amounts of collateral received. On a daily basis, the value of the Federal Home Loan Bankunderlying securities that we have loaned to the Borrowers is compared to the value of Pittsburgh (“FHLB”)cash and as members, may borrowsecurities collateral we received from the FHLB. Borrowings from the FHLB may be used to provide low-cost, supplemental liquidity. As of December 31, 2016, there were no FHLB borrowings outstanding. Private mortgage insurers, including Radian Guaranty,Borrowers, and additional cash or securities are required to comply with the PMIERs to remain eligible insurers of loans purchasedrequested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the GSEs. See “—Radian Group—Short-Term Liquidity Needs” andintermediary. For additional information on our securities lending agreements, see Note 1 6of Notes to Consolidated Financial Statements for additional information. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs Financial Requirements.
Freddie Mac Agreement
At December 31, 2016 and December 31, 2015, Radian Guaranty had $63.9 million and $74.7 million, respectively, in a collateral account pursuant to the Freddie Mac Agreement. This collateral account, which contains investments primarily invested in and classified as part of our trading securities, is pledged to cover Loss Mitigation Activity on the loans subject to the Freddie Mac Agreement. Subject to certain conditions in the Freddie Mac Agreement, amounts in the collateral account may be released to Radian Guaranty over time to the extent that Loss Mitigation Activity becomes final in accordance with the terms of that agreement. In accordance with these provisions, Radian Guaranty withdrew $11.7 million from this account in October 2016 related to Loss Mitigation Activity that had become final as of August 31, 2016. Following this withdrawal, if, as of August 29, 2017, the amount of additional Loss Mitigation Activity that has become final in accordance with the Freddie Mac Agreement is less than $64 million, then any shortfall will be paid to Freddie Mac from the funds remaining in the collateral account, subject to certain adjustments designed to allow for any Loss Mitigation Activity that has not become final or any claims evaluation that has not been completed as of that date. As of December 31, 2016, we have $57.4 million recorded in reserve for losses that we expect to be paid to Freddie Mac from the funds expected to be remaining in the collateral account as of the August 29, 2017 measurement date.Statements.
Services As of December 31, 2016,2018, our Services segment maintained cash and cash equivalents totaling $12.7$8.6 million, which included restricted cash of $3.8$2.0 million. The principal demands for liquidity in our Services segment includeinclude: (i) the payment of employee compensation and other operating expenses, (includingincluding those allocated from Radian Group),Group; (ii) reimbursements to Radian Group for interest payments related to the Senior Notes due 2019,its portion of allocated expense; and (iii) dividends to Radian Group, if any. The principal sources of liquidity in our Services segment are cash generated by operations and, to the extent necessary, capital contributions from Radian Group. Liquidity levels may fluctuate depending on the levels and contractual timing of our invoicing and the payment practices of the Services clients, in combination with the timing of Services’ payments for employee compensation and to external vendors. The amount, if any, and timing of the Services segment’s dividend paying capacity will depend primarily on the amount of excess cash flow generated by the segment. The Services segment didhas not generategenerated sufficient cash flows to pay dividends to Radian Group in 2016.Group. Additionally, while cash flow is expected to behas been sufficient to pay the Services segment’s direct operating expenses, it has not been sufficient to reimburse Radian Group for $35.3$97.3 million of its accumulated allocated operating expense and interest expense. We do not expect that the Services segment will be able to bring its reimbursement obligations current in the next four to five years.foreseeable future. In the event the cash flow from operations of the Services segment is not adequate to fund all of its needs, Radian Group may provide additional funds to the Services segment in the form of a capital contribution or an intercompany note.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows The following table summarizes our consolidated cash flows from operating, investing and financing activities: | | | (In thousands) | Year Ended December 31, | Year Ended December 31, | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Net cash provided by (used in): | | | | | | | | | | | | Operating activities | $ | 381,724 |
| | $ | 11,721 |
| | $ | (146,262 | ) | $ | 677,786 |
| | $ | 360,575 |
| | $ | 381,724 |
| | Investing activities | (176,058 | ) | | 2,792 |
| | (336,041 | ) | (689,414 | ) | | (201,492 | ) | | (176,058 | ) | | Financing activities | (203,269 | ) | | 601 |
| | 482,016 |
| 22,386 |
| | (125,084 | ) | | (203,269 | ) | | Effect of exchange rate changes on cash and restricted cash | (481 | ) | | (133 | ) | | (67 | ) | — |
| | 431 |
| | (481 | ) | | Less: Increase (decrease) in cash of business held for sale | — |
| | (421 | ) | | 557 |
| | | Increase (decrease) in cash and restricted cash | $ | 1,916 |
| | $ | 15,402 |
| | $ | (911 | ) | $ | 10,758 |
| | $ | 34,430 |
| | $ | 1,916 |
| | | | | | | | | | | | |
Operating Activities Our most significant source of operating cash flows is from premiums received from our insurance policies, while our most significant uses of operating cash flows are generally for claims paid on our insured policies and our operating expenses. Net cash flows provided by operating activities increasedtotaled $677.8 million for 20162018, compared to 2015, primarily as a result of a significant reduction$360.6 million in total claims paid in 2016, compared to 2015. The improvement in net cash from operating activities in 2015 compared to 2014 was mainly attributable to an2017. This increase in net premiums written and a decrease in claims paid.
Investing Activities
Net cash used in investing activities increased for 2016, compared to a small amount of net cash provided by investing activities for 2015, primarily as a result of the investment of a portion of the net cash provided by operating activities in 2016. The net cash provided by operating activities, combined with funds provided by sales and redemptions of trading securities and short-term investments, contributed to a high volume of purchases of fixed-maturity investments available for sale during 2016. In addition, purchases of property and equipment, net, increased during 2016, primarily as a result of our technology upgrade project.
Net cash provided by investing activities increased in 2015,2018, compared to net cash used in investing activities in 2014. During 2015, net cash provided by investing activities2017, was not significant, as the proceeds received from the sale of Radian Asset Assurance and the sales and redemptions of trading securities, equity securities available for sale and short-term investments were primarily reinvested in fixed-maturity investments available for sale. During 2014, net cash used in investing activities was primarilyprincipally the result of investing a significant portion of the proceeds we received from our issuances of long-term debtof: (i) an increase in net premiums written in 2018 and common stock. These investments included the acquisition of Clayton and purchases of short-term investments.
Financing Activities
Net cash used in financing activities increased for 2016, compared to net cash provided by financing activities for 2015, primarily due to: (i) purchases of aggregate principal amounts of $30.1 million and $322.0 million, respectively, of our outstanding Convertible Senior Notes due 2017 and 2019, which were partially settled in cash in the amount of $235.0 million and (ii) the redemption of the remaining $195.5 million aggregate principal amount of our Senior Notes due 2017, which we settled in cash in the amount of $211.3 million. The cash flow impact of these 2016 purchases and redemptions collectively exceeded the purchases and redemption of long-term debt for the same period of 2015 and was partially offset by a reduction in purchasesclaims paid in 2018. Claims paid for 2017 included payments that were made in connection with the scheduled final settlement of our common shares.
Net cash provided by financing activities declined for 2015 compared to 2014, primarily due to a reductionthe Freddie Mac Agreement in the issuancethird quarter of common stock and an increase in purchases of common shares.2017.
See “Item 8. Financial Statements and Supplementary Data—Consolidated Statements of Cash Flows” for additional information.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net cash provided by operating activities totaled $360.6 million in 2017, compared to $381.7 million in 2016. This decrease in net cash provided by operating activities in 2017, compared to 2016, was principally the result of estimated payments made for income taxes, partially offset by an increase in net premiums received and a reduction in net claims paid. Investing Activities Net cash used in investing activities increased in 2018, compared to 2017, primarily as a result of: (i) an increase in purchases of short-term investments; (ii) a decrease in proceeds from trading securities; and (iii) a decrease in proceeds, net of purchases of fixed-maturity investments. These changes were partially offset by an increase in proceeds, net of purchases, from equity securities. Net cash used in investing activities increased in 2017, compared to 2016, primarily as a result of (i) an increase in purchases, net of proceeds, from sales of equity securities and (ii) a decrease in proceeds from sales of trading securities. These increases were partially offset by a decrease in purchases, net of proceeds from sales, of fixed-maturity investments available for sale. Financing Activities Net cash provided by financing activities increased for 2018, as compared to net cash used in financing activities during 2017. For 2018 our primary financing activities included an increase in secured borrowings from the FHLB, partially offset by an increase in the purchases of our common shares. For 2017 our primary financing activities included the issuance of $450 million aggregate principal amount of Senior Notes due 2024 as well as: (i) the purchases of aggregate principal amounts of $141.4 million, $115.9 million and $152.3 million of our Senior Notes due 2019, 2020 and 2021, respectively; (ii) the settlement of our obligations on the remaining $68.0 million aggregate principal amount of our Convertible Senior Notes due 2019; and (iii) the purchase of $21.6 million aggregate principal amount of our Convertible Senior Notes due 2017, all of which were settled in cash for an aggregate amount of $592.5 million during 2017. Net cash used in financing activities decreased for 2017, compared to 2016, primarily as a result of reduced repurchases of our common stock, partially offset by purchases and redemptions of debt exceeding debt issuances. During 2016, cash used in financing activities primarily related to purchases of our Convertible Senior Notes due 2017 and 2019 as well as repurchases of our common stock, partially offset by the issuance of $350 million aggregate principal amount of Senior Notes due 2021. See “Item 8. Financial Statements and Supplementary Data—Consolidated Statements of Cash Flows” for additional information. Stockholders’ Equity Stockholders’ equity increased to $2.9$3.5 billion at December 31, 2016,2018, from $2.5$3.0 billion at December 31, 2015.2017. The net increase in stockholders’ equity resulted primarily from: (i)from our net income of $308$606.0 million for the year ended2018, partially offset by: (i) net unrealized losses on investments of $87.1 million and (ii) shares repurchased under our share repurchase program of $50.1 million. See Note 15 of Notes to Consolidated Financial Statements for additional information. During 2018, Radian’s holding company debt-to-capital ratio decreased to 22.8% at December 31, 2016 and (ii) the impact of our recently completed debt and equity transactions to strengthen Radian’s capital position, which increased stockholder’s equity by $42.9 million, excluding the $59.8 million after-tax impact2018 from the loss on induced conversion and debt extinguishment already reflected in net income. See “Overview—2016 and Other Recent Capital Management Developments” for additional information.25.5% at December 31, 2017. Ratings Radian Group, Radian Guaranty and Radian Reinsurance have been assigned the ratings set forth in the chart below. We believe that ratings often are considered by others in assessing our credit strength and the financial strength of our primary mortgage insurance subsidiary.subsidiaries. The following ratings have been independently assigned by third-party statistical rating organizations, are for informational purposes only and are subject to change. See “Item 1A.Risk Factors—Radian Guaranty may fail to maintain its eligibility status with the GSEs.” | | | | | | | | Moody’s (1) | | S&P (2) | | | Radian Group | Ba3Ba2 | | BB | BB+ | | Radian Guaranty | Baa3Baa2 |
| BBB | BBB+ | | Radian Reinsurance | N/A | | BBB | (3)BBB+ |
______________________ | | | (1) | Based on the October 1, 2018 update, Moody’s outlook for Radian Group and Radian Guaranty currently is Stable. |
| | | (2) | Based on the October 11, 2018 update, S&P’s outlook for Radian Group, Radian Guaranty and Radian Reinsurance is currently is Stable. |
| | (3) | Received February 2, 2017. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies SEC guidance defines Critical Accounting Policies as those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing our consolidated financial statements in accordance with GAAP, management has made estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing these financial statements, management has utilized available information, including our past history, industry standards and the current and projected economic and housing environments, among other factors, in forming its estimates, assumptions and judgments, giving due consideration to materiality. Because the use of estimates is inherent in GAAP, actual results could differ from those estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses. A summary of the accounting policies that management believes are critical to the preparation of our consolidated financial statements is set forth below. Reserve for Losses and LAE We establish reserves to provide for losses and LAE, includingwhich include the estimated costs of settling claims in our Mortgage Insurance segment, in accordance with the accounting standard regarding accounting and reporting by insurance enterprises. Although this standard specifically excludes mortgage insurance from its guidance relating to the reserve for losses, because there is no specific guidance for mortgage insurance, we establish reserves for mortgage insurance as described below, using the guidance contained in this standard supplemented with other accounting guidance, due to the lack of specific guidance for mortgage insurance.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
guidance.
Estimating our loss reservereserves involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities. The models, assumptions and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty. As such, we cannot be certain that our reserve estimate will be adequate to cover ultimate losses on incurred defaults. For example, our mortgage insurance loss reserves generally increase as defaulted loans age, because historically, as defaulted loans age, they have been more likely to result in foreclosure, and therefore, have been more likely to result in a claim payment. While we believe this remains accurate, following the financial crisis, there are a significant number of loans in our defaulted portfolio that have been in default for an extended period of time, but which have not been subject to foreclosure, and therefore, have not resulted in claims. As a result, significant uncertainty remains with respect to the ultimate resolution of these aged defaults. This uncertainty requires management to use considerable judgment in estimating the rate at which these loans will result in claims. Commutations and other negotiated terminations of our insured risks in our Mortgage Insurance segment provide us with an opportunity to exit exposures for an agreed upon payment, or payments, sometimes at an amount less than the previously estimated ultimate liability. Once all exposures relating to such policies are extinguished, all reserves for losses and LAE and other balances relating to the insured policies are generally reversed, with any remaining net gain or loss typically recorded through provision for losses. We take into consideration the specific contractual and economic terms for each individual agreement when accounting for our commutations or other negotiated terminations, which may result in differences in the accounting for these transactions. In our Mortgage Insurance business, the default and claim cycle begins with the receipt of a default notice from the loan servicer. Reserves for losses are established upon receipt of notification from servicers that a borrower has missed two monthly payments, which is when we consider a loan to be in default for financial statement and internal tracking purposes. We also establish reserves for associated LAE, consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process. We maintain an extensive database of claim payment history, and use models based on a variety of loan characteristics to determine the likelihood that a default will reach claim status. With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. For purposes of reserve modeling, loans are aggregated into groups using a variety of factors. The attributes currently used to define the groups for purposes of developing various assumptions include, but are not limited to, the Stage of Default, the Time in Default and type of insurance (i.e., primary or pool). We use an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. With respect to new defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received from September 2017 through February 2018, we assume a lower gross Default to Claim Rate than for new defaults with similar characteristics from other areas, due to our
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
expectations based on past experience with other natural disasters, that a significant portion of these defaults will not result in claims. The Default to Claim Rate also includes our estimates with respect to expected Rescissions and Claim Denials, which have the effect of reducing our Default to Claim Rates. We forecast the impact of our Loss Mitigation Activity in protecting us against fraud, underwriting negligence, breach of representation and warranties, inadequate documentation of submitted claims and other items that may give rise to Rescissions or cancellations and Claim Denials, to help determine the Default to Claim Rate. Our Loss Mitigation Activities have resulted in challenges from certain lender and servicer customers, which have resulted in some reversals of our decisions regarding Rescissions, Claim Denials and Claim Curtailments.Curtailments in the ordinary course. Although we believe that our Loss Mitigation Activities are justified under our policies, if any of thesecertain challenges resulthave resulted in disputes or are notand litigation, which if resolved theyunfavorably to us, could result in arbitration or judicial proceedings and we may needrequire us to reassume the risk on, and increase loss reserves for, those policies or pay additional claims. See Note 11 of Notes to Consolidated Financial Statements for additional information. Our Master Policies specify the time period during which a suit or action arising from any right of the insured under the policy must be commenced. The assumptions embedded in our estimated Default to Claim Rate on our in-force default inventory include an adjustment to our estimated Rescissions and Claim Denials to account for the fact that we expect a certain number of policies to be reinstated and ultimately to be paid, as a result of valid challenges by such policy holders.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our aggregate weighted averageweighted-average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 42% (40%33% (31% excluding pending claims) at December 31, 20162018 and 46% (42%31% (29% excluding pending claims) at December 31, 2015.2017. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans grouped according to the period in which the default occurred, as measured by the progress toward foreclosure sale and the number of months in default. During the year ended December 31, 2015, we reduced ourOur gross Default to Claim Rate assumption for new primary defaults was reduced from 16% to 13% due to continued improvement in actual claim development trends. During the year ended10% at December 31, 2016, this assumed rate was further reduced2017, to 12%.8% at December 31, 2018. Our estimates of gross Default to Claim Rates on our primary portfolio as of December 31, 20162018 generally ranged from 12%8% for new defaults to 81%75% for Foreclosure Stage Defaults. As discussed above, based on our past experience, we assumed an average gross Default to Claim Rate of 3% for new defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two hurricanes and through February 2018, which contributed to the decrease in the overall weighted-average Default to Claim Rate assumption at December 31, 2018 as compared to December 31, 2017. Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our estimated Default to Claim Rate is generally based on our recent experience. Consideration is also given forto differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory, as well as the estimated impact of the BofA Settlement Agreement, as described below.inventory. After estimating the Default to Claim Rate, we estimate Claim Severity based on the average of recently observed severity rates within product type, type of insurance, and Time in Default cohorts. These average severity estimates are then applied to individual loan coverage amounts to determine reserves. Similar to the Default to Claim Rate, Claim Severity also is impacted by the length of time that loans are in default and by our Loss Mitigation Activity. For claims under our primary mortgage insurance, the coverage percentage is applied to the claim amount, which consists of the unpaid loan principal, plus past due interest (for which our liability is contractually capped in accordance with the terms of our Master Policies) and certain expenses associated with the default, to determine our maximum liability. Therefore, Claim Severity generally increases the longer that a loan is in default. In addition, we estimate the impact that the amount that Claim Curtailments due to servicer noncompliance with our insurance policies and servicing guidelines have on the amount that we ultimately will have to pay with respect to claims. As part of our claims review process, we assess whether defaulted loans were serviced appropriately in accordance with our insurance policies and servicing guidelines. If a servicer failed to satisfy its servicing obligations, our insurance policies provide that we may curtail the claim payment for such default, and in some circumstances, cancel coverage or deny the claim. We do not establish reserves for loans that are in default if we believe that we will not be liable for the payment of a claim with respect to that default.default unless a reserve for premium deficiency is required. We generally do not establish loss reserves for expected future claims on insured mortgages that are not in default. See “—Reserve for Premium Deficiency” below for an exception to this general principle. IBNR and Other Reserves We also establish reserves for defaults that we estimate have been incurred but have not been reported to us on a timely basis by the servicer, as well as for previous Rescissions, Claim Denials and Claim Curtailments that we estimate will be reinstated and subsequently paid. We generally give the policyholder up to 30 days to challenge our decision to rescind coverage before we consider a policy to be rescinded and remove it from our defaulted inventory; therefore, we currently expect only a limited percentage of policies that were rescinded to be reinstated. We currently expect a significant percentage of claims that were denied to be resubmitted as a perfected claim and ultimately paid. Most often, a Claim Denial is the result of a servicer’s inability to provide the loan origination file or other servicing documents for review. Under the terms of our Master
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Policies with our lending customers, our policyholders have up to one year after the acquisition of borrower’s title to provide to us the necessary documents to perfect a claim. All estimates are periodically reviewed and adjustments are made as they become necessary. The impact to our reserve due to estimated future Loss Mitigation Activities incorporates our expectations regarding the number of policies that we expect to be reinstated as a result of our claims rebuttal process. Rescissions, Claim Denials and Claim Curtailments may occur for various reasons, including, without limitation, underwriting negligence, fraudulent applications and appraisals, breach of representations and warranties and inadequate documentation, primarily related to our Legacy Portfolio.insurance written in years prior to and including 2008. The level of Rescissions, Claim Denials and Claim Curtailments has been declining in recent periods as our defaulted Legacy Portfolio continuesdefaults related to insurance written in years prior to and including 2008 continue to decline, and we expect this trend to continue. In addition, with respect to claims decisions on the population of Future Legacy Loans covered under the BofA Settlement Agreement, Radian Guaranty has agreed, subject to certain limited exceptions and conditions, that it will limit Rescissions, Claim Denials or Claim Curtailments. See Note 11 of Notes to Consolidated Financial Statements for additional information about the BofA Settlement Agreement.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. Under the accounting standard regarding contingencies, an estimated loss is accrued only if we determine that the loss is probable and can be reasonably estimated. For populations of disputed Rescissions, Claim Denials and Claim Curtailments where we determine that a settlement is probable and that a loss can be reasonably estimated, we reflect our best estimate of the expected loss related to the populations under discussion in our financial statements, primarily as a component of our IBNR reserve. While our reserves include our best estimate of such losses, the outcome of the discussions or potential legal proceedings that could ensue is uncertain, and it is reasonably possible that a loss exists in excess of the amount accrued. Included in our loss reserves is an estimate related to a potential additional payment to Freddie Mac under the Freddie Mac Agreement, which is dependent upon the Loss Mitigation Activity on the population of loans subject to that agreement. Our reserve related to this potential additional payment is based on the estimated Rescissions, Claim Denials, Claim Curtailments and cancellations for this population of loans, determined using assumptions that are consistent with those utilized to determine our overall loss reserves. See Note 11 of Notes to Consolidated Financial Statements for additional information about the Freddie Mac Agreement.
Sensitivity Analysis We considered the sensitivity of first-lien loss reserve estimates at December 31, 20162018 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 101.0%96.0% of risk exposure at December 31, 2016)2018), we estimated that our loss reserves would change by approximately $6.3$3.8 million at December 31, 2016. For2018. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 42%33% at December 31, 2016,2018, including our assumptions related to Rescissions and Claim Denials), we estimated a $14.5$10.4 million change in our loss reserves at December 31, 2016.2018. Senior management regularly reviews the modeled frequency, Rescission, Claim Denial, Claim Curtailments and Claim Severity estimates, which are based on historical trends, as described above. If recent emerging or projected trends differ significantly from the historical trends used to develop the modeled estimates, management evaluates these trends and determines how they should be considered in its reserve estimates. Reserve for Premium Deficiency Insurance enterprises are required to establish a PDR if the net present value of the expected future losses and expenses for a particular product line exceeds the net present value of expected future premiums and existing reserves for that product line. We reassess our expectations for premiums, losses and expenses for our mortgage insurance business at least quarterly and update our premium deficiency analyses accordingly. Expected future expenses include consideration of maintenance costs associated with maintaining records relating to insurance contracts and with the processing of premium collections. We also consider investment income in the premium deficiency calculation through the use of our pre-tax investment yield to discount certain cash flows for this analysis. For our mortgage insurance business, we group our mortgage insurance products into two categories: first-lien and Second-lien. To assess the need for a PDR on our first-lien insurance portfolio, we develop loss projections based on modeled loan defaults related to our current RIF. This projection is based on recent trends in default experience, severity and rates of defaulted loans moving to claim (such Default to Claim Rates are net of our estimates of Rescissions and Claim Denials), as well as recent trends in the rate at which loans are prepaid. As of December 31, 2016, our modeled loan default projections for our first-lien insured portfolio assume that the rate at which current loans will default improves further, based on our expectation that home prices will continue to appreciate and the unemployment rate will continue to decline.second-lien mortgage loans. For our first-lien insurance business, because the combination of the net present value of our expected future premiums and previously establishedexisting reserves (net of reinsurance recoverables) exceedssignificantly exceeded the net present value of our future expected losses and expenses, a first-lien PDR was not required as of December 31, 20162018 or December 31, 2015. For our Second-lien insurance business, we project future premiums and losses using historical results to help determine future performance for both prepayments and claims. An estimated expense factor is then applied, and the result is discounted using a rate of return that approximates our pre-tax investment yield. This net present value, less any existing reserves,2017. Our second-lien PDR is recorded as a premium deficiency and the reserve is updated at least quarterly based on actual results for that quarter, along with updated transaction level projections.
Part II Item 7. Management’s Discussion and Analysiscomponent of Financial Condition and Results of Operations
other liabilities.
Evaluating the expected profitability of our existing mortgage insurance business and the need for a PDR for our first-lien business involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of potential losses and premium revenues. The models, assumptions and estimates we use to evaluate the need for a PDR may prove to be inaccurate,not accurately forecast future performance, especially during any extended economic downturn or period of extreme market volatility and uncertainty. We cannot be certain that we have correctly estimated the expected profitability of our existing first-lien mortgage portfolio or that the Second-lien PDR established will be adequate to cover the ultimate losses on our Second-lien business. Fair Value of Financial Instruments Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with GAAP, we established a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below: | | | Level I | — Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| | | Level II | — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and |
| | | Level III | — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available. |
For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy. At December 31, 2016, totalThere were no material Level III assets of $1 million accounted for less than 0.1% of total assets measured at fair value. There were no Level IIIor liabilities at December 31, 2016.
2018. Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5 of Notes to Consolidated Financial Statements. All changes in fair value of trading securities, equity securities (effective January 1, 2018) and certain other assets are included in our consolidated statements of operations. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. All changes in the fair value of available for sale securities are recorded in AOCIaccumulated other comprehensive income (loss). The following are descriptions of our valuation methodologies for financial assets and liabilities measured at fair value. Investments U.S. government and agency securities—The fair value of U.S. government and agency securities is estimated using observed market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy. State and municipal obligations—The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. Money market instruments—The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Corporate bonds and notes—The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. RMBS, CMBS and Other ABS—The fair value of these instruments is estimated based on prices of comparable securities and spreads and observable prepayment speeds. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Foreign government and agency securities—The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy. Equity securities—The fair value of these securities is generally estimated using observable market data in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or II of the fair value hierarchy, as observable market data are readily available. A small number of ourFrom time to time, certain equity securities however, aremay be categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data or the use of model-based valuations. Other investments—These securities primarily consist of commercial paper and short-term certificates of deposit, which are categorized in Level II of the fair value hierarchy. Other investments also contains convertible notes of non-reporting issuers, which are categorized in Level III of theThe fair value hierarchy due to a lack of market-based transaction data.these investments is estimated using market data for comparable instruments of similar maturity and average yield. We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we utilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptions for various asset classes and individual securities. We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a review of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our investment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. Investments We group assetsfixed-maturity securities in our investment portfolio into one of three main categories: held to maturity, available for sale or trading securities. Fixed-maturity securities for which we have the positive intent and ability to hold to maturity, if any, are classified as held to maturity and are reported at amortized cost. Trading securities are securities that are purchased and held primarily for the purpose of selling them in the near term, and are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities not classified as held to maturity or trading securities are classified as available for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as AOCI. Investments classified as tradingaccumulated other comprehensive income (loss). Equity securities consist of holdings in common stock, preferred stock and exchange traded funds, which, effective January 1, 2018, are reportedall recorded at fair value with unrealized gains and losses reported as a separate componentin income. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities that were available for sale were classified in accumulated other comprehensive income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of three12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We record an other-than-temporary impairment adjustment on a security with an unrealized loss if we intend to sell the impaired security, if it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis, or if the present value of cash flows we expect to collect is less than the amortized cost basis of the security. If a sale is likely, the security is classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, losses on securities that are other-than-temporarily impaired are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in AOCI,accumulated other comprehensive income (loss), net of taxes. A credit loss is determined to exist if the present value of discounted cash flows expected to be collected from the security is less than the amortized cost basis of the security. The present value of discounted cash flows is determined using the original yield of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors in addition to the above, including, but not limited to, the following: the extent and the duration of the decline in value;
| | | • | the extent and the duration of the decline in value; |
the reasons for the decline in value (e.g., credit event, interest related or market fluctuations); and the financial position, access to capital and near term prospects of the issuer, including the current and future impact of any specific events.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our DTAsdeferred tax assets and DTLsdeferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. DTAsDeferred tax assets and DTLsdeferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the DTAdeferred tax asset or DTLdeferred tax liability is expected to be realized or settled. In regards to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold. We are required to establish a valuation allowance against our DTAdeferred tax assets when it is more likely than not that all or some portion of our DTAdeferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our DTAdeferred tax assets will be realized in future periods. Our framework for assessing the recoverability of our DTAs requires consideration of all available evidence, including:
whether there are cumulative losses from previous years;
future projections of taxable income within the applicable carryback and carryforward periods, including the sustainability of our forecasts of future taxable income under potential stress scenarios;
the degree of certainty regarding our projected incurred losses;
future reversals of existing taxable temporary differences; and
potential tax planning strategies.
Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the full year of 20162018 and 2015.2017. When estimating our full year 20162018 and 20152017 effective tax rates, we adjust our forecasted pre-tax income for gains and losses on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for discretelyas Discrete Items at the applicable federal tax rate.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Goodwill and Other Acquired Intangible Assets, Net Goodwill and other acquired intangible assets were established primarily in connection with our acquisition of Clayton. Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that were not individually identified and separately recognized, and includes the value of discounted expected future cash flows of Clayton, Clayton’s workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment at the reporting unit level. A reporting unit represents a business for which discrete financial information is available; more than one reporting unit may be aggregated into a single reporting unit if they have similar economic characteristics. Events that could result in an interim assessment of goodwill impairment and/or a potential impairment charge include, but are not limited to: (i) significant under-performance relative to historical or projected future operating results; (ii) significant changes in the strategy for the Services segment; (iii) significant negative industry or economic trends; and (iv) a decline in Radian’s market capitalization below book value if such decline is attributable to the Services segment. Management regularly updates certain assumptions related to our projections, including the likelihood of achieving the assumed potential revenues from new initiatives and business strategies, and if these or other items have a significant negative impact on the reporting unit’s projections we may perform additional analysis to determine whether an impairment charge is needed. Lower earnings over sustained periods also can lead to impairment of goodwill, which could result in a charge to earnings. The value of goodwill is primarily supported by revenue projections, which are mostly driven by projected transaction volume and margins. In performing the interim quantitative analysis for our goodwill impairment test as of June 30, 2017, we elected to early adopt the update to the accounting standard regarding goodwill and other intangibles, which simplified the subsequent measurement of goodwill by eliminating step two of the goodwill impairment test. Under this guidance, if indicators for impairment are present, we perform a quantitative analysis to evaluate our long-lived assets for potential impairment, and then determine the amount of the goodwill impairment by comparing a reporting unit’s fair value to its carrying amount. After adjusting the carrying value for any impairment of other intangibles or long-lived assets, an impairment charge is recognized for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value, up to the full amount of the goodwill allocated to the reporting unit. Intangible assets, other than goodwill, primarily consist of customer relationships, technology, trade name and trademarks, client backlog and non-competition agreements. Customer relationships represent the value of the specifically acquired customer relationships and are valued using the excess earnings approach using estimated client revenues, attrition rates, implied royalty rates and discount rates. The excess earnings approach estimates the present value of expected earnings in excess of a traditional return on business assets. Technology represents proprietary software used for loan review, underwriting and due diligence, managing the REO disposition process, performing surveillance of mortgage loan servicers, real estate valuations and client workflow solutions. Trade name and trademarks primarily reflect the value inherent in the recognition of the “Clayton” name and its reputation. For purposes of our intangible assets, we use the term client backlog to refer to the estimated present value of fees to be earned for services performed on loans currently under surveillance or REO assets under
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
management. The value of a non-competition agreement is an appraisal of potential lost revenues that would arise from an individual leaving to work for a competitor or initiating a competing enterprise. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset. The calculation of the estimated fair value of goodwill and other acquired intangibles is performed primarily using an income approach and requires the use of significant estimates and assumptions that are highly subjective in nature, such as attrition rates, discount rates, future expected cash flows and market conditions. The most significant assumptions relate to the valuation of goodwill and customer relationships. In particular, future expected cash flows include estimated transaction volumes that are not currently contracted, as well as volume projections associated with non-agency RMBS securitizations, for which current market conditions are not favorable. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Based on our most recent annual goodwill impairment analysis performed inDuring the fourth quarter 2018, we performed our annual quantitative assessment of 2016, the excessgoodwill and concluded there was no impairment of the estimated fair value over the carrying amountgoodwill as of the Services segment was approximately $50 million, or 18% of the carrying amount. Held-For-Sale Classification
We report a business as held for sale when management is committed to a formal plan to sell the assets, the business is available for immediate sale and is being actively marketed at a price that is reasonable in relation to its fair value, an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, the sale is probable and expected to be completed within one year, and it is deemed unlikely that significant changes to the plan will be made or that the plan will be withdrawn. A business classified as held for sale is reflected at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the consolidated balance sheets in the period in which the business is classified as held for sale. After a business is classified as held for sale, depreciation and amortization expense is not recognized on its assets.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Discontinued Operations
We report the results of operations of a business as discontinued operations if the business is classified as held for sale, the operations and cash flows of the business have been or will be eliminated from our ongoing operations as a result of a disposal transaction and we will not have any significant continuing involvement in the operations of the business after the disposal transaction. In the period in which the business meets the criteria of a discontinued operation, its results are reported in income or loss from discontinued operations in the consolidated statements of operations for current and prior periods, and include any required adjustment of the carrying amount to its fair value less cost to sell. In addition, tax is allocated to continuing operations and discontinued operations. The amount of tax allocated to discontinued operations is the difference between the tax originally allocated to continuing operations and the tax allocated to the restated amount of income from continuing operations in each period.
Recent Accounting Pronouncements
Accounting Standards Adopted During 2016
In April 2015, the FASB issued an update to the accounting standard for the accounting of internal-use software. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The provisions of this update are effective for interim and annual periods beginning after December 15, 2015. The implementation of this update, effective January 1, 2016, did not have a material impact to our financial position, results of operations or cash flows.
In May 2015, the FASB issued an update to the accounting standard for the accounting of short-duration insurance contracts by insurance entities. The amendments in this update require insurance entities to disclose certain information about the liability for unpaid claims and claim adjustment expenses. The additional information required is focused on improvements in disclosures regarding insurance liabilities, including the timing, nature and uncertainty of future cash flows related to insurance liabilities and the effect of those cash flows on the statement of comprehensive income. The disclosures required by this update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. We adopted this update effective December 31, 2016.2018. See Note 117 of Notes to Consolidated Financial Statements for additional disclosures.information.
In August and November 2016, the FASB issued updates to the accounting standard regarding the statement of cash flows. The updates reduce diversity in practice over the presentation and classification of certain cash receipts and cash payments. Specifically, the revisions provide guidance related to certain cash flow issues, including a requirement that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows. These updates are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, and we elected to early adopt these updates effective December 31, 2016. As a result of the early adoption of these updates, there were no changes in the presentation or classification of cash receipts and cash payments in the statement of cash flows; however, restricted cash is now included with cash and cash equivalents in the beginning and ending cash balances, retrospectively for all the periods presented.Recent Accounting Pronouncements
Accounting Standards Not Yet Adopted During 2018. In May 2014, the FASB issued an update to the accounting standard regarding revenue recognition. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This update is not expected to change revenue recognition principles related to our investments and insurance products, which represent a significant portion of our total revenues. This update is primarily applicable to revenues from our Services segment. In July 2015, the FASB delayed the effective date for this updated standard for public companies to interim and annual periods beginning after December 15, 2017, and subsequently issued various clarifying updates. EarlyOur adoption is permitted. This of this standard, permits the use of the retrospective or cumulative effective transition method. We are currently in the process of categorizing the Services revenues to evaluate theJanuary 1, 2018, had no impact toon our financial statements and futurestatements. See Note 2 of Notes to Consolidated Financial Statements for the disclosures as a result of the updates.required by this update.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In January 2016, the FASB issued an update that makes certain changes to the standard for the accounting of financial instruments. Among other things, the update requires: (i) equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (iv) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. In February 2018, the FASB issued technical corrections related to this update, which addresses common questions regarding the application and adoption of the new guidance and the subsequent amendments. As a result of adopting these updates, equity securities are no longer classified as available for sale securities and changes in fair value are recognized through earnings. Consequently, we recorded a cumulative effect adjustment to retained earnings from accumulated other comprehensive income representing unrealized losses related to equity securities in the amount of $0.2 million, net of tax. In addition, we elected to utilize net asset value as a practical expedient to measure certain other investments, which resulted in an increase to other invested assets with an offset to retained earnings in the amount of $2.3 million, net of tax. Our adoption of both of these updates, effective January 1, 2018, resulted in a net increase to retained earnings of $2.1 million. See Notes 5 and 6 of Notes to Consolidated Financial Statements for additional information. In January 2017, the FASB issued an update to the accounting standard regarding business combinations. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. We adopted this update effective January 1, 2018 and it did not have a material impact on our financial statements. In February 2018, the FASB issued an update to the accounting standard regarding income statement reporting of comprehensive income and reclassification of certain tax effects from accumulated other comprehensive income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, for reporting periods for which financial statements have not been available for issuance. We elected to early adopt this update effective January 1, 2018. As a result we recorded a reclassification adjustment from accumulated other
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
comprehensive income to retained earnings in the amount of $2.7 million. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the TCJA. In August 2018, the FASB issued an update to the accounting standard regarding the disclosure requirements for fair value measurements. The amendments in this update remove certain disclosure requirements regarding transfers between Level I and Level II assets as well as the requirement to disclose the valuation process for Level III assets. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, withincluding adoption in an interim period. We elected to early adopt the exceptionfull update as of the ���own credit” provision. We are currently evaluating theDecember 31, 2018 and it did not have a material impact toon our financial statements and future disclosures as a result of this update, but we do not expect the impact to be material due to the current amount of our investments in equity securities and our investment strategy.or disclosures. Accounting Standards Not Yet Adopted. In February 2016, the FASB issued an update that replaces the existing accounting and disclosure requirements for leases of property, plant and equipment. The update requires lessees to recognize, as of the lease commencement date, assets and liabilities for all leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Pursuant to the new standard, the liability initially recognized for the lease obligation is equal to the present value of the lease payments not yet made, discounted over the lease term at the implicit interest rate of the lease, if available, or otherwise at the lessee’s incremental borrowing rate. The lessee is also required to recognize an asset for its right to use the underlying asset for the lease term, based on the liability subject to certain adjustments, such as for initial direct costs. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortization of the right-of-use asset. Quantitative disclosures are required for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also required regarding the nature of the leases, such as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. ThisIn July 2018 the FASB issued a further update is effectivecontaining certain targeted improvements to the accounting and disclosure requirements for public companies for fiscal yearsleases, including an additional (and optional) transition method to recognize the cumulative-effect adjustment as of the beginning after December 15, 2018, including interim periods within those fiscal years. Earlyof the period of adoption, is permitted. The new standard must be adopted by applyingrather than recognizing the new guidancecumulative-effect adjustment as of the beginning of the earliest comparative period presented, using a modified retrospectivepresented. We expect to elect the optional transition approach with certain optionalmethod to recognize the cumulative-effect adjustment as of the beginning of the period of adoption.However, we do not expect the adoption of this standard to impact our stockholders’ equity, results of operations or liquidity. In addition, we expect to elect the practical expedients. We are currently evaluatingexpedients for transitioning existing leases to the impact to our financial statements and future disclosuresnew standard as of the effective date. As a result of this update. See “Contractual Obligations and Commitments” for more information. In March 2016, the FASB issued an update to the accounting standards for share-based payment transactions, including: (i) accounting for income taxes; (ii) classification of excess tax benefits on the statement of cash flows; (iii) forfeitures; (iv) minimum statutory tax withholding requirements; (v) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes; (vi)applying the practical expedientexpedients: (i) we are not required to reassess expired or existing contracts to determine if they contain additional leases; (ii) we are not required to reassess the lease classification for estimating the expected term;expired and (vii) intrinsic value. Among other things, the update requires: (i) all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement as they occur; (ii) recognition of excess tax benefits, regardless of whether the benefits reduce taxes payable in the current period;existing leases; and (iii) excess tax benefitswe are not required to be classified along with other cash flows as an operating activity, rather than separated from other income tax cash flows as a financing activity. For companies with significant share-based compensation, these changes may result in more volatile effective tax rates and net earnings, and result in additional dilution in earnings per share calculations. Thisreassess initial direct costs for existing leases. The update is effective for public companies for fiscal years beginning after December 15, 2016. Our adoption of this update, effectiveus on January 1, 2017, had2019 and upon our adoption, we expect to record an immaterial impact onincrease in other assets of approximately $50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statements at implementation. As a resultstatement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of implementationthe amendments. See Note 14 of this new standard, however, we expect the potentialNotes to Consolidated Financial Statements for limited increased volatility inadditional information about our effective tax rate, which would impact our results of operations.leases.
In June 2016, the FASB issued an update to the accounting standard regarding the measurement of credit losses on financial instruments.instruments and certain other assets. This update requires that financial assets measured at their amortized cost basis be presented at the net (of allowance for credit losses) amount expected to be collected. Credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. This update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as offor the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is not applicable to credit losses associated with our mortgage insurance policies. We are currently evaluating the impact toon our financial statements and future disclosures as a result of this update.
In March 2017, the FASB issued an update to the accounting standard regarding receivables. The new standard requires certain premiums on purchased callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of this update to have a material effect on our financial statements and disclosures.
In August 2018, the FASB issued an update to the accounting standard regarding the accounting for long-duration insurance contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
reviewed at least annually; (ii) defines and simplifies the measurement of market risk benefits; (iii) simplifies the amortization of deferred acquisition costs; and (iv) enhances the required disclosures about long-duration contracts. This update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this update. In October 2016,August 2018, the FASB issued an update to the accounting standard regarding the capitalization of implementation costs for activities performed in a cloud computing arrangement that is a service contract. The new standard aligns the accounting for income taxes. This update requires an entity to recognizeimplementation costs of hosting arrangements that are service contracts with the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.accounting for capitalizing internal-use software. This update is effective for public companies for fiscal years beginning after December 15, 2017,2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in the firstan interim period of the adoption year.period. We are currently evaluating the potential impact of the adoption of this update and do not expect it to have a material effect on our financial statements as a result of this update. In January 2017, the FASB issued an update to the accounting standard regarding goodwill and other intangibles. This update simplifies the subsequent measurement of goodwill by eliminating step two of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value. The provisions of this update are effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We intend to early adopt this update, effective as of our goodwill impairment test in 2017.
disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk represents the potential for loss due to adverse changes in the value of financial instruments as a result of changes in market conditions. Examples of market risk include changes in interest rates, credit spreads, foreign currency exchange rates and equity prices. We perform sensitivity analyses to determine the effects of market risk exposures on our investment securities by determining the potential loss in future earnings, fair values or cash flows of market-risk-sensitive instruments resulting from one or more selected hypothetical changes in interest rates, credit spreads, foreign currency exchange rates and equity prices.the above mentioned market risks. Interest-Rate Risk and Credit-Spread Risk The primary market riskrisks in our investment portfolio isare interest-rate risk and credit-spread risk, namely the fair value sensitivity of our fixed-incomefixed income securities to changes in interest rates. An additional market risk in our investment portfolio is credit-spread risk, which is the sensitivity of the fair value of our fixed-income securities to changes inrates and credit spreads.spreads, respectively. We regularly analyze our exposure to interest-rate risk and credit-spread risk and have determined that the fair value of our investments is materially exposed to changes in both interest rates and credit spreads. Our sensitivity analysis for interest rates is based on the change in fair value of our fixed-incomefixed income securities, assuming a hypothetical instantaneous and parallel 100-basis point increase or decrease in the U.S. Treasury yield curve, with all other factors remaining constant. We calculate the duration of our fixed-incomefixed income securities, expressed in years, in order to estimate the interest-rate sensitivity of these securities, as shown in the table below. To assist us in setting duration targets for the investment portfolio, we analyze: (i) the interest-rate sensitivities of our liabilities; (ii) entity specific cash flows; and (iii) our current risk appetite. Credit spread represents the additional yield on a fixed-incomefixed income security, above the risk-free rate, that is paid by an issuer to compensate investors for assuming the issuer’s credit risk of the issuer and market liquidity risk.of the fixed income security. We manage credit-spread risk on both an enterpriseentity and group level, across issuer, maturity, sector and asset class. Our sensitivity analysis for credit-spread risk is based on the change in fair value of our fixed-incomefixed income securities, assuming a hypothetical 100-basis point increase or decrease in all credit spreads, with the exception of U.S. Treasury and agency obligations and assuming all other factors remain constant. Wefor which we have assumed no change in credit spreads, for U.S. Treasury and agency obligations.assuming all other factors remain constant. Actual shifts in credit spreads generally vary by issuer and security, based on issuer-specific and security-specific factors such as credit quality, durationmaturity, sector and sector.asset class. Within a given asset class, investment grade securities generally exhibit less credit-spread volatility than securities with lower credit ratings. Our investment securities portfolio primarily consists of investment grade securities.
Our sensitivity analyses for interest-rate risk and credit-spread risk provide an indication of our investment portfolio’s sensitivity to shifts in interest rates and credit spreads. However, the timing and magnitude of actual market changes may differ from the hypothetical assumptions used in our sensitivity calculations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table illustrates the sensitivity of our investment portfolio to both interest-rate risk and credit-spread risk. | | | | Short-term and Available for Sale | | Trading | Short-term and Available for Sale | | Trading | | ($ in millions) | December 31, 2016 | | December 31,
2015 | | December 31, 2016 | | December 31,
2015 | December 31, 2018 | | December 31,
2017 | | December 31, 2018 | | December 31,
2017 | Carrying value of fixed-income investment portfolio (1) | $ | 3,580 |
| | $ | 2,943 |
| | $ | 880 |
| | $ | 1,279 |
| | Percentage of fixed-income securities compared to total investment portfolio | 80.2 | % | | 68.5 | % | | 19.7 | % | | 29.8 | % | | | Average duration of fixed-income portfolio | 5.0 years |
| | 3.9 years |
| | 5.8 years |
| | 5.4 years |
| | Carrying value of fixed income investment portfolio (1) (2) | | $ | 4,556.1 |
| | $ | 4,009.8 |
| | $ | 566.2 |
| | $ | 606.4 |
| Percentage of fixed income investment portfolio compared to total investment portfolio (3) | | 87.9 | % | | 85.8 | % | | 10.9 | % | | 13.0 | % | | Average duration of fixed income portfolio | | 4.0 years |
| | 4.4 years |
| | 4.3 years |
| | 5.1 years |
| | | | | | | | | | | | | | | | | | Interest-rate risk increase/(decrease) in market value | | | | | | | | | | | | | | | | +100 basis points - $ | $ | (172.6 | ) | | $ | (113.1 | ) | | $ | (48.0 | ) | | $ | (65.9 | ) | $ | (175.0 | ) | | $ | (169.8 | ) | | $ | (23.4 | ) | | $ | (29.7 | ) | +100 basis points - % (2) | (4.8 | )% | | (3.8 | )% | | (5.5 | )% | | (5.2 | )% | | +100 basis points - % (4) | | (3.8 | )% | | (4.2 | )% | | (4.1 | )% | | (4.9 | )% | | - 100 basis points - $ | $ | 183.0 |
| | $ | 120.9 |
| | $ | 53.1 |
| | $ | 73.2 |
| $ | 186.8 |
| | $ | 184.7 |
| | $ | 25.3 |
| | $ | 32.5 |
| - 100 basis points - % (2) | 5.1 | % | | 4.1 | % | | 6.0 | % | | 5.7 | % | | - 100 basis points - % (4) | | 4.1 | % | | 4.6 | % | | 4.5 | % | | 5.4 | % | | | | | | | | | | | | | | | | | | Credit-spread risk increase/(decrease) in market value | | | | | | | | | | | | | | | | +100 basis points - $ | $ | (159.5 | ) | | $ | (108.2 | ) | | $ | (49.3 | ) | | $ | (63.0 | ) | $ | (185.5 | ) | | $ | (183.8 | ) | | $ | (24.8 | ) | | $ | (30.4 | ) | +100 basis points - % (2) | (4.5 | )% | | (3.7 | )% | | (5.6 | )% | | (4.9 | )% | | +100 basis points - % (4) | | (4.1 | )% | | (4.6 | )% | | (4.4 | )% | | (5.0 | )% | | - 100 basis points - $ | $ | 151.9 |
| | $ | 106.7 |
| | $ | 46.3 |
| | $ | 61.8 |
| $ | 173.0 |
| | $ | 148.6 |
| | $ | 22.6 |
| | $ | 24.6 |
| - 100 basis points - % (2) | 4.2 | % | | 3.6 | % | | (5.3 | )% | | 4.8 | % | | - 100 basis points - % (4) | | 3.8 | % | | 3.7 | % | | 4.0 | % | | 4.1 | % |
______________________ | | | (1) | Total fixed-incomefixed income securities include fixed-maturity investments available for sale, trading securities and short-term investments.investments and exclude reinvested cash collateral held under securities lending agreements. At December 31, 2018 and 2017, fixed income securities shown above also include $97.1 million and $134.1 million, respectively, invested in certain fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheets, as well as $17.8 million and $20.7 million, respectively, in fixed income securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
| | | (2) | At December 31, 2017, equity securities, including our fixed income exchange-traded funds included in this table, were classified as available for sale in our consolidated balance sheet. At December 31, 2018, in accordance with the new accounting guidance adopted for 2018, equity securities are no longer classified as available for sale in our consolidated balance sheet and changes in fair value for equity securities are recognized through earnings. As a result, at December 31, 2018, the fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheet are included in trading securities in this table. See Note 2 of Notes to Consolidated Financial Statements for additional details on the implementation of this new accounting guidance. |
| | | (3) | Total investment portfolio comprises total investments per the consolidated balance sheets including securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
| | | (4) | Change in value expressed as a percentage of the market value of the related fixed-incomefixed income portfolio. |
The change in the average duration of our total fixed-incomefixed income portfolio from 4.3was 4.0 years at December 31, 20152018 compared to 5.14.5 years at December 31, 2016, was primarily due2017. To assist us in setting duration targets for the investment portfolio, we analyze: (i) the interest-rate sensitivities of our liabilities, including prepayment risk associated with premium cash flows and credit losses; (ii) entity specific cash flows under various economic scenarios; (iii) return, volatility and correlation of specific asset classes and the interconnection with our liabilities; and (iv) our current risk appetite. Securities Lending Agreements. Radian Guaranty and Radian Reinsurance from time to becoming more fully investedtime enter into certain short-term securities lending agreements with third-party Borrowers for the purpose of increasing the yield on our investment securities portfolio with minimal incremental risk. Market factors, including changes in interest rates, credit spreads and equity prices, may impact the timing or magnitude of cash outflows for the return of cash collateral. For the purpose of illustrating our coreinterest-rate risk and credit-spread risk, we have included our fixed income strategy atsecurities (which include certain exchange-traded funds) loaned in the sensitivity table above. As of December 31, 2016, in contrast2018 and December 31, 2017, the carrying value of these securities was $17.8 million and $20.7 million, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Under our securities lending agreements, the Borrower generally may return the loaned securities to being overweight inus at any time, which would require us to return the cash and other collateral within the standard settlement period for the loaned securities on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with the cash collateral by maintaining the cash collateral in a short-term investmentsmoney-market fund with daily availability. The counterparty risk under these programs is reduced by the amounts of collateral received. On a daily basis, the value of the underlying securities that we have loaned to the Borrowers is compared to the value of cash and securities collateral we received from the Borrowers, and additional cash or securities are requested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the intermediary. We also have the right to request the return of the loaned securities at December 31, 2015.any time. For additional information on our securities lending agreements, see Note 6 of Notes to Consolidated Financial Statements. Foreign Exchange Rate Risk As of December 31, 20162018 and 2015,2017, we did not hold any foreign currency denominated securities in our investment portfolio. Exchange gains and losses on foreign currency transactions from our foreign operations have not been material due to the limited amount of business performed in those locations. Currency risk is further limited because, in general, both the revenues and expenses of our foreign operations are denominated in the same functional currency, based on the country in which the operations occur. Equity Market Price Equity Investments at December 31, 2018. At December 31, 2016, both2018, the market value and cost of the equity securities in our investment portfolio were $1.3 million. None$130.6 million and $139.4 million, respectively. These amounts include market value and cost of fixed income exchange-traded funds of $96.9 million and $102.7 million, respectively, which are subject to interest-rate risk and credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks. The remaining $33.7 million and $36.7 million of market value and cost, respectively, of equity securities were classified as trading securities.at December 31, 2018, primarily consists of publicly-traded business development company equity securities and equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2018, our exposure to changes in equity market prices is not significant. Equity Investments at December 31, 2017. At December 31, 2015,2017, the market value and cost of the equity securities in our investment portfolio were $100.4$162.8 million and $102.6$163.1 million, respectively. Included in theThese amounts include market value and cost of fixed income exchange-traded funds of $134.0 million and $135.0 million, respectively, which are subject to interest-rate risk and credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks. The remaining $28.8 million and $28.1 million of market value and cost, respectively, of equity securities at December 31, 2015 were $25.0 million2017, consists of publicly-traded business development company equity securities and $27.0 million, respectively, of securities classified as trading securities. equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2016,2017, our exposure to changes in equity market prices iswas not significant. See “Item 1. Business—Investment Policy and Portfolio” for additional information on risk management.
| | | Item 8. | Financial Statements and Supplementary Data. |
| | | | Index to Consolidated Financial Statements | | Annual Financial Statements: | PAGE | | | | | Financial Statements as of December 20162018 and 20152017 and for the years ended December 31, 2016, 20152018, 2017 and 2014:2016: | | | | | | | | | | | | | | | | | Notes to Consolidated Financial Statements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REPORT ON MANAGEMENT’S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the Consolidated Financial Statements and other financial information presented in this annual report. The accompanying Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimations and judgments as required. Our board of directors exercises its responsibility for the financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with management and with PricewaterhouseCoopers LLP, the independent registered public accounting firm retained to audit our Consolidated Financial Statements, both privately and with management present, to review accounting, auditing, internal control and financial reporting matters. The accompanying report of PricewaterhouseCoopers LLP is based on its audit, which it is required to conduct in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), and which includes the consideration of our internal control over financial reporting to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. Sanford A. IbrahimRichard G. Thornberry
Chief Executive Officer J. Franklin Hall Senior Executive Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To: The
To theBoard of Directors and Stockholders of Radian Group Inc. In our opinion,
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Radian Group Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, (loss), changes in common stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Radian Group Inc. and its subsidiariesat December 31, 2016and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20162018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(3) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidatedfinancial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedules, and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Philadelphia, PA February 27, 201728, 2019
We have served as the Company’s auditor since 2007.
CONSOLIDATED BALANCE SHEETS
| | | Radian Group Inc. | | Radian Group Inc. | | CONSOLIDATED BALANCE SHEETS | | CONSOLIDATED BALANCE SHEETS | | | December 31,
2016 | | December 31,
2015 | December 31,
2018 | | December 31,
2017 | | ($ in thousands, except per-share amounts) | | | | | | (In thousands, except per-share amounts) | | | | | | Assets | | | | | | | | Investments (Note 6) | | | | | | | | Fixed-maturities available for sale—at fair value (amortized cost $2,856,468 and $1,893,356) | $ | 2,838,512 |
| | $ | 1,865,461 |
| | | Equity securities available for sale—at fair value (cost $1,330 and $75,538) | 1,330 |
| | 75,430 |
| | | Fixed-maturities available for sale—at fair value (amortized cost $4,098,962 and $3,426,217) | | $ | 4,021,575 |
| | $ | 3,458,719 |
| | Trading securities—at fair value | 879,862 |
| | 1,279,137 |
| 469,071 |
| | 606,401 |
| | Short-term investments—at fair value | 741,531 |
| | 1,076,944 |
| | | Other invested assets | 1,195 |
| | 1,714 |
| | | Equity securities—at fair value (cost of $139,377 and $163,106) | | 130,565 |
| | 162,830 |
| | Short-term investments—at fair value (includes $11,699 and $19,357 of reinvested cash collateral held under securities lending agreements) | | 528,403 |
| | 415,658 |
| | Other invested assets—at fair value (amortized cost at December 31, 2017) | | 3,415 |
| | 334 |
| | Total investments | 4,462,430 |
| | 4,298,686 |
| 5,153,029 |
| | 4,643,942 |
| | Cash | 52,149 |
| | 46,898 |
| 95,393 |
| | 80,569 |
| | Restricted cash | 9,665 |
| | 13,000 |
| 11,609 |
| | 15,675 |
| | Accounts and notes receivable | 77,631 |
| | 61,734 |
| 78,652 |
| | 72,558 |
| | Deferred income taxes, net (Note 10) | 411,798 |
| | 577,945 |
| 131,643 |
| | 229,567 |
| | Goodwill and other intangible assets, net (Note 7) | 276,228 |
| | 289,417 |
| | | Goodwill and other acquired intangible assets, net (Note 7) | | 58,998 |
| | 64,212 |
| | Prepaid reinsurance premium (Note 2) | 229,438 |
| | 40,491 |
| 417,628 |
| | 386,509 |
| | Other assets (Note 9) | 343,835 |
| | 313,929 |
| 367,700 |
| | 407,849 |
| | Total assets | $ | 5,863,174 |
| | $ | 5,642,100 |
| $ | 6,314,652 |
| | $ | 5,900,881 |
| | Liabilities and Stockholders’ Equity |
| | |
| | | | Unearned premiums | $ | 681,222 |
| | $ | 680,300 |
| $ | 739,357 |
| | $ | 723,938 |
| | Reserve for losses and loss adjustment expenses (“LAE”) (Note 11) | 760,269 |
| | 976,399 |
| 401,361 |
| | 507,588 |
| | Long-term debt (Note 12) | 1,069,537 |
| | 1,219,454 |
| | | Senior notes (Note 12) | | 1,030,348 |
| | 1,027,074 |
| | Reinsurance funds withheld (Note 2) | 158,001 |
| | — |
| 321,212 |
| | 288,398 |
| | Other liabilities | 321,859 |
| | 269,016 |
| | | Other liabilities (Note 13) | | 333,659 |
| | 353,845 |
| | Total liabilities | 2,990,888 |
| | 3,145,169 |
| 2,825,937 |
| | 2,900,843 |
| | Commitments and Contingencies (Note 13) |
| |
| | | Commitments and Contingencies (Note 14) | |
| |
| | Stockholders’ equity | | | | | | | | Common stock: par value $.001 per share; 485,000,000 shares authorized at December 31, 2016 and 2015; 232,091,921 and 224,432,465 shares issued at December 31, 2016 and 2015, respectively; 214,521,079 and 206,871,768 shares outstanding at December 31, 2016 and 2015, respectively | 232 |
| | 224 |
| | | Treasury stock, at cost: 17,570,842 and 17,560,697 shares at December 31, 2016 and 2015, respectively | (893,332 | ) | | (893,176 | ) | | | Common stock: par value $.001 per share; 485,000 shares authorized at December 31, 2018 and 2017; 231,132 and 233,417 shares issued at December 31, 2018 and 2017, respectively; 213,473 and 215,814 shares outstanding at December 31, 2018 and 2017, respectively | | 231 |
| | 233 |
| | Treasury stock, at cost: 17,660 and 17,603 shares at December 31, 2018 and 2017, respectively | | (894,870 | ) | | (893,888 | ) | | Additional paid-in capital | 2,779,891 |
| | 2,716,618 |
| 2,724,733 |
| | 2,754,275 |
| | Retained earnings | 997,890 |
| | 691,742 |
| 1,719,541 |
| | 1,116,333 |
| | Accumulated other comprehensive income (loss) (“AOCI”) (Note 17) | (12,395 | ) | | (18,477 | ) | | | Accumulated other comprehensive income (loss) (Note 18) | | (60,920 | ) | | 23,085 |
| | Total stockholders’ equity | 2,872,286 |
| | 2,496,931 |
| 3,488,715 |
| | 3,000,038 |
| | Total liabilities and stockholders’ equity | $ | 5,863,174 |
| | $ | 5,642,100 |
| $ | 6,314,652 |
| | $ | 5,900,881 |
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Radian Group Inc. | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF OPERATIONS | | CONSOLIDATED STATEMENTS OF OPERATIONS | | | Year Ended December 31, | Year Ended December 31, | | (In thousands, except per-share amounts) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Revenues: | | | | | | | | | | | | Net premiums earned—insurance | $ | 921,769 |
| | $ | 915,908 |
| | $ | 844,528 |
| $ | 1,014,007 |
| | $ | 932,773 |
| | $ | 921,769 |
| | Services revenue | 168,894 |
| | 157,216 |
| | 77,951 |
| 144,972 |
| | 155,103 |
| | 168,894 |
| | Net investment income | 113,466 |
| | 81,537 |
| | 65,655 |
| 152,475 |
| | 127,248 |
| | 113,466 |
| | Net gains (losses) on investments and other financial instruments | 30,751 |
| | 35,693 |
| | 79,989 |
| (42,476 | ) | | 3,621 |
| | 30,751 |
| | Other income | 3,572 |
| | 2,899 |
| | 4,562 |
| 4,028 |
| | 2,886 |
| | 3,572 |
| | Total revenues | 1,238,452 |
| | 1,193,253 |
| | 1,072,685 |
| 1,273,006 |
| | 1,221,631 |
| | 1,238,452 |
| | Expenses: | | | | | | | | | | | | Provision for losses | 202,788 |
| | 198,585 |
| | 246,083 |
| 104,641 |
| | 135,154 |
| | 202,788 |
| | Policy acquisition costs | 23,480 |
| | 22,424 |
| | 24,446 |
| 25,265 |
| | 24,277 |
| | 23,480 |
| | Cost of services | 114,174 |
| | 93,715 |
| | 44,679 |
| 98,124 |
| | 104,599 |
| | 114,174 |
| | Other operating expenses | 244,896 |
| | 242,405 |
| | 251,209 |
| 280,818 |
| | 267,321 |
| | 244,896 |
| | Restructuring and other exit costs (Note 1) | | 6,053 |
| | 17,268 |
| | — |
| | Interest expense | 81,132 |
|
| 91,102 |
|
| 90,464 |
| 61,490 |
|
| 62,761 |
|
| 81,132 |
| | Loss on induced conversion and debt extinguishment (Note 12) | 75,075 |
| | 94,207 |
| | — |
| — |
| | 51,469 |
| | 75,075 |
| | Amortization and impairment of intangible assets | 13,221 |
| | 12,986 |
| | 8,648 |
| | | Impairment of goodwill (Note 7) | | — |
| | 184,374 |
| | — |
| | Amortization and impairment of other acquired intangible assets | | 12,429 |
| | 27,671 |
| | 13,221 |
| | Total expenses | 754,766 |
| | 755,424 |
| | 665,529 |
| 588,820 |
| | 874,894 |
| | 754,766 |
| | Pretax income from continuing operations | 483,686 |
| | 437,829 |
| | 407,156 |
| | | Income tax provision (benefit) | 175,433 |
|
| 156,290 |
|
| (852,418 | ) | | | Net income from continuing operations | 308,253 |
| | 281,539 |
| | 1,259,574 |
| | | Income (loss) from discontinued operations, net of tax | — |
| | 5,385 |
| | (300,057 | ) | | | Pretax income | | 684,186 |
| | 346,737 |
| | 483,686 |
| | Income tax provision | | 78,175 |
|
| 225,649 |
|
| 175,433 |
| | Net income | $ | 308,253 |
| | $ | 286,924 |
| | $ | 959,517 |
| $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | | | | | | | | | | | | | Net income per share: | | | | | | | | | | | | Basic: | | | | | | | | Net income from continuing operations | $ | 1.46 |
| | $ | 1.41 |
| | $ | 6.83 |
| | | Income (loss) from discontinued operations, net of tax | — |
| | 0.03 |
| | (1.63 | ) | | | Net income | $ | 1.46 |
| | $ | 1.44 |
| | $ | 5.20 |
| | | | | | | | | | | Diluted: | | | | | | | | Net income from continuing operations | $ | 1.37 |
| | $ | 1.20 |
| | $ | 5.44 |
| | | Income (loss) from discontinued operations, net of tax | — |
| | 0.02 |
| | (1.28 | ) | | | Net income | $ | 1.37 |
| | $ | 1.22 |
| | $ | 4.16 |
| | | Basic | | $ | 2.83 |
| | $ | 0.56 |
| | $ | 1.46 |
| | Diluted | | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | | | | | | | | | | | | | Weighted-average number of common shares outstanding—basic | 211,789 |
| | 199,910 |
| | 184,551 |
| 214,267 |
| | 215,321 |
| | 211,789 |
| | Weighted-average number of common and common equivalent shares outstanding—diluted | 229,258 |
| | 246,332 |
| | 233,902 |
| 218,553 |
| | 220,406 |
| | 229,258 |
| | | | | | | | | | Dividends per share | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | Radian Group Inc. | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | Year Ended December 31, | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Net income | $ | 308,253 |
| | $ | 286,924 |
| | $ | 959,517 |
| $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | Other comprehensive income (loss), net of tax (Note 17): |
| | | | | | | Other comprehensive income (loss), net of tax (Note 18): | | | | | | | | Unrealized gains (losses) on investments: | | | | | | | | | | | | Unrealized holding gains (losses) arising during the period | 8,782 |
| | (22,573 | ) | | 13,650 |
| (97,356 | ) | | 31,903 |
| | 8,782 |
| | Less: Reclassification adjustment for net gains (losses) included in net income | 2,251 |
| | 44,183 |
| | (1,039 | ) | (10,270 | ) | | (2,642 | ) | | 2,251 |
| | Net unrealized gains (losses) on investments | 6,531 |
| | (66,756 | ) | | 14,689 |
| (87,086 | ) | | 34,545 |
| | 6,531 |
| | Foreign currency translation adjustments: | | | | | | | | Unrealized foreign currency translation adjustments | | 5 |
| | 150 |
| | (474 | ) | | Less: Reclassification adjustment for liquidation of foreign subsidiary and other adjustments included in net income | | 1 |
| | (721 | ) | | — |
| | Net foreign currency translation adjustments | (474 | ) | | (217 | ) | | (226 | ) | 4 |
| | 871 |
| | (474 | ) | | Activity related to investments recorded as assets held for sale | — |
| | (3,254 | ) | | (302 | ) | | | Net actuarial gains (losses) | 25 |
| | 265 |
| | (59 | ) | | | Net actuarial gains | | 129 |
| | 64 |
| | 25 |
| | Other comprehensive income (loss), net of tax | 6,082 |
| | (69,962 | ) | | 14,102 |
| (86,953 | ) | | 35,480 |
| | 6,082 |
| | Comprehensive income | $ | 314,335 |
| | $ | 216,962 |
| | $ | 973,619 |
| $ | 519,058 |
| | $ | 156,568 |
| | $ | 314,335 |
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY
| | | Radian Group Inc. | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY | | CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY | | | Year Ended December 31, | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Common Stock | | | | | | | | | | | | Balance, beginning of period | $ | 224 |
| | $ | 209 |
| | $ | 191 |
| $ | 233 |
| | $ | 232 |
| | $ | 224 |
| | Impact of extinguishment of Convertible Senior Notes due 2017 and 2019 (Note 12) | 17 |
| | 28 |
| | — |
| | | Impact of extinguishment of convertible senior notes (Note 12) | | — |
| | — |
| | 17 |
| | Issuance of common stock under incentive and benefit plans | — |
| | 1 |
| | — |
| 1 |
| | 1 |
| | — |
| | Issuance of common stock - stock offering | — |
| | — |
| | 18 |
| | | Termination of capped calls (Note 12) | — |
| | (3 | ) | | — |
| | | Shares repurchased under share repurchase program (Note 14) | (9 | ) | | (11 | ) | | — |
| | | Shares repurchased under share repurchase program (Note 15) | | (3 | ) | | — |
| | (9 | ) | | Balance, end of period | 232 |
| | 224 |
| | 209 |
| 231 |
| | 233 |
| | 232 |
| | | | | | | | | | | | | | Treasury Stock | | | | | | | | | | | | Balance, beginning of period | (893,176 | ) | | (892,961 | ) | | (892,807 | ) | (893,888 | ) | | (893,332 | ) | | (893,176 | ) | | Repurchases of common stock under incentive plans | (156 | ) | | (215 | ) | | (154 | ) | (982 | ) | | (556 | ) | | (156 | ) | | Balance, end of period | (893,332 | ) | | (893,176 | ) | | (892,961 | ) | (894,870 | ) | | (893,888 | ) | | (893,332 | ) | | | | | | | | | | | | | | Additional Paid-in Capital | | | | | | | | | | | | Balance, beginning of period | 2,716,618 |
| | 2,531,513 |
| | 2,347,104 |
| 2,754,275 |
| | 2,779,891 |
| | 2,716,618 |
| | Issuance of common stock under incentive and benefit plans | 2,117 |
| | 2,422 |
| | 1,141 |
| 2,859 |
| | 8,635 |
| | 2,117 |
| | Issuance of common stock - stock offering | — |
| | — |
| | 247,170 |
| | | Stock-based compensation | 18,257 |
| | 15,513 |
| | 12,176 |
| 17,649 |
| | 13,491 |
| | 18,257 |
| | Dividends declared | — |
| | — |
| | (1,388 | ) | | | Impact of extinguishment of Convertible Senior Notes due 2017 and 2019 (Note 12) | 143,078 |
| | 336,358 |
| | — |
| | | Impact of extinguishment of convertible senior notes (Note 12) | | — |
| | (52,700 | ) | | 143,078 |
| | Cumulative effect of adoption of the accounting standard update for share-based payment transactions | | — |
| | 756 |
| | — |
| | Termination of capped calls (Note 12) | — |
| | 13,153 |
| | — |
| — |
| | 4,208 |
| | — |
| | Change in equity component of currently redeemable convertible senior notes | — |
| | 19,648 |
| | (74,690 | ) | | | Shares repurchased under share repurchase program (Note 14) | (100,179 | ) | | (201,989 | ) | | — |
| | | Shares repurchased under share repurchase program (Note 15) | | (50,050 | ) | | (6 | ) | | (100,179 | ) | | Balance, end of period | 2,779,891 |
| | 2,716,618 |
| | 2,531,513 |
| 2,724,733 |
| | 2,754,275 |
| | 2,779,891 |
| | | | | | | | | | | | | | Retained Earnings | | | | | | | | | | | | Balance, beginning of period | 691,742 |
| | 406,814 |
| | (552,226 | ) | 1,116,333 |
| | 997,890 |
| | 691,742 |
| | Net income | 308,253 |
| | 286,924 |
| | 959,517 |
| 606,011 |
| | 121,088 |
| | 308,253 |
| | Dividends declared | (2,105 | ) | | (1,996 | ) | | (477 | ) | (2,140 | ) | | (2,154 | ) | | (2,105 | ) | | Cumulative effect of adopting the accounting standard update for financial instruments | | 2,061 |
| | — |
| | — |
| | Cumulative effect of adopting the accounting standard update for the reclassification of certain tax effects from accumulated other comprehensive income | | (2,724 | ) | | — |
| | — |
| | Cumulative effect of adoption of the accounting standard update for share-based payment transactions, net of tax | | — |
| | (491 | ) | | — |
| | Balance, end of period | 997,890 |
| | 691,742 |
| | 406,814 |
| 1,719,541 |
| | 1,116,333 |
| | 997,890 |
| | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) (“AOCI”) | | | | | | | | Balance, beginning of period | (18,477 | ) | | 51,485 |
| | 37,383 |
| | | Net foreign currency translation adjustment, net of tax | (474 | ) | | (217 | ) | | (226 | ) | | | Net unrealized gains (losses) on investments, net of tax | 6,531 |
| | (66,756 | ) | | 14,689 |
| | | Activity related to investments recorded as assets held for sale | — |
| | (3,254 | ) | | (302 | ) | | | Net actuarial gains (losses) | 25 |
| | 265 |
| | (59 | ) | | | Balance, end of period | (12,395 | ) | | (18,477 | ) | | 51,485 |
| | | | | | | | | | | Total Stockholders’ Equity | $ | 2,872,286 |
| | $ | 2,496,931 |
| | $ | 2,097,060 |
| |
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Accumulated Other Comprehensive Income (Loss) | | | | | | | Balance, beginning of period | 23,085 |
| | (12,395 | ) | | (18,477 | ) | | Cumulative effect of adopting the accounting standard update for financial instruments | 224 |
| | — |
| | — |
| | Cumulative effect of adopting the accounting standard update for reclassification of certain tax effects from accumulated other comprehensive income | 2,724 |
| | — |
| | — |
| | Net unrealized gains (losses) on investments, net of tax | (87,086 | ) | | 34,545 |
| | 6,531 |
| | Net foreign currency translation adjustment, net of tax | 4 |
| | 871 |
| | (474 | ) | | Net actuarial gains | 129 |
| | 64 |
| | 25 |
| | Balance, end of period | (60,920 | ) | | 23,085 |
| | (12,395 | ) | | | | | | | | | Total Stockholders’ Equity | $ | 3,488,715 |
| | $ | 3,000,038 |
| | $ | 2,872,286 |
|
See Notes to Consolidated Financial Statements.
| | Radian Group Inc. | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (In thousands) | Year Ended December 31, | Year Ended December 31, | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Cash flows from operating activities: | | | | | | | | | | | | Net income | $ | 308,253 |
| | $ | 286,924 |
| | $ | 959,517 |
| $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | Less: Income (loss) from discontinued operations, net of tax | — |
| | 5,385 |
| | (300,057 | ) | | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | Net (gains) losses on investments and other financial instruments recognized in earnings | (30,751 | ) | | (35,693 | ) | | (79,989 | ) | | | Net (gains) losses on investments and other financial instruments | | 42,476 |
| | (3,621 | ) | | (30,751 | ) | | Loss on induced conversion and debt extinguishment | 75,075 |
| | 94,207 |
| | — |
| — |
| | 51,469 |
| | 75,075 |
| | Deferred income tax provision (benefit) | 170,887 |
| | 156,170 |
| | (825,843 | ) | | | Amortization and impairment of intangible assets | 13,221 |
| | 12,986 |
| | 8,648 |
| | | Depreciation and other amortization, net | 57,795 |
| | 68,639 |
| | 57,301 |
| | | Deferred income tax provision | | 120,573 |
| | 166,527 |
| | 170,887 |
| | Impairment of goodwill | | — |
| | 184,374 |
| | — |
| | Amortization and impairment of other acquired intangible assets | | 12,429 |
| | 27,797 |
| | 13,221 |
| | Depreciation, other amortization, and other impairments, net | | 56,661 |
| | 58,038 |
| | 57,795 |
| | Change in: |
|
| |
|
| |
|
|
|
| |
|
| |
|
| | Accounts and notes receivable | (16,011 | ) | | 25,656 |
| | (28,310 | ) | (4,599 | ) | | 3,628 |
| | (16,011 | ) | | Prepaid reinsurance premiums | (188,947 | ) | | 16,800 |
| | 3,221 |
| (31,119 | ) | | (157,071 | ) | | (188,947 | ) | | Unearned premiums | 862 |
| | 35,796 |
| | 77,432 |
| 15,419 |
| | 42,716 |
| | 862 |
| | Reserve for losses and LAE | (216,135 | ) | | (583,633 | ) | | (604,321 | ) | (109,642 | ) | | (252,681 | ) | | (216,135 | ) | | Reinsurance funds withheld | 158,001 |
| | — |
| | — |
| 32,814 |
| | 130,397 |
| | 158,001 |
| | Other assets | (3,381 | ) | | 14 |
| | 23,790 |
| 43,562 |
| | (16,491 | ) | | (7,662 | ) | | Other liabilities | 52,855 |
| | (59,001 | ) | | (54,836 | ) | (106,799 | ) | | 4,405 |
| | 57,136 |
| | Net cash provided by (used in) operating activities, continuing operations | 381,724 |
| | 13,480 |
| | (163,333 | ) | | | Net cash provided by (used in) operating activities, discontinued operations | — |
| | (1,759 | ) | | 17,071 |
| | | Net cash provided by (used in) operating activities | 381,724 |
| | 11,721 |
| | (146,262 | ) | 677,786 |
| | 360,575 |
| | 381,724 |
| | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | Proceeds from sales of: | | | | | | | | | | | | Fixed-maturity investments available for sale | 687,173 |
| | 20,100 |
| | 19,672 |
| 728,584 |
| | 888,219 |
| | 687,173 |
| | Equity securities available for sale | 74,868 |
| | 146,049 |
| | — |
| | | Trading securities | 290,855 |
| | 78,826 |
| | 469,582 |
| 58,317 |
| | 194,784 |
| | 290,855 |
| | Equity securities | | 95,697 |
| | 38,318 |
| | 74,868 |
| | Proceeds from redemptions of: | | | | | | | | | | | | Fixed-maturity investments held to maturity | — |
| | — |
| | 350 |
| | | Fixed-maturity investments available for sale | 337,630 |
| | 103,595 |
| | 4,985 |
| 457,595 |
| | 463,548 |
| | 337,630 |
| | Trading securities | 123,645 |
| | 221,914 |
| | 201,597 |
| 54,329 |
| | 79,296 |
| | 123,645 |
| | Purchases of: | | | | | | | | | | | | Fixed-maturity investments available for sale | (1,990,652 | ) | | (1,486,318 | ) | | (519,166 | ) | (1,875,069 | ) | | (1,947,916 | ) | | (1,990,652 | ) | | Equity securities available for sale | (830 | ) | | (75,538 | ) | | — |
| | | Equity securities | | (69,160 | ) | | (213,469 | ) | | (830 | ) | | Sales, redemptions and (purchases) of: | | | | | | | | | | | | Short-term investments, net | 334,456 |
| | 222,882 |
| | (364,855 | ) | (108,325 | ) | | 324,258 |
| | 334,456 |
| | Other assets and other invested assets, net | 2,489 |
| | 16,717 |
| | 7,836 |
| 2,590 |
| | 882 |
| | 2,489 |
| | Proceeds from the sale of investment in affiliate, net of cash transferred | — |
| | 784,866 |
| | — |
| | | Net cash received (transferred) in sale of subsidiaries | | — |
| | (650 | ) | | — |
| | Purchases of property and equipment, net | (35,542 | ) | | (25,466 | ) | | (18,495 | ) | (26,008 | ) | | (28,676 | ) | | (35,542 | ) | | Acquisitions, net of cash acquired | (150 | ) | | (9,834 | ) | | (294,386 | ) | (7,964 | ) | | (86 | ) | | (150 | ) | | Net cash provided by (used in) investing activities, continuing operations | (176,058 | ) | | (2,207 | ) | | (492,880 | ) | | | Net cash provided by (used in) investing activities | | (689,414 | ) | | (201,492 | ) | | (176,058 | ) |
| | Radian Group Inc. | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (In thousands) | Year Ended December 31, | Year Ended December 31, | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Net cash provided by (used in) investing activities, discontinued operations | — |
| | 4,999 |
| | 156,839 |
| | | Net cash provided by (used in) investing activities | (176,058 | ) | | 2,792 |
| | (336,041 | ) | | | Cash flows from financing activities: | | | | | | | | | | | | Dividends paid | (2,105 | ) | | (1,996 | ) | | (1,865 | ) | (2,140 | ) | | (2,154 | ) | | (2,105 | ) | | Issuance of long-term debt, net | 343,417 |
| | 343,334 |
| | 293,809 |
| | | Purchases and redemptions of long-term debt | (445,072 | ) | | (156,172 | ) | | (57,223 | ) | | | Issuance of senior notes, net | | — |
| | 442,163 |
| | 343,417 |
| | Purchases and redemptions of senior notes | | — |
| | (593,527 | ) | | (445,072 | ) | | Proceeds from termination of capped calls | — |
| | 13,150 |
| | — |
| — |
| | 4,208 |
| | — |
| | Issuance of common stock | 717 |
| | 1,285 |
| | 247,188 |
| 1,385 |
| | 7,132 |
| | 717 |
| | Purchase of common shares | (100,188 | ) | | (202,000 | ) | | — |
| | | Purchases of common shares | | (50,053 | ) | | (6 | ) | | (100,188 | ) | | Credit facility commitment fees paid | | (1,510 | ) | | (1,993 | ) | | — |
| | Change in secured borrowings (Note 13) | | 39,342 |
| | 19,357 |
| | — |
| | Proceeds from secured borrowings (with terms greater than 3 months) | | 56,449 |
| | — |
| | — |
| | Payments of secured borrowings (with terms greater than 3 months) | | (20,917 | ) | | — |
| | — |
| | Excess tax benefits from stock-based awards | 333 |
| | 3,000 |
| | 107 |
| — |
| | — |
| | 333 |
| | Repayment of other borrowings | (371 | ) | | — |
| | — |
| | | Net cash provided by financing activities, continuing operations | (203,269 | ) | | 601 |
| | 482,016 |
| | | Net cash provided by (used in) financing activities, discontinued operations | — |
| | — |
| | — |
| | | Repayments of other borrowings | | (170 | ) | | (264 | ) | | (371 | ) | | Net cash provided by (used in) financing activities | (203,269 | ) | | 601 |
| | 482,016 |
| 22,386 |
| | (125,084 | ) | | (203,269 | ) | | Effect of exchange rate changes on cash and restricted cash | (481 | ) | | (133 | ) | | (67 | ) | — |
| | 431 |
| | (481 | ) | | Increase (decrease) in cash and restricted cash | 1,916 |
| | 14,981 |
| | (354 | ) | 10,758 |
| | 34,430 |
| | 1,916 |
| | Cash and restricted cash, beginning of period | 59,898 |
| | 44,496 |
| | 45,407 |
| 96,244 |
| | 61,814 |
| | 59,898 |
| | Less: Increase (decrease) in cash of business held for sale | — |
| | (421 | ) | | 557 |
| | | Cash and restricted cash, end of period | $ | 61,814 |
| | $ | 59,898 |
| | $ | 44,496 |
| $ | 107,002 |
| | $ | 96,244 |
| | $ | 61,814 |
| | | | | | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | Income taxes paid (received), continuing operations | $ | (673 | ) | | $ | 3,712 |
| | $ | (4,312 | ) | | | Income taxes paid, discontinued operations | — |
| | 2,036 |
| | 13,891 |
| | | Income taxes paid (received) (Note 10) | | $ | 8,364 |
| | $ | 94,328 |
| | $ | (673 | ) | | Interest paid | 65,531 |
| | 61,077 |
| | 50,702 |
| 56,688 |
| | 57,453 |
| | 65,531 |
|
See Notes to Consolidated Financial Statements.
Radian Group Inc.
Notes to Consolidated Financial Statements
1. Description of Business and Recent Developments We provideare a diversified mortgage and real estate services business, providing both credit-related insurance on first-liencoverage and other credit risk management solutions, as well as a broad array of mortgage, loans, and products and services to the real estate and mortgage finance industries.title services. We have two reportable business segments—Mortgage Insurance and Services. On April 1, 2015, Radian Guaranty completed the sale of its subsidiary, Radian Asset Assurance, a financial guaranty insurer, to Assured, pursuant to the Radian Asset Assurance Stock Purchase Agreement dated as of December 22, 2014. The operating results of Radian Asset Assurance have been classified as discontinued operations for all periods presented in our consolidated balance sheets and consolidated statements of operations. See Note 18 for additional information related to discontinued operations. Mortgage Insurance Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as other credit risk management solutions, to mortgage lending institutions nationwide.and mortgage credit investors. We provide our mortgage insurance products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Private mortgage insurance protectsplays an important role in the U.S. housing finance system because it promotes affordable home ownership and helps protect mortgage lenders, investors and third-partyother beneficiaries by mitigating default-related losses on residential mortgage loans. Generally, these loans are made to home buyers who make down payments of less than 20% of the purchase price for their homes.home or, in the case of refinancings, have less than 20% equity in their home. Private mortgage insurance also facilitates the sale of these low down payment mortgage loans in the secondary mortgage market, most of which are currently sold to the GSEs. Our Mortgage Insurance segment currently offerstotal direct primary mortgage insurance coverage on residential first-lien mortgage loans, which comprised 98.0% of our $47.7RIF was $56.7 billion total direct RIF as of December 31, 2016. At December 31, 2016, Pool Insurance represented 2.0% of our total direct RIF. We provide our mortgage insurance products and services mainly through our wholly-owned subsidiary, Radian Guaranty.2018. The GSEs and state insurance regulators impose various capital and financial requirements on our insurance subsidiaries. These include Risk-to-capital, other risk-based capital measures and surplus requirements, as well as the PMIERs Financial Requirementsfinancial requirements discussed below. Failure to comply with these capital and financial requirements may limit the amount of insurance that our mortgage insurance subsidiaries may write.write or prohibit our mortgage insurance subsidiaries from writing insurance altogether. The GSEs and state insurance regulators also possess significant discretion with respect to our mortgage insurance subsidiaries and all aspects of their business. See Note 19 for additional regulatory information. PMIERs. Private mortgage insurers, including Radian Guaranty, are required In order to comply with the PMIERsbe eligible to remain eligible insurers ofinsure loans purchased by the GSEs.GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. At December 31, 2016,2018, Radian Guaranty is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs Financial Requirements.financial requirements. The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. The GSEs may amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer’s business and operations,insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer, andas well as the approved insurer’s financial condition. TheIn addition, the GSEs have a broad range of consent rights under the PMIERs and require private mortgage insurers to approve various actionsobtain the prior consent of the approved insurer.GSEs before taking certain actions, which may include entering into various intercompany agreements and commuting or reinsuring risk, among others. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, the GSEs could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty. The PMIERs Financial Requirements require that a mortgage insurer’s Available Assets (as defined, these primarily include liquid assets and exclude premiums received but not yet earned) meet or exceed its Minimum Required Assets (a risk-based minimum required asset amount calculated based on net RIF, and which is intendedFrom time to approximate the maximum loss exposure based on a variety of criteria which are indicative of credit quality). The GSEs may amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of our Available Assets and/or Minimum Required Assets. The PMIERs specifically provide for the factors that are applied to calculate and determine a mortgage insurer’s Minimum Required Assets to be updated every two years following a minimum of 180 days’ notice (with the next review scheduled to take place in 2017), or more frequently, as determined by the GSEs, to reflect changes in macroeconomic conditions or loan performance. We have enteredwe enter into reinsurance transactions as parta component of our long-term risk distribution strategy to manage our capital position and risk management activities, including to manageprofile, which includes managing Radian Guaranty’s capital position under the PMIERs Financial Requirements, and thefinancial requirements. The credit that we receive under the PMIERs Financial Requirementsfinancial requirements for these transactions is subject to the periodicinitial and ongoing review ofby the GSEs.
Services Our Services segment is primarily a fee-for-service business that offers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In December 2016, the GSEs issued interim guidance for the industry that negatively impacted the amount of credit thataddition, we receive for our Single Premium QSR Transaction, but also gave creditprovide title insurance to certain liquid investments that are readily availablemortgage lenders as well as directly to pay claims that previously were not permittedborrowers. Our mortgage services help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to be included in our Available Assets. This interim guidance did not affect Radian Guaranty’s compliance with the PMIERs.single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Underreal estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive suite of title insurance products, title settlement services and both traditional and digital closing services.
2018 Developments Capital and Liquidity Actions. On August 9, 2017, Radian Group’s board of directors authorized the PMIERs,Company to repurchase up to $50 million of its common stock. The Company completed this program during the first half of 2018 by purchasing 3.0 million shares at an average price of $16.56 per share, including commissions. On August 16, 2018, Radian Guaranty’s Available Assets and Minimum Required Assets are determinedGroup’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions until expiration of the program on July 31, 2019. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program. See Note 15 for additional information. Reinsurance. As part of Radian’s long-term risk distribution strategy, in November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an aggregate basis, taking into account the assetsexisting portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and insured riskJanuary 1, 2018, with an initial RIF of $9.1 billion. In addition, Radian Guaranty and its exclusive affiliated reinsurers. Therefore, developments that impactentered into a separate excess-of-loss reinsurance agreement for up to $21.4 million of coverage, representing a pro rata share of the assets and insuredcredit risk ofalongside the risk assumed by Eagle Re on those Monthly Premium Policies. See Note 8 for additional information. IRS Matter. Radian Guaranty’s exclusive affiliated reinsurers individually also will impact the aggregate Available Assets and Minimum Required Assets, and importantly, Radian Guaranty’s compliancefinalized a settlement with the PMIERs Financial Requirements.IRS which resolved the issues and concluded all disputes related to the IRS Matter. In the three-month period ended June 30, 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the settlement with the IRS as well as the reversal of certain previously accrued state and local tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit. See Note 10 for additional information. Restructuring and Other Exit Costs. As a result references to Radian Guaranty’s Available Assets and Minimum Required Assets take into consideration both Radian Guaranty and its exclusive affiliated reinsurers. Theof the Company’s continued implementation of its 2017 plan to restructure the PMIERs, effectiveServices business, for the year ended December 31, 2015, has:2018, pretax restructuring charges of $2.5 million were recognized, which include $2.0 million in cash expenses. For the year ended December 31, 2017, pretax restructuring charges of $17.3 million were recognized, including $6.8 million of cash expenses. This initiative was completed during 2018 and, for the two-year period ending December 31, 2018, we recognized total restructuring charges of $19.8 million, consisting of: (i) increasedasset impairment charges (including the amountloss recognized on the sale of capital that Radian Guaranty is required to hold;our EuroRisk business) of $10.8 million; (ii) imposed higher capital requirements for certain typesemployee severance and benefit costs of mortgage insurance policies that may potentially impact the type$7.4 million; (iii) facility and volumelease termination costs of business that Radian Guaranty$1.3 million; and (iv) contract termination and other private mortgage insurers are willing to write; (iii) imposed extensive and more stringent operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others, that may result in additionalrestructuring costs to maintain compliance; and (iv) imposed a requirement for Radian Guaranty to receive the consent of the GSEs prior to taking certain actions such as paying dividends, entering into various intercompany agreements, and commuting or reinsuring risk, among others.
Services
Our Services segment provides services and solutions to the real estate and mortgage finance industries. Our Services segment provides outsourced services, information-based analytics, valuations and specialized consulting and surveillance services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities as well as other consumer ABS. The primary lines of business in our Services segment include:
Loan Review, Underwriting and Due Diligence—Loan-level due diligence for various asset classes and securitizations, with a primary focus on the mortgage and RMBS markets, utilizing skilled professionals and proprietary technology, with offerings focused on credit underwriting, regulatory compliance and collateral valuation;
Surveillance—Monitoring of mortgage servicer and loan performance, with risk management and servicing oversight solutions that include RMBS surveillance, regulatory and operational loan level oversight, asset representation review and consulting services;
Real Estate Valuation and Component Services—Outsourced solutions offered through Green River Capital, Red Bell and ValuAmerica, primarily focused on the SFR market, including valuations, property inspections, title reviews, lease reviews, tax lien reviews and due diligence reviews for SFR and residential real estate markets, as well as outsourced solutions for appraisal, title and closing services;
REO Management—REO asset management services offered through Green River Capital, which include management of the entire REO disposition process for our clients; and
EuroRisk—Outsourced mortgage services in the United Kingdom and Europe, with offerings that include due diligence services, quality control reviews, valuation reviews and consulting services.
During the first quarter of 2015, Clayton expanded its service offerings by acquiring Red Bell, a real estate brokerage, valuation and technology company that provides products and services that include automated valuation models; broker price opinions used by investors, lenders and loan servicers; and advanced technology solutions for: (i) monitoring loan portfolio performance; (ii) tracking non-performing loans; (iii) managing REO assets; and (iv) valuing and selling residential real estate through a secure platform. In addition, in October 2015, Clayton acquired ValuAmerica, a national title agency and appraisal management company with a technology platform that helps mortgage lenders and their vendors streamline and manage their supply chains and operational workflow. Red Bell and ValuAmerica have been included in the Services segment since the dates of acquisition.$0.3 million. See Note 7 for additional information.information, including the events that led to the restructuring plan.
Discontinued Operations
On April 1, 2015, Radian Guaranty completedWe review assets for impairment in accordance with the saleaccounting guidance for long-lived assets. As part of 100%this assessment, during 2018, we incurred $3.6 million of other exit costs associated with impairment of internal-use software that was in addition to the asset impairment charges recognized as part of the issued and outstanding shares of Radian Asset Assurance for a purchase price of approximately $810 million, pursuant to the Radian Asset Assurance Stock Purchase Agreement. The divestiture was intended to better position Radian Guaranty to complyrestructuring charges associated with the PMIERs and to support Radian’s strategic focus on the mortgage and real estate industries. After closing costs and other adjustments, Radian Guaranty received net proceeds of $789 million. For additional information related to discontinued operations, see Note 18.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
2016 Developments
During 2016, we completed a series of capital management transactions to strengthen our financial position. See Notes 8, 12, 14 and 21 for additional information.
Services business.
2. Significant Accounting Policies Basis of PresentationIBNR and Other Reserves
Our consolidated financial statements are prepared in accordance with GAAP and include the accounts of all wholly-owned subsidiaries. All intercompany accounts and transactions, including intercompany profits and losses,We also establish reserves for defaults that we estimate have been eliminated. Certain prior period amountsincurred but have not been reclassifiedreported to conformus on a timely basis by the servicer, as well as for previous Rescissions, Claim Denials and Claim Curtailments that we estimate will be reinstated and subsequently paid. We generally give the policyholder up to current period presentation,30 days to challenge our decision to rescind coverage before we consider a policy to be rescinded and remove it from our defaulted inventory; therefore, we currently expect only a limited percentage of policies that were rescinded to be reinstated. We currently expect a significant percentage of claims that were denied to be resubmitted as a perfected claim and ultimately paid. Most often, a Claim Denial is the result of a servicer’s inability to provide the loan origination file or other servicing documents for review. Under the terms of our Master
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Policies with our lending customers, our policyholders have up to one year after the acquisition of borrower’s title to provide to us the necessary documents to perfect a claim. All estimates are periodically reviewed and adjustments are made as they become necessary. The impact to our reserve due to estimated future Loss Mitigation Activities incorporates our expectations regarding the number of policies that we expect to be reinstated as a result of our claims rebuttal process. Rescissions, Claim Denials and Claim Curtailments may occur for various reasons, including, the reclassification to services revenuewithout limitation, underwriting negligence, fraudulent applications and costappraisals, breach of services from other incomerepresentations and other operating expense, respectively, of itemswarranties and inadequate documentation, primarily related to certain contract underwritingour insurance written in years prior to and including 2008. The level of Rescissions, Claim Denials and Claim Curtailments has been declining in recent periods as our defaults related to insurance written in years prior to and including 2008 continue to decline, and we expect this trend to continue. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. Under the accounting standard regarding contingencies, an estimated loss is accrued only if we determine that were previously reported in the Mortgage Insurance segment, as further described in Note 4 below. Onloss is probable and can be reasonably estimated. For populations of disputed Rescissions, Claim Denials and Claim Curtailments where we determine that a consolidated basis, the reclassifications increased services revenue, withsettlement is probable and that a corresponding decrease in other income, by $3.4 million in 2015 and $1.3 million in 2014. The reclassifications also increased cost of services, with a corresponding decrease in other operating expenses, by $3.8 million in 2015 and $1.1 million in 2014. These reclassifications are not material to amountsloss can be reasonably estimated, we reported or disclosed in prior periods. Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofreflect our contingent assets and liabilities at the datesbest estimate of the financial statements andexpected loss related to the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Risks and Uncertainties
Radian Group and its subsidiaries are subject to risks and uncertainties that could affect amounts reportedpopulations under discussion in our financial statements, in future periods. Our future performance and financial condition are subject to significant risks and uncertaintiesprimarily as a component of our IBNR reserve. While our reserves include our best estimate of such losses, the outcome of the discussions or potential legal proceedings that could cause actual resultsensue is uncertain, and it is reasonably possible that a loss exists in excess of the amount accrued.
Sensitivity Analysis We considered the sensitivity of first-lien loss reserve estimates at December 31, 2018 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be materially different96.0% of risk exposure at December 31, 2018), we estimated that our loss reserves would change by approximately $3.8 million at December 31, 2018. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 33% at December 31, 2018, including our assumptions related to Rescissions and Claim Denials), we estimated a $10.4 million change in our loss reserves at December 31, 2018. Senior management regularly reviews the modeled frequency, Rescission, Claim Denial, Claim Curtailments and Claim Severity estimates, which are based on historical trends, as described above. If recent emerging or projected trends differ significantly from ourthe historical trends used to develop the modeled estimates, management evaluates these trends and forward-looking statements.determines how they should be considered in its reserve estimates. Reserve for Losses and LAEPremium Deficiency WeInsurance enterprises are required to establish reserves to provide fora PDR if the net present value of the expected future losses and LAE, includingexpenses for a particular product line exceeds the estimated costsnet present value of settling claims inexpected future premiums and existing reserves for that product line. We reassess our Mortgage Insurance segment, in accordance with the accounting standard regarding accountingexpectations for premiums, losses and reporting by insurance enterprises. Although this standard specifically excludesexpenses for our mortgage insurance from its guidance relating to the reserve for losses, we establish reserves forbusiness at least quarterly and update our premium deficiency analyses accordingly. For our mortgage insurance business, we group our mortgage insurance products into two categories: first-lien and second-lien mortgage loans.
For our first-lien insurance business, because the combination of the net present value of our expected future premiums and existing reserves (net of reinsurance recoverables) significantly exceeded the net present value of our future expected losses and expenses, a first-lien PDR was not required as described below, usingof December 31, 2018 or December 31, 2017. Our second-lien PDR is recorded as a component of other liabilities. Evaluating the guidance contained in this standard supplemented with other accounting guidance, due toexpected profitability of our existing mortgage insurance business and the lack of specific guidanceneed for mortgage insurance. Estimatinga PDR for our loss reservefirst-lien business involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities.losses and premium revenues. The models, assumptions and estimates we use to establish loss reservesevaluate the need for a PDR may prove to be inaccurate,not accurately forecast future performance, especially during anany extended economic downturn or a period of extreme market volatility and uncertainty.
Fair Value of Financial Instruments Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with GAAP, we established a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below: | | | Level I | — Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| | | Level II | — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and |
| | | Level III | — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available. |
For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy. There were no material Level III assets or liabilities at December 31, 2018. Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5 of Notes to Consolidated Financial Statements. All changes in fair value of trading securities, equity securities (effective January 1, 2018) and certain other assets are included in our consolidated statements of operations. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. All changes in the fair value of available for sale securities are recorded in accumulated other comprehensive income (loss). The following are descriptions of our valuation methodologies for financial assets and liabilities measured at fair value. Investments U.S. government and agency securities—The fair value of U.S. government and agency securities is estimated using observed market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy. State and municipal obligations—The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. Money market instruments—The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy. Corporate bonds and notes—The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. RMBS, CMBS and Other ABS—The fair value of these instruments is estimated based on prices of comparable securities and spreads and observable prepayment speeds. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Foreign government and agency securities—The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy. Equity securities—The fair value of these securities is generally estimated using observable market data in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or II of the fair value hierarchy, as observable market data are readily available. From time to time, certain equity securities may be categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data or the use of model-based valuations. Other investments— These securities primarily consist of commercial paper and short-term certificates of deposit, which are categorized in Level II of the fair value hierarchy. The fair value of these investments is estimated using market data for comparable instruments of similar maturity and average yield. We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we cannot be certainutilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptions for various asset classes and individual securities. We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a review of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our reserve estimateinvestment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. Investments We group fixed-maturity securities in our investment portfolio into one of three main categories: held to maturity, available for sale or trading securities. Fixed-maturity securities for which we have the positive intent and ability to hold to maturity, if any, are classified as held to maturity and are reported at amortized cost. Trading securities are securities that are purchased and held primarily for the purpose of selling them in the near term, and are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities not classified as held to maturity or trading securities are classified as available for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equity securities consist of holdings in common stock, preferred stock and exchange traded funds, which, effective January 1, 2018, are all recorded at fair value with unrealized gains and losses reported in income. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities that were available for sale were classified in accumulated other comprehensive income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. We record an other-than-temporary impairment adjustment on a security with an unrealized loss if we intend to sell the impaired security, if it is more likely than not that we will be adequaterequired to cover ultimatesell the impaired security prior to recovery of its amortized cost basis, or if the present value of cash flows we expect to collect is less than the amortized cost basis of the security. If a sale is likely, the security is classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, losses on incurred defaults.securities that are other-than-temporarily impaired are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive income (loss), net of taxes. A credit loss is determined to exist if the present value of discounted cash flows expected to be collected from the security is less than the amortized cost basis of the security. The present value of discounted cash flows is determined using the original yield of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors in addition to the above, including, but not limited to, the following: | | | • | the extent and the duration of the decline in value; |
the reasons for the decline in value (e.g., credit event, interest related or market fluctuations); and the financial position, access to capital and near term prospects of the issuer, including the current and future impact of any specific events.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our deferred tax assets and deferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. Deferred tax assets and deferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or deferred tax liability is expected to be realized or settled. In regards to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold. We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the full year of 2018 and 2017. When estimating our full year 2018 and 2017 effective tax rates, we adjust our forecasted pre-tax income for gains and losses on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for as Discrete Items at the applicable federal tax rate. Goodwill and Other Acquired Intangible Assets, Net Goodwill and other acquired intangible assets were established primarily in connection with our acquisition of Clayton. Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that were not individually identified and separately recognized, and includes the value of discounted expected future cash flows of Clayton, Clayton’s workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment at the reporting unit level. A reporting unit represents a business for which discrete financial information is available; more than one reporting unit may be aggregated into a single reporting unit if they have similar economic characteristics. Events that could result in an interim assessment of goodwill impairment and/or a potential impairment charge include, but are not limited to: (i) significant under-performance relative to historical or projected future operating results; (ii) significant changes in the strategy for the Services segment; (iii) significant negative industry or economic trends; and (iv) a decline in Radian’s market capitalization below book value if such decline is attributable to the Services segment. Management regularly updates certain assumptions related to our projections, including the likelihood of achieving the assumed potential revenues from new initiatives and business strategies, and if these or other items have a significant negative impact on the reporting unit’s projections we may perform additional analysis to determine whether an impairment charge is needed. Lower earnings over sustained periods also can lead to impairment of goodwill, which could result in a charge to earnings. The value of goodwill is primarily supported by revenue projections, which are mostly driven by projected transaction volume and margins. In performing the interim quantitative analysis for our goodwill impairment test as of June 30, 2017, we elected to early adopt the update to the accounting standard regarding goodwill and other intangibles, which simplified the subsequent measurement of goodwill by eliminating step two of the goodwill impairment test. Under this guidance, if indicators for impairment are present, we perform a quantitative analysis to evaluate our long-lived assets for potential impairment, and then determine the amount of the goodwill impairment by comparing a reporting unit’s fair value to its carrying amount. After adjusting the carrying value for any impairment of other intangibles or long-lived assets, an impairment charge is recognized for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value, up to the full amount of the goodwill allocated to the reporting unit. Intangible assets, other than goodwill, primarily consist of customer relationships, technology, trade name and trademarks, client backlog and non-competition agreements. Customer relationships represent the value of the specifically acquired customer relationships and are valued using the excess earnings approach using estimated client revenues, attrition rates, implied royalty rates and discount rates. The excess earnings approach estimates the present value of expected earnings in excess of a traditional return on business assets. Technology represents proprietary software used for loan review, underwriting and due diligence, managing the REO disposition process, performing surveillance of mortgage loan servicers, real estate valuations and client workflow solutions. Trade name and trademarks primarily reflect the value inherent in the recognition of the “Clayton” name and its reputation. For example,purposes of our intangible assets, we use the term client backlog to refer to the estimated present value of fees to be earned for services performed on loans currently under surveillance or REO assets under
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
management. The value of a non-competition agreement is an appraisal of potential lost revenues that would arise from an individual leaving to work for a competitor or initiating a competing enterprise. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset. The calculation of the estimated fair value of goodwill and other acquired intangibles is performed primarily using an income approach and requires the use of significant estimates and assumptions that are highly subjective in nature, such as attrition rates, discount rates, future expected cash flows and market conditions. The most significant assumptions relate to the valuation of customer relationships. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. During the fourth quarter 2018, we performed our annual quantitative assessment of goodwill and concluded there was no impairment of goodwill as of December 31, 2018. See Note 7 of Notes to Consolidated Financial Statements for additional information. Recent Accounting Pronouncements Accounting Standards Adopted During 2018. In May 2014, the FASB issued an update to the accounting standard regarding revenue recognition. In July 2015, the FASB delayed the effective date for this updated standard for public companies to interim and annual periods beginning after December 15, 2017, and subsequently issued various clarifying updates. Our adoption of this standard, effective January 1, 2018, had no impact on our financial statements. See Note 2 of Notes to Consolidated Financial Statements for the disclosures required by this update. In January 2016, the FASB issued an update that makes certain changes to the standard for the accounting of financial instruments. Among other things, the update requires: (i) equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (iv) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. In February 2018, the FASB issued technical corrections related to this update, which addresses common questions regarding the application and adoption of the new guidance and the subsequent amendments. As a result of adopting these updates, equity securities are no longer classified as available for sale securities and changes in fair value are recognized through earnings. Consequently, we recorded a cumulative effect adjustment to retained earnings from accumulated other comprehensive income representing unrealized losses related to equity securities in the amount of $0.2 million, net of tax. In addition, we elected to utilize net asset value as a practical expedient to measure certain other investments, which resulted in an increase to other invested assets with an offset to retained earnings in the amount of $2.3 million, net of tax. Our adoption of both of these updates, effective January 1, 2018, resulted in a net increase to retained earnings of $2.1 million. See Notes 5 and 6 of Notes to Consolidated Financial Statements for additional information. In January 2017, the FASB issued an update to the accounting standard regarding business combinations. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. We adopted this update effective January 1, 2018 and it did not have a material impact on our financial statements. In February 2018, the FASB issued an update to the accounting standard regarding income statement reporting of comprehensive income and reclassification of certain tax effects from accumulated other comprehensive income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, for reporting periods for which financial statements have not been available for issuance. We elected to early adopt this update effective January 1, 2018. As a result we recorded a reclassification adjustment from accumulated other
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
comprehensive income to retained earnings in the amount of $2.7 million. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the TCJA. In August 2018, the FASB issued an update to the accounting standard regarding the disclosure requirements for fair value measurements. The amendments in this update remove certain disclosure requirements regarding transfers between Level I and Level II assets as well as the requirement to disclose the valuation process for Level III assets. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We elected to early adopt the full update as of December 31, 2018 and it did not have a material impact on our financial statements or disclosures. Accounting Standards Not Yet Adopted. In February 2016, the FASB issued an update that replaces the existing accounting and disclosure requirements for leases of property, plant and equipment. The update requires lessees to recognize, as of the lease commencement date, assets and liabilities for all leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortization of the right-of-use asset. Quantitative disclosures are required for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also required regarding the nature of the leases, such as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. In July 2018 the FASB issued a further update containing certain targeted improvements to the accounting and disclosure requirements for leases, including an additional (and optional) transition method to recognize the cumulative-effect adjustment as of the beginning of the period of adoption, rather than recognizing the cumulative-effect adjustment as of the beginning of the earliest comparative period presented. We expect to elect the optional transition method to recognize the cumulative-effect adjustment as of the beginning of the period of adoption.However, we do not expect the adoption of this standard to impact our stockholders’ equity, results of operations or liquidity. In addition, we expect to elect the practical expedients for transitioning existing leases to the new standard as of the effective date. As a result of applying the practical expedients: (i) we are not required to reassess expired or existing contracts to determine if they contain additional leases; (ii) we are not required to reassess the lease classification for expired and existing leases; and (iii) we are not required to reassess initial direct costs for existing leases. The update is effective for us on January 1, 2019 and upon our adoption, we expect to record an increase in other assets of approximately $50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 of Notes to Consolidated Financial Statements for additional information about our leases. In June 2016, the FASB issued an update to the accounting standard regarding the measurement of credit losses on financial instruments and certain other assets. This update requires that financial assets measured at their amortized cost basis be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. This update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is not applicable to credit losses associated with our mortgage insurance loss reserves generally increasepolicies. We are currently evaluating the impact on our financial statements and future disclosures as defaulted loans age, because historically, as defaulted loans age, theya result of this update. In March 2017, the FASB issued an update to the accounting standard regarding receivables. The new standard requires certain premiums on purchased callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of this update to have been more likelya material effect on our financial statements and disclosures. In August 2018, the FASB issued an update to result in foreclosure,the accounting standard regarding the accounting for long-duration insurance contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be
Part II Item 7. Management’s Discussion and therefore, have been more likelyAnalysis of Financial Condition and Results of Operations
reviewed at least annually; (ii) defines and simplifies the measurement of market risk benefits; (iii) simplifies the amortization of deferred acquisition costs; and (iv) enhances the required disclosures about long-duration contracts. This update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this update. In August 2018, the FASB issued an update to resultthe accounting standard regarding the capitalization of implementation costs for activities performed in a claim payment. While we believecloud computing arrangement that is a service contract. The new standard aligns the accounting for implementation costs of hosting arrangements that are service contracts with the accounting for capitalizing internal-use software. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential impact of the adoption of this remains accurate, followingupdate and do not expect it to have a material effect on our financial statements and disclosures. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk represents the potential for loss due to adverse changes in the value of financial crisis, there areinstruments as a significant numberresult of loanschanges in market conditions. Examples of market risk include changes in interest rates, credit spreads, foreign currency exchange rates and equity prices. We perform sensitivity analyses to determine the effects of market risk exposures on our investment securities by determining the potential loss in future earnings, fair values or cash flows of market-risk-sensitive instruments resulting from one or more selected hypothetical changes in the above mentioned market risks. Interest-Rate Risk and Credit-Spread Risk The primary market risks in our defaultedinvestment portfolio are interest-rate risk and credit-spread risk, namely the fair value sensitivity of our fixed income securities to changes in interest rates and credit spreads, respectively. We regularly analyze our exposure to interest-rate risk and credit-spread risk and have determined that the fair value of our investments is materially exposed to changes in both interest rates and credit spreads. Our sensitivity analysis for interest rates is based on the change in fair value of our fixed income securities, assuming a hypothetical instantaneous and parallel 100-basis point increase or decrease in the U.S. Treasury yield curve, with all other factors remaining constant. We calculate the duration of our fixed income securities, expressed in years, in order to estimate the interest-rate sensitivity of these securities, as shown in the table below. Credit spread represents the additional yield on a fixed income security, above the risk-free rate, that is paid by an issuer to compensate investors for assuming the credit risk of the issuer and market liquidity of the fixed income security. We manage credit-spread risk on both an entity and group level, across issuer, maturity, sector and asset class. Our sensitivity analysis for credit-spread risk is based on the change in fair value of our fixed income securities, assuming a hypothetical 100-basis point increase or decrease in all credit spreads, with the exception of U.S. Treasury and agency obligations for which we have beenassumed no change in defaultcredit spreads, and assuming all other factors remain constant. Actual shifts in credit spreads generally vary by issuer and security, based on issuer-specific and security-specific factors such as credit quality, maturity, sector and asset class. Within a given asset class, investment grade securities generally exhibit less credit-spread volatility than securities with lower credit ratings. Our investment securities portfolio primarily consists of investment grade securities. Our sensitivity analyses for interest-rate risk and credit-spread risk provide an extendedindication of our investment portfolio’s sensitivity to shifts in interest rates and credit spreads. However, the timing and magnitude of actual market changes may differ from the hypothetical assumptions used in our sensitivity calculations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table illustrates the sensitivity of our investment portfolio to both interest-rate risk and credit-spread risk. | | | | | | | | | | | | | | | | | | | Short-term and Available for Sale | | Trading | | ($ in millions) | December 31, 2018 | | December 31,
2017 | | December 31, 2018 | | December 31,
2017 | Carrying value of fixed income investment portfolio (1) (2) | $ | 4,556.1 |
| | $ | 4,009.8 |
| | $ | 566.2 |
| | $ | 606.4 |
| Percentage of fixed income investment portfolio compared to total investment portfolio (3) | 87.9 | % | | 85.8 | % | | 10.9 | % | | 13.0 | % | | Average duration of fixed income portfolio | 4.0 years |
| | 4.4 years |
| | 4.3 years |
| | 5.1 years |
| | | | | | | | | | | Interest-rate risk increase/(decrease) in market value | | | | | | | | | +100 basis points - $ | $ | (175.0 | ) | | $ | (169.8 | ) | | $ | (23.4 | ) | | $ | (29.7 | ) | +100 basis points - % (4) | (3.8 | )% | | (4.2 | )% | | (4.1 | )% | | (4.9 | )% | | - 100 basis points - $ | $ | 186.8 |
| | $ | 184.7 |
| | $ | 25.3 |
| | $ | 32.5 |
| - 100 basis points - % (4) | 4.1 | % | | 4.6 | % | | 4.5 | % | | 5.4 | % | | | | | | | | | | | Credit-spread risk increase/(decrease) in market value | | | | | | | | | +100 basis points - $ | $ | (185.5 | ) | | $ | (183.8 | ) | | $ | (24.8 | ) | | $ | (30.4 | ) | +100 basis points - % (4) | (4.1 | )% | | (4.6 | )% | | (4.4 | )% | | (5.0 | )% | | - 100 basis points - $ | $ | 173.0 |
| | $ | 148.6 |
| | $ | 22.6 |
| | $ | 24.6 |
| - 100 basis points - % (4) | 3.8 | % | | 3.7 | % | | 4.0 | % | | 4.1 | % |
______________________ | | | (1) | Total fixed income securities include fixed-maturity investments available for sale, trading securities and short-term investments and exclude reinvested cash collateral held under securities lending agreements. At December 31, 2018 and 2017, fixed income securities shown above also include $97.1 million and $134.1 million, respectively, invested in certain fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheets, as well as $17.8 million and $20.7 million, respectively, in fixed income securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
| | | (2) | At December 31, 2017, equity securities, including our fixed income exchange-traded funds included in this table, were classified as available for sale in our consolidated balance sheet. At December 31, 2018, in accordance with the new accounting guidance adopted for 2018, equity securities are no longer classified as available for sale in our consolidated balance sheet and changes in fair value for equity securities are recognized through earnings. As a result, at December 31, 2018, the fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheet are included in trading securities in this table. See Note 2 of Notes to Consolidated Financial Statements for additional details on the implementation of this new accounting guidance. |
| | | (3) | Total investment portfolio comprises total investments per the consolidated balance sheets including securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
| | | (4) | Change in value expressed as a percentage of the market value of the related fixed income portfolio. |
The average duration of our total fixed income portfolio was 4.0 years at December 31, 2018 compared to 4.5 years at December 31, 2017. To assist us in setting duration targets for the investment portfolio, we analyze: (i) the interest-rate sensitivities of our liabilities, including prepayment risk associated with premium cash flows and credit losses; (ii) entity specific cash flows under various economic scenarios; (iii) return, volatility and correlation of specific asset classes and the interconnection with our liabilities; and (iv) our current risk appetite. Securities Lending Agreements. Radian Guaranty and Radian Reinsurance from time to time enter into certain short-term securities lending agreements with third-party Borrowers for the purpose of increasing the yield on our investment securities portfolio with minimal incremental risk. Market factors, including changes in interest rates, credit spreads and equity prices, may impact the timing or magnitude of cash outflows for the return of cash collateral. For the purpose of illustrating our interest-rate risk and credit-spread risk, we have included our fixed income securities (which include certain exchange-traded funds) loaned in the sensitivity table above. As of December 31, 2018 and December 31, 2017, the carrying value of these securities was $17.8 million and $20.7 million, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Under our securities lending agreements, the Borrower generally may return the loaned securities to us at any time, which would require us to return the cash and other collateral within the standard settlement period for the loaned securities on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with the cash collateral by maintaining the cash collateral in a short-term money-market fund with daily availability. The counterparty risk under these programs is reduced by the amounts of time, but whichcollateral received. On a daily basis, the value of the underlying securities that we have loaned to the Borrowers is compared to the value of cash and securities collateral we received from the Borrowers, and additional cash or securities are requested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the intermediary. We also have the right to request the return of the loaned securities at any time. For additional information on our securities lending agreements, see Note 6 of Notes to Consolidated Financial Statements. Foreign Exchange Rate Risk As of December 31, 2018 and 2017, we did not hold any foreign currency denominated securities in our investment portfolio. Exchange gains and losses on foreign currency transactions from our foreign operations have not been material due to the limited amount of business performed in those locations. Currency risk is further limited because, in general, both the revenues and expenses of our foreign operations are denominated in the same functional currency, based on the country in which the operations occur. Equity Market Price Equity Investments at December 31, 2018. At December 31, 2018, the market value and cost of the equity securities in our investment portfolio were $130.6 million and $139.4 million, respectively. These amounts include market value and cost of fixed income exchange-traded funds of $96.9 million and $102.7 million, respectively, which are subject to foreclosure,interest-rate risk and therefore,credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks. The remaining $33.7 million and $36.7 million of market value and cost, respectively, of equity securities at December 31, 2018, primarily consists of publicly-traded business development company equity securities and equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2018, our exposure to changes in equity market prices is not resultedsignificant. Equity Investments at December 31, 2017. At December 31, 2017, the market value and cost of the equity securities in claims. Asour investment portfolio were $162.8 million and $163.1 million, respectively. These amounts include market value and cost of fixed income exchange-traded funds of $134.0 million and $135.0 million, respectively, which are subject to interest-rate risk and credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks. The remaining $28.8 million and $28.1 million of market value and cost, respectively, of equity securities at December 31, 2017, consists of publicly-traded business development company equity securities and equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2017, our exposure to changes in equity market prices was not significant. See “Item 1. Business—Investment Policy and Portfolio” for additional information on risk management.
| | | Item 8. | Financial Statements and Supplementary Data. |
| | | | Index to Consolidated Financial Statements | | Annual Financial Statements: | PAGE | | | | | | Financial Statements as of December 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016: | | | | | | | | | | | | | Notes to Consolidated Financial Statements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REPORT ON MANAGEMENT’S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the Consolidated Financial Statements and other financial information presented in this annual report. The accompanying Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimations and judgments as required. Our board of directors exercises its responsibility for the financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with management and with PricewaterhouseCoopers LLP, the independent registered public accounting firm retained to audit our Consolidated Financial Statements, both privately and with management present, to review accounting, auditing, internal control and financial reporting matters. The accompanying report of PricewaterhouseCoopers LLP is based on its audit, which it is required to conduct in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), and which includes the consideration of our internal control over financial reporting to establish a result, significant uncertainty remainsbasis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. Richard G. Thornberry Chief Executive Officer J. Franklin Hall Senior Executive Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theBoard of Directors and Stockholders of Radian Group Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Radian Group Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, changes in common stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(3) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the ultimate resolutionCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of these aged defaults. This uncertainty requiresthe Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, to use considerable judgmentas well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in estimating the rate at which these loans will result in claims.circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP Philadelphia, PA February 28, 2019
We have served as the Company’s auditor since 2007.
| | | | | | | | | | Radian Group Inc. | | CONSOLIDATED BALANCE SHEETS | | | December 31,
2018 | | December 31,
2017 | | (In thousands, except per-share amounts) | | | | | Assets | | | | | Investments (Note 6) | | | | | Fixed-maturities available for sale—at fair value (amortized cost $4,098,962 and $3,426,217) | $ | 4,021,575 |
| | $ | 3,458,719 |
| | Trading securities—at fair value | 469,071 |
| | 606,401 |
| | Equity securities—at fair value (cost of $139,377 and $163,106) | 130,565 |
| | 162,830 |
| | Short-term investments—at fair value (includes $11,699 and $19,357 of reinvested cash collateral held under securities lending agreements) | 528,403 |
| | 415,658 |
| | Other invested assets—at fair value (amortized cost at December 31, 2017) | 3,415 |
| | 334 |
| | Total investments | 5,153,029 |
| | 4,643,942 |
| | Cash | 95,393 |
| | 80,569 |
| | Restricted cash | 11,609 |
| | 15,675 |
| | Accounts and notes receivable | 78,652 |
| | 72,558 |
| | Deferred income taxes, net (Note 10) | 131,643 |
| | 229,567 |
| | Goodwill and other acquired intangible assets, net (Note 7) | 58,998 |
| | 64,212 |
| | Prepaid reinsurance premium (Note 2) | 417,628 |
| | 386,509 |
| | Other assets (Note 9) | 367,700 |
| | 407,849 |
| | Total assets | $ | 6,314,652 |
| | $ | 5,900,881 |
| | Liabilities and Stockholders’ Equity |
| | | | Unearned premiums | $ | 739,357 |
| | $ | 723,938 |
| | Reserve for losses and loss adjustment expenses (“LAE”) (Note 11) | 401,361 |
| | 507,588 |
| | Senior notes (Note 12) | 1,030,348 |
| | 1,027,074 |
| | Reinsurance funds withheld (Note 2) | 321,212 |
| | 288,398 |
| | Other liabilities (Note 13) | 333,659 |
| | 353,845 |
| | Total liabilities | 2,825,937 |
| | 2,900,843 |
| | Commitments and Contingencies (Note 14) |
| |
| | Stockholders’ equity | | | | | Common stock: par value $.001 per share; 485,000 shares authorized at December 31, 2018 and 2017; 231,132 and 233,417 shares issued at December 31, 2018 and 2017, respectively; 213,473 and 215,814 shares outstanding at December 31, 2018 and 2017, respectively | 231 |
| | 233 |
| | Treasury stock, at cost: 17,660 and 17,603 shares at December 31, 2018 and 2017, respectively | (894,870 | ) | | (893,888 | ) | | Additional paid-in capital | 2,724,733 |
| | 2,754,275 |
| | Retained earnings | 1,719,541 |
| | 1,116,333 |
| | Accumulated other comprehensive income (loss) (Note 18) | (60,920 | ) | | 23,085 |
| | Total stockholders’ equity | 3,488,715 |
| | 3,000,038 |
| | Total liabilities and stockholders’ equity | $ | 6,314,652 |
| | $ | 5,900,881 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF OPERATIONS | | | Year Ended December 31, | | (In thousands, except per-share amounts) | 2018 | | 2017 | | 2016 | | Revenues: | | | | | | | Net premiums earned—insurance | $ | 1,014,007 |
| | $ | 932,773 |
| | $ | 921,769 |
| | Services revenue | 144,972 |
| | 155,103 |
| | 168,894 |
| | Net investment income | 152,475 |
| | 127,248 |
| | 113,466 |
| | Net gains (losses) on investments and other financial instruments | (42,476 | ) | | 3,621 |
| | 30,751 |
| | Other income | 4,028 |
| | 2,886 |
| | 3,572 |
| | Total revenues | 1,273,006 |
| | 1,221,631 |
| | 1,238,452 |
| | Expenses: | | | | | | | Provision for losses | 104,641 |
| | 135,154 |
| | 202,788 |
| | Policy acquisition costs | 25,265 |
| | 24,277 |
| | 23,480 |
| | Cost of services | 98,124 |
| | 104,599 |
| | 114,174 |
| | Other operating expenses | 280,818 |
| | 267,321 |
| | 244,896 |
| | Restructuring and other exit costs (Note 1) | 6,053 |
| | 17,268 |
| | — |
| | Interest expense | 61,490 |
|
| 62,761 |
|
| 81,132 |
| | Loss on induced conversion and debt extinguishment (Note 12) | — |
| | 51,469 |
| | 75,075 |
| | Impairment of goodwill (Note 7) | — |
| | 184,374 |
| | — |
| | Amortization and impairment of other acquired intangible assets | 12,429 |
| | 27,671 |
| | 13,221 |
| | Total expenses | 588,820 |
| | 874,894 |
| | 754,766 |
| | Pretax income | 684,186 |
| | 346,737 |
| | 483,686 |
| | Income tax provision | 78,175 |
|
| 225,649 |
|
| 175,433 |
| | Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | | | | | | | | Net income per share: | | | | | | | Basic | $ | 2.83 |
| | $ | 0.56 |
| | $ | 1.46 |
| | Diluted | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | | | | | | | | Weighted-average number of common shares outstanding—basic | 214,267 |
| | 215,321 |
| | 211,789 |
| | Weighted-average number of common and common equivalent shares outstanding—diluted | 218,553 |
| | 220,406 |
| | 229,258 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | Other comprehensive income (loss), net of tax (Note 18): | | | | | | | Unrealized gains (losses) on investments: | | | | | | | Unrealized holding gains (losses) arising during the period | (97,356 | ) | | 31,903 |
| | 8,782 |
| | Less: Reclassification adjustment for net gains (losses) included in net income | (10,270 | ) | | (2,642 | ) | | 2,251 |
| | Net unrealized gains (losses) on investments | (87,086 | ) | | 34,545 |
| | 6,531 |
| | Foreign currency translation adjustments: | | | | | | | Unrealized foreign currency translation adjustments | 5 |
| | 150 |
| | (474 | ) | | Less: Reclassification adjustment for liquidation of foreign subsidiary and other adjustments included in net income | 1 |
| | (721 | ) | | — |
| | Net foreign currency translation adjustments | 4 |
| | 871 |
| | (474 | ) | | Net actuarial gains | 129 |
| | 64 |
| | 25 |
| | Other comprehensive income (loss), net of tax | (86,953 | ) | | 35,480 |
| | 6,082 |
| | Comprehensive income | $ | 519,058 |
| | $ | 156,568 |
| | $ | 314,335 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Common Stock | | | | | | | Balance, beginning of period | $ | 233 |
| | $ | 232 |
| | $ | 224 |
| | Impact of extinguishment of convertible senior notes (Note 12) | — |
| | — |
| | 17 |
| | Issuance of common stock under incentive and benefit plans | 1 |
| | 1 |
| | — |
| | Shares repurchased under share repurchase program (Note 15) | (3 | ) | | — |
| | (9 | ) | | Balance, end of period | 231 |
| | 233 |
| | 232 |
| | | | | | | | | Treasury Stock | | | | | | | Balance, beginning of period | (893,888 | ) | | (893,332 | ) | | (893,176 | ) | | Repurchases of common stock under incentive plans | (982 | ) | | (556 | ) | | (156 | ) | | Balance, end of period | (894,870 | ) | | (893,888 | ) | | (893,332 | ) | | | | | | | | | Additional Paid-in Capital | | | | | | | Balance, beginning of period | 2,754,275 |
| | 2,779,891 |
| | 2,716,618 |
| | Issuance of common stock under incentive and benefit plans | 2,859 |
| | 8,635 |
| | 2,117 |
| | Stock-based compensation | 17,649 |
| | 13,491 |
| | 18,257 |
| | Impact of extinguishment of convertible senior notes (Note 12) | — |
| | (52,700 | ) | | 143,078 |
| | Cumulative effect of adoption of the accounting standard update for share-based payment transactions | — |
| | 756 |
| | — |
| | Termination of capped calls (Note 12) | — |
| | 4,208 |
| | — |
| | Shares repurchased under share repurchase program (Note 15) | (50,050 | ) | | (6 | ) | | (100,179 | ) | | Balance, end of period | 2,724,733 |
| | 2,754,275 |
| | 2,779,891 |
| | | | | | | | | Retained Earnings | | | | | | | Balance, beginning of period | 1,116,333 |
| | 997,890 |
| | 691,742 |
| | Net income | 606,011 |
| | 121,088 |
| | 308,253 |
| | Dividends declared | (2,140 | ) | | (2,154 | ) | | (2,105 | ) | | Cumulative effect of adopting the accounting standard update for financial instruments | 2,061 |
| | — |
| | — |
| | Cumulative effect of adopting the accounting standard update for the reclassification of certain tax effects from accumulated other comprehensive income | (2,724 | ) | | — |
| | — |
| | Cumulative effect of adoption of the accounting standard update for share-based payment transactions, net of tax | — |
| | (491 | ) | | — |
| | Balance, end of period | 1,719,541 |
| | 1,116,333 |
| | 997,890 |
| | | | | | | |
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Accumulated Other Comprehensive Income (Loss) | | | | | | | Balance, beginning of period | 23,085 |
| | (12,395 | ) | | (18,477 | ) | | Cumulative effect of adopting the accounting standard update for financial instruments | 224 |
| | — |
| | — |
| | Cumulative effect of adopting the accounting standard update for reclassification of certain tax effects from accumulated other comprehensive income | 2,724 |
| | — |
| | — |
| | Net unrealized gains (losses) on investments, net of tax | (87,086 | ) | | 34,545 |
| | 6,531 |
| | Net foreign currency translation adjustment, net of tax | 4 |
| | 871 |
| | (474 | ) | | Net actuarial gains | 129 |
| | 64 |
| | 25 |
| | Balance, end of period | (60,920 | ) | | 23,085 |
| | (12,395 | ) | | | | | | | | | Total Stockholders’ Equity | $ | 3,488,715 |
| | $ | 3,000,038 |
| | $ | 2,872,286 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (In thousands) | Year Ended December 31, | | 2018 | | 2017 | | 2016 | | Cash flows from operating activities: | | | | | | | Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | Net (gains) losses on investments and other financial instruments | 42,476 |
| | (3,621 | ) | | (30,751 | ) | | Loss on induced conversion and debt extinguishment | — |
| | 51,469 |
| | 75,075 |
| | Deferred income tax provision | 120,573 |
| | 166,527 |
| | 170,887 |
| | Impairment of goodwill | — |
| | 184,374 |
| | — |
| | Amortization and impairment of other acquired intangible assets | 12,429 |
| | 27,797 |
| | 13,221 |
| | Depreciation, other amortization, and other impairments, net | 56,661 |
| | 58,038 |
| | 57,795 |
| | Change in: |
|
| |
|
| |
|
| | Accounts and notes receivable | (4,599 | ) | | 3,628 |
| | (16,011 | ) | | Prepaid reinsurance premiums | (31,119 | ) | | (157,071 | ) | | (188,947 | ) | | Unearned premiums | 15,419 |
| | 42,716 |
| | 862 |
| | Reserve for losses and LAE | (109,642 | ) | | (252,681 | ) | | (216,135 | ) | | Reinsurance funds withheld | 32,814 |
| | 130,397 |
| | 158,001 |
| | Other assets | 43,562 |
| | (16,491 | ) | | (7,662 | ) | | Other liabilities | (106,799 | ) | | 4,405 |
| | 57,136 |
| | Net cash provided by (used in) operating activities | 677,786 |
| | 360,575 |
| | 381,724 |
| | | | | | | | | Cash flows from investing activities: | | | | | | | Proceeds from sales of: | | | | | | | Fixed-maturity investments available for sale | 728,584 |
| | 888,219 |
| | 687,173 |
| | Trading securities | 58,317 |
| | 194,784 |
| | 290,855 |
| | Equity securities | 95,697 |
| | 38,318 |
| | 74,868 |
| | Proceeds from redemptions of: | | | | | | | Fixed-maturity investments available for sale | 457,595 |
| | 463,548 |
| | 337,630 |
| | Trading securities | 54,329 |
| | 79,296 |
| | 123,645 |
| | Purchases of: | | | | | | | Fixed-maturity investments available for sale | (1,875,069 | ) | | (1,947,916 | ) | | (1,990,652 | ) | | Equity securities | (69,160 | ) | | (213,469 | ) | | (830 | ) | | Sales, redemptions and (purchases) of: | | | | | | | Short-term investments, net | (108,325 | ) | | 324,258 |
| | 334,456 |
| | Other assets and other invested assets, net | 2,590 |
| | 882 |
| | 2,489 |
| | Net cash received (transferred) in sale of subsidiaries | — |
| | (650 | ) | | — |
| | Purchases of property and equipment, net | (26,008 | ) | | (28,676 | ) | | (35,542 | ) | | Acquisitions, net of cash acquired | (7,964 | ) | | (86 | ) | | (150 | ) | | Net cash provided by (used in) investing activities | (689,414 | ) | | (201,492 | ) | | (176,058 | ) |
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (In thousands) | Year Ended December 31, | | 2018 | | 2017 | | 2016 | | Cash flows from financing activities: | | | | | | | Dividends paid | (2,140 | ) | | (2,154 | ) | | (2,105 | ) | | Issuance of senior notes, net | — |
| | 442,163 |
| | 343,417 |
| | Purchases and redemptions of senior notes | — |
| | (593,527 | ) | | (445,072 | ) | | Proceeds from termination of capped calls | — |
| | 4,208 |
| | — |
| | Issuance of common stock | 1,385 |
| | 7,132 |
| | 717 |
| | Purchases of common shares | (50,053 | ) | | (6 | ) | | (100,188 | ) | | Credit facility commitment fees paid | (1,510 | ) | | (1,993 | ) | | — |
| | Change in secured borrowings (Note 13) | 39,342 |
| | 19,357 |
| | — |
| | Proceeds from secured borrowings (with terms greater than 3 months) | 56,449 |
| | — |
| | — |
| | Payments of secured borrowings (with terms greater than 3 months) | (20,917 | ) | | — |
| | — |
| | Excess tax benefits from stock-based awards | — |
| | — |
| | 333 |
| | Repayments of other borrowings | (170 | ) | | (264 | ) | | (371 | ) | | Net cash provided by (used in) financing activities | 22,386 |
| | (125,084 | ) | | (203,269 | ) | | Effect of exchange rate changes on cash and restricted cash | — |
| | 431 |
| | (481 | ) | | Increase (decrease) in cash and restricted cash | 10,758 |
| | 34,430 |
| | 1,916 |
| | Cash and restricted cash, beginning of period | 96,244 |
| | 61,814 |
| | 59,898 |
| | Cash and restricted cash, end of period | $ | 107,002 |
| | $ | 96,244 |
| | $ | 61,814 |
| | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Income taxes paid (received) (Note 10) | $ | 8,364 |
| | $ | 94,328 |
| | $ | (673 | ) | | Interest paid | 56,688 |
| | 57,453 |
| | 65,531 |
|
See Notes to Consolidated Financial Statements.
Radian Group Inc.
Notes to Consolidated Financial Statements
1. Description of Business and Recent Developments We are a diversified mortgage and real estate services business, providing both credit-related insurance coverage and other credit risk management solutions, as well as a broad array of mortgage, real estate and title services. We have two reportable business segments—Mortgage Insurance and Services. Mortgage Insurance Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as other credit risk management solutions, to mortgage lending institutions and mortgage credit investors. We provide our mortgage insurance products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Private mortgage insurance plays an important role in the U.S. housing finance system because it promotes affordable home ownership and helps protect mortgage lenders, investors and other beneficiaries by mitigating default-related losses on residential mortgage loans. Generally, these loans are made to home buyers who make down payments of less than 20% of the purchase price for their home or, in the case of refinancings, have less than 20% equity in their home. Private mortgage insurance also facilitates the sale of these low down payment loans in the secondary mortgage market, most of which are currently sold to the GSEs. Our total direct primary mortgage insurance RIF was $56.7 billion as of December 31, 2018. The GSEs and state insurance regulators impose various capital and financial requirements on our insurance subsidiaries. These include Risk-to-capital, other risk-based capital measures and surplus requirements, as well as the PMIERs financial requirements discussed below. Failure to comply with these capital and financial requirements may limit the amount of insurance that our mortgage insurance subsidiaries may write or prohibit our mortgage insurance subsidiaries from writing insurance altogether. The GSEs and state insurance regulators also possess significant discretion with respect to our mortgage insurance subsidiaries and all aspects of their business. See Note 19 for additional regulatory information. PMIERs. In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. At December 31, 2018, Radian Guaranty is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements. The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. The GSEs may amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer, as well as the approved insurer’s financial condition. In addition, the GSEs have a broad range of consent rights under the PMIERs and require private mortgage insurers to obtain the prior consent of the GSEs before taking certain actions, which may include entering into various intercompany agreements and commuting or reinsuring risk, among others. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, the GSEs could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty. From time to time, we enter into reinsurance transactions as a component of our long-term risk distribution strategy to manage our capital position and risk profile, which includes managing Radian Guaranty’s capital position under the PMIERs financial requirements. The credit that we receive under the PMIERs financial requirements for these transactions is subject to initial and ongoing review by the GSEs. Services Our Services segment is primarily a fee-for-service business that offers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers. Our mortgage services help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and
Radian Group Inc. Notes to Consolidated Financial Statements - (Continued)
Commutationsreal estate agents evaluate, manage, monitor and othersell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive suite of title insurance products, title settlement services and both traditional and digital closing services.
2018 Developments Capital and Liquidity Actions. On August 9, 2017, Radian Group’s board of directors authorized the Company to repurchase up to $50 million of its common stock. The Company completed this program during the first half of 2018 by purchasing 3.0 million shares at an average price of $16.56 per share, including commissions. On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated terminationstransactions until expiration of our insured risksthe program on July 31, 2019. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program. See Note 15 for additional information. Reinsurance. As part of Radian’s long-term risk distribution strategy, in our Mortgage Insurance segment provide usNovember 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an opportunityinitial RIF of $9.1 billion. In addition, Radian Guaranty entered into a separate excess-of-loss reinsurance agreement for up to exit exposures$21.4 million of coverage, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re on those Monthly Premium Policies. See Note 8 for an agreed upon payment, or payments, sometimes at an amount less thanadditional information. IRS Matter. Radian finalized a settlement with the previously estimated ultimate liability. OnceIRS which resolved the issues and concluded all exposures relating to such policies are extinguished, all reserves for losses and LAE and other balances relatingdisputes related to the insured policies are generally reversed, with any remaining net gain or loss typicallyIRS Matter. In the three-month period ended June 30, 2018, we recorded through provision for losses. We take into considerationtax benefits of $73.6 million, which includes both the specific contractual and economic terms for each individual agreement when accounting for our commutations or other negotiated terminations, which may result in differences inimpact of the accounting for these transactions. In our Mortgage Insurance business, the default and claim cycle beginssettlement with the receipt of a default notice from the loan servicer. Reserves for losses are established upon receipt of notification from servicers that a borrower has missed two monthly payments, which is when we consider a loan to be in default for financial statement and internal tracking purposes. We also establish reserves for associated LAE, consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process. We maintain an extensive database of claim payment history, and use models based on a variety of loan characteristics to determine the likelihood that a default will reach claim status.
With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. For purposes of reserve modeling, loans are aggregated into groups using a variety of factors. The attributes currently used to define the groups for purposes of developing various assumptions include, but are not limited to, the Stage of Default, the Time in Default and type of insurance (i.e., primary or pool). We use an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in DefaultIRS as well as the date that a loan goes into default. The Default to Claim Rate also includes our estimates with respect to expected Rescissionsreversal of certain previously accrued state and Claim Denials, which havelocal tax liabilities. In 2018, under the effect of reducing our Default to Claim Rates. We forecast the impact of our Loss Mitigation Activity in protecting us against fraud, underwriting negligence, breach of representation and warranties, inadequate documentation of submitted claims and other items that may give rise to Rescissions or cancellations and Claim Denials, to help determine the Default to Claim Rate. Our Loss Mitigation Activities have resulted in challenges from certain lender and servicer customers, which have resulted in some reversals of our decisions regarding Rescissions, Claim Denials and Claim Curtailments. Although we believe that our Loss Mitigation Activities are justified under our policies, if any of these challenges result in disputes or are not resolved, they could result in arbitration or judicial proceedings and we may need to reassume the risk on, and increase loss reserves for, those policies or pay additional claims. Our Master Policies specify the time period during which a suit or action arising from any rightterms of the insured undersettlement, Radian utilized its “qualified deposits” with the policy must be commenced. The assumptions embeddedU.S. Treasury to settle its $31 million obligation to the IRS, and in our estimated Default2019, the Company expects the IRS to Claim Raterefund to Radian the remaining $58 million that was previously on our in-force default inventory include an adjustment to our estimated Rescissionsdeposit. See Note 10 for additional information.
Restructuring and Claim Denials to account for the fact that we expect a certain number of policies to be reinstated and ultimately to be paid, asOther Exit Costs. As a result of valid challenges by such policy holders. After estimating the DefaultCompany’s continued implementation of its 2017 plan to Claim Rate,restructure the Services business, for the year ended December 31, 2018, pretax restructuring charges of $2.5 million were recognized, which include $2.0 million in cash expenses. For the year ended December 31, 2017, pretax restructuring charges of $17.3 million were recognized, including $6.8 million of cash expenses. This initiative was completed during 2018 and, for the two-year period ending December 31, 2018, we estimate Claim Severity basedrecognized total restructuring charges of $19.8 million, consisting of: (i) asset impairment charges (including the loss recognized on the averagesale of recently observed severity rates within product type, typeour EuroRisk business) of insurance,$10.8 million; (ii) employee severance and Time in Default cohorts. These average severity estimates are then applied to individual loan coverage amounts to determine reserves. Similarbenefit costs of $7.4 million; (iii) facility and lease termination costs of $1.3 million; and (iv) contract termination and other restructuring costs of $0.3 million. See Note 7 for additional information, including the events that led to the Default to Claim Rate, Claim Severity also is impacted by the length of time that loans are in default and by our Loss Mitigation Activity. For claims under our primary mortgage insurance, the coverage percentage is applied to the claim amount, which consists of the unpaid loan principal, plus past due interest (for which our liability is contractually cappedrestructuring plan.
We review assets for impairment in accordance with the terms of our Master Policies) and certain expenses associated with the default, to determine our maximum liability. Therefore, Claim Severity generally increases the longer that a loan is in default. In addition, we estimate the impact that the amount that Claim Curtailments due to servicer noncompliance with our insurance policies and servicing guidelines have on the amount that we ultimately will have to pay with respect to claims.accounting guidance for long-lived assets. As part of our claims review process,this assessment, during 2018, we assess whether defaulted loans were serviced appropriatelyincurred $3.6 million of other exit costs associated with impairment of internal-use software that was in accordanceaddition to the asset impairment charges recognized as part of the restructuring charges associated with our insurance policies and servicing guidelines. If a servicer failed to satisfy its servicing obligations, our insurance policies provide that we may curtail the claim payment for such default, and in some circumstances, cancel coverage or deny the claim.Services business. We do not establish reserves for loans that are in default if we believe that we will not be liable for the payment of a claim with respect to that default. We do not establish loss reserves for expected future claims on insured mortgages that are not in default. See “—Reserve for Premium Deficiency” below for an exception to this general principle.
2. Significant Accounting Policies
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
IBNR and Other Reserves We also establish reserves for defaults that we estimate have been incurred but have not been reported to us on a timely basis by the servicer, as well as for previous Rescissions, Claim Denials and Claim Curtailments that we estimate will be reinstated and subsequently paid. We generally give the policyholder up to 30 days to challenge our decision to rescind coverage before we consider a policy to be rescinded and remove it from our defaulted inventory; therefore, we currently expect only a limited percentage of policies that were rescinded to be reinstated. We currently expect a significant percentage of claims that were denied to be resubmitted as a perfected claim and ultimately paid. Most often, a Claim Denial is the result of a servicer’s inability to provide the loan origination file or other servicing documents for review. Under the terms of our Master
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Policies with our lending customers, our policyholders have up to one year after the acquisition of borrower’s title to provide to us the necessary documents to perfect a claim. All estimates are periodically reviewed and adjustments are made as they become necessary. The impact to our reserve due to estimated future Loss Mitigation Activities incorporates our expectations regarding the number of policies that we expect to be reinstated as a result of our claims rebuttal process. Rescissions, Claim Denials and Claim Curtailments may occur for various reasons, including, without limitation, underwriting negligence, fraudulent applications and appraisals, breach of representations and warranties and inadequate documentation, primarily related to our insurance written in years prior to and including 2008. The level of Rescissions, Claim Denials and Claim Curtailments has been declining in recent periods as our defaults related to insurance written in years prior to and including 2008 continue to decline, and we expect this trend to continue. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. Under the accounting standard regarding contingencies, an estimated loss is accrued only if we determine that the loss is probable and can be reasonably estimated. For populations of disputed Rescissions, Claim Denials and Claim Curtailments where we determine that a settlement is probable and that a loss can be reasonably estimated, we reflect our best estimate of the expected loss related to the populations under discussion in our financial statements, primarily as a component of our IBNR reserve. While our reserves include our best estimate of such losses, the outcome of the discussions or potential legal proceedings that could ensue is uncertain, and it is reasonably possible that a loss exists in excess of the amount accrued. Sensitivity Analysis We considered the sensitivity of first-lien loss reserve estimates at December 31, 2018 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 96.0% of risk exposure at December 31, 2018), we estimated that our loss reserves would change by approximately $3.8 million at December 31, 2018. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 33% at December 31, 2018, including our assumptions related to Rescissions and Claim Denials), we estimated a $10.4 million change in our loss reserves at December 31, 2018. Senior management regularly reviews the modeled frequency, Rescission, Claim Denial, Claim Curtailments and Claim Severity estimates, which are based on historical trends, as described above. If recent emerging or projected trends differ significantly from the historical trends used to develop the modeled estimates, management evaluates these trends and determines how they should be considered in its reserve estimates. Reserve for Premium Deficiency Insurance enterprises are required to establish a PDR if the net present value of the expected future losses and expenses for a particular product line exceeds the net present value of expected future premiums and existing reserves for that product line. We reassess our expectations for premiums, losses and expenses for our mortgage insurance business at least quarterly and update our premium deficiency analyses accordingly. For our mortgage insurance business, we group our mortgage insurance products into two categories: first-lien and second-lien mortgage loans. For our first-lien insurance business, because the combination of the net present value of our expected future premiums and existing reserves (net of reinsurance recoverables) significantly exceeded the net present value of our future expected losses and expenses, a first-lien PDR was not required as of December 31, 2018 or December 31, 2017. Our second-lien PDR is recorded as a component of other liabilities. Evaluating the expected profitability of our existing mortgage insurance business and the need for a PDR for our first-lien business involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of potential losses and premium revenues. The models, assumptions and estimates we use to evaluate the need for a PDR may not accurately forecast future performance, especially during any extended economic downturn or period of extreme market volatility and uncertainty. Fair Value of Financial Instruments Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with GAAP, we established a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below: | | | Level I | — Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| | | Level II | — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and |
| | | Level III | — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available. |
For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy. There were no material Level III assets or liabilities at December 31, 2018. Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5 of Notes to Consolidated Financial Statements. All changes in fair value of trading securities, equity securities (effective January 1, 2018) and certain other assets are included in our consolidated statements of operations. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. All changes in the fair value of available for sale securities are recorded in accumulated other comprehensive income (loss). The following are descriptions of our valuation methodologies for financial assets and liabilities measured at fair value. Investments U.S. government and agency securities—The fair value of U.S. government and agency securities is estimated using observed market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy. State and municipal obligations—The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. Money market instruments—The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy. Corporate bonds and notes—The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. RMBS, CMBS and Other ABS—The fair value of these instruments is estimated based on prices of comparable securities and spreads and observable prepayment speeds. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Foreign government and agency securities—The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy. Equity securities—The fair value of these securities is generally estimated using observable market data in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or II of the fair value hierarchy, as observable market data are readily available. From time to time, certain equity securities may be categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data or the use of model-based valuations. Other investments— These securities primarily consist of commercial paper and short-term certificates of deposit, which are categorized in Level II of the fair value hierarchy. The fair value of these investments is estimated using market data for comparable instruments of similar maturity and average yield. We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we utilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptions for various asset classes and individual securities. We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a review of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our investment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. Investments We group fixed-maturity securities in our investment portfolio into one of three main categories: held to maturity, available for sale or trading securities. Fixed-maturity securities for which we have the positive intent and ability to hold to maturity, if any, are classified as held to maturity and are reported at amortized cost. Trading securities are securities that are purchased and held primarily for the purpose of selling them in the near term, and are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities not classified as held to maturity or trading securities are classified as available for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equity securities consist of holdings in common stock, preferred stock and exchange traded funds, which, effective January 1, 2018, are all recorded at fair value with unrealized gains and losses reported in income. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities that were available for sale were classified in accumulated other comprehensive income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. We record an other-than-temporary impairment adjustment on a security with an unrealized loss if we intend to sell the impaired security, if it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis, or if the present value of cash flows we expect to collect is less than the amortized cost basis of the security. If a sale is likely, the security is classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, losses on securities that are other-than-temporarily impaired are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive income (loss), net of taxes. A credit loss is determined to exist if the present value of discounted cash flows expected to be collected from the security is less than the amortized cost basis of the security. The present value of discounted cash flows is determined using the original yield of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors in addition to the above, including, but not limited to, the following: | | | • | the extent and the duration of the decline in value; |
the reasons for the decline in value (e.g., credit event, interest related or market fluctuations); and the financial position, access to capital and near term prospects of the issuer, including the current and future impact of any specific events.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our deferred tax assets and deferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. Deferred tax assets and deferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or deferred tax liability is expected to be realized or settled. In regards to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold. We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the full year of 2018 and 2017. When estimating our full year 2018 and 2017 effective tax rates, we adjust our forecasted pre-tax income for gains and losses on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for as Discrete Items at the applicable federal tax rate. Goodwill and Other Acquired Intangible Assets, Net Goodwill and other acquired intangible assets were established primarily in connection with our acquisition of Clayton. Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that were not individually identified and separately recognized, and includes the value of discounted expected future cash flows of Clayton, Clayton’s workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment at the reporting unit level. A reporting unit represents a business for which discrete financial information is available; more than one reporting unit may be aggregated into a single reporting unit if they have similar economic characteristics. Events that could result in an interim assessment of goodwill impairment and/or a potential impairment charge include, but are not limited to: (i) significant under-performance relative to historical or projected future operating results; (ii) significant changes in the strategy for the Services segment; (iii) significant negative industry or economic trends; and (iv) a decline in Radian’s market capitalization below book value if such decline is attributable to the Services segment. Management regularly updates certain assumptions related to our projections, including the likelihood of achieving the assumed potential revenues from new initiatives and business strategies, and if these or other items have a significant negative impact on the reporting unit’s projections we may perform additional analysis to determine whether an impairment charge is needed. Lower earnings over sustained periods also can lead to impairment of goodwill, which could result in a charge to earnings. The value of goodwill is primarily supported by revenue projections, which are mostly driven by projected transaction volume and margins. In performing the interim quantitative analysis for our goodwill impairment test as of June 30, 2017, we elected to early adopt the update to the accounting standard regarding goodwill and other intangibles, which simplified the subsequent measurement of goodwill by eliminating step two of the goodwill impairment test. Under this guidance, if indicators for impairment are present, we perform a quantitative analysis to evaluate our long-lived assets for potential impairment, and then determine the amount of the goodwill impairment by comparing a reporting unit’s fair value to its carrying amount. After adjusting the carrying value for any impairment of other intangibles or long-lived assets, an impairment charge is recognized for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value, up to the full amount of the goodwill allocated to the reporting unit. Intangible assets, other than goodwill, primarily consist of customer relationships, technology, trade name and trademarks, client backlog and non-competition agreements. Customer relationships represent the value of the specifically acquired customer relationships and are valued using the excess earnings approach using estimated client revenues, attrition rates, implied royalty rates and discount rates. The excess earnings approach estimates the present value of expected earnings in excess of a traditional return on business assets. Technology represents proprietary software used for loan review, underwriting and due diligence, managing the REO disposition process, performing surveillance of mortgage loan servicers, real estate valuations and client workflow solutions. Trade name and trademarks primarily reflect the value inherent in the recognition of the “Clayton” name and its reputation. For purposes of our intangible assets, we use the term client backlog to refer to the estimated present value of fees to be earned for services performed on loans currently under surveillance or REO assets under
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
management. The value of a non-competition agreement is an appraisal of potential lost revenues that would arise from an individual leaving to work for a competitor or initiating a competing enterprise. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset. The calculation of the estimated fair value of goodwill and other acquired intangibles is performed primarily using an income approach and requires the use of significant estimates and assumptions that are highly subjective in nature, such as attrition rates, discount rates, future expected cash flows and market conditions. The most significant assumptions relate to the valuation of customer relationships. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. During the fourth quarter 2018, we performed our annual quantitative assessment of goodwill and concluded there was no impairment of goodwill as of December 31, 2018. See Note 7 of Notes to Consolidated Financial Statements for additional information. Recent Accounting Pronouncements Accounting Standards Adopted During 2018. In May 2014, the FASB issued an update to the accounting standard regarding revenue recognition. In July 2015, the FASB delayed the effective date for this updated standard for public companies to interim and annual periods beginning after December 15, 2017, and subsequently issued various clarifying updates. Our adoption of this standard, effective January 1, 2018, had no impact on our financial statements. See Note 2 of Notes to Consolidated Financial Statements for the disclosures required by this update. In January 2016, the FASB issued an update that makes certain changes to the standard for the accounting of financial instruments. Among other things, the update requires: (i) equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (iv) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. In February 2018, the FASB issued technical corrections related to this update, which addresses common questions regarding the application and adoption of the new guidance and the subsequent amendments. As a result of adopting these updates, equity securities are no longer classified as available for sale securities and changes in fair value are recognized through earnings. Consequently, we recorded a cumulative effect adjustment to retained earnings from accumulated other comprehensive income representing unrealized losses related to equity securities in the amount of $0.2 million, net of tax. In addition, we elected to utilize net asset value as a practical expedient to measure certain other investments, which resulted in an increase to other invested assets with an offset to retained earnings in the amount of $2.3 million, net of tax. Our adoption of both of these updates, effective January 1, 2018, resulted in a net increase to retained earnings of $2.1 million. See Notes 5 and 6 of Notes to Consolidated Financial Statements for additional information. In January 2017, the FASB issued an update to the accounting standard regarding business combinations. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. We adopted this update effective January 1, 2018 and it did not have a material impact on our financial statements. In February 2018, the FASB issued an update to the accounting standard regarding income statement reporting of comprehensive income and reclassification of certain tax effects from accumulated other comprehensive income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, for reporting periods for which financial statements have not been available for issuance. We elected to early adopt this update effective January 1, 2018. As a result we recorded a reclassification adjustment from accumulated other
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
comprehensive income to retained earnings in the amount of $2.7 million. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the TCJA. In August 2018, the FASB issued an update to the accounting standard regarding the disclosure requirements for fair value measurements. The amendments in this update remove certain disclosure requirements regarding transfers between Level I and Level II assets as well as the requirement to disclose the valuation process for Level III assets. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We elected to early adopt the full update as of December 31, 2018 and it did not have a material impact on our financial statements or disclosures. Accounting Standards Not Yet Adopted. In February 2016, the FASB issued an update that replaces the existing accounting and disclosure requirements for leases of property, plant and equipment. The update requires lessees to recognize, as of the lease commencement date, assets and liabilities for all leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortization of the right-of-use asset. Quantitative disclosures are required for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also required regarding the nature of the leases, such as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. In July 2018 the FASB issued a further update containing certain targeted improvements to the accounting and disclosure requirements for leases, including an additional (and optional) transition method to recognize the cumulative-effect adjustment as of the beginning of the period of adoption, rather than recognizing the cumulative-effect adjustment as of the beginning of the earliest comparative period presented. We expect to elect the optional transition method to recognize the cumulative-effect adjustment as of the beginning of the period of adoption.However, we do not expect the adoption of this standard to impact our stockholders’ equity, results of operations or liquidity. In addition, we expect to elect the practical expedients for transitioning existing leases to the new standard as of the effective date. As a result of applying the practical expedients: (i) we are not required to reassess expired or existing contracts to determine if they contain additional leases; (ii) we are not required to reassess the lease classification for expired and existing leases; and (iii) we are not required to reassess initial direct costs for existing leases. The update is effective for us on January 1, 2019 and upon our adoption, we expect to record an increase in other assets of approximately $50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 of Notes to Consolidated Financial Statements for additional information about our leases. In June 2016, the FASB issued an update to the accounting standard regarding the measurement of credit losses on financial instruments and certain other assets. This update requires that financial assets measured at their amortized cost basis be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. This update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is not applicable to credit losses associated with our mortgage insurance policies. We are currently evaluating the impact on our financial statements and future disclosures as a result of this update. In March 2017, the FASB issued an update to the accounting standard regarding receivables. The new standard requires certain premiums on purchased callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of this update to have a material effect on our financial statements and disclosures. In August 2018, the FASB issued an update to the accounting standard regarding the accounting for long-duration insurance contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
reviewed at least annually; (ii) defines and simplifies the measurement of market risk benefits; (iii) simplifies the amortization of deferred acquisition costs; and (iv) enhances the required disclosures about long-duration contracts. This update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this update. In August 2018, the FASB issued an update to the accounting standard regarding the capitalization of implementation costs for activities performed in a cloud computing arrangement that is a service contract. The new standard aligns the accounting for implementation costs of hosting arrangements that are service contracts with the accounting for capitalizing internal-use software. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential impact of the adoption of this update and do not expect it to have a material effect on our financial statements and disclosures. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk represents the potential for loss due to adverse changes in the value of financial instruments as a result of changes in market conditions. Examples of market risk include changes in interest rates, credit spreads, foreign currency exchange rates and equity prices. We perform sensitivity analyses to determine the effects of market risk exposures on our investment securities by determining the potential loss in future earnings, fair values or cash flows of market-risk-sensitive instruments resulting from one or more selected hypothetical changes in the above mentioned market risks. Interest-Rate Risk and Credit-Spread Risk The primary market risks in our investment portfolio are interest-rate risk and credit-spread risk, namely the fair value sensitivity of our fixed income securities to changes in interest rates and credit spreads, respectively. We regularly analyze our exposure to interest-rate risk and credit-spread risk and have determined that the fair value of our investments is materially exposed to changes in both interest rates and credit spreads. Our sensitivity analysis for interest rates is based on the change in fair value of our fixed income securities, assuming a hypothetical instantaneous and parallel 100-basis point increase or decrease in the U.S. Treasury yield curve, with all other factors remaining constant. We calculate the duration of our fixed income securities, expressed in years, in order to estimate the interest-rate sensitivity of these securities, as shown in the table below. Credit spread represents the additional yield on a fixed income security, above the risk-free rate, that is paid by an issuer to compensate investors for assuming the credit risk of the issuer and market liquidity of the fixed income security. We manage credit-spread risk on both an entity and group level, across issuer, maturity, sector and asset class. Our sensitivity analysis for credit-spread risk is based on the change in fair value of our fixed income securities, assuming a hypothetical 100-basis point increase or decrease in all credit spreads, with the exception of U.S. Treasury and agency obligations for which we have assumed no change in credit spreads, and assuming all other factors remain constant. Actual shifts in credit spreads generally vary by issuer and security, based on issuer-specific and security-specific factors such as credit quality, maturity, sector and asset class. Within a given asset class, investment grade securities generally exhibit less credit-spread volatility than securities with lower credit ratings. Our investment securities portfolio primarily consists of investment grade securities. Our sensitivity analyses for interest-rate risk and credit-spread risk provide an indication of our investment portfolio’s sensitivity to shifts in interest rates and credit spreads. However, the timing and magnitude of actual market changes may differ from the hypothetical assumptions used in our sensitivity calculations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table illustrates the sensitivity of our investment portfolio to both interest-rate risk and credit-spread risk. | | | | | | | | | | | | | | | | | | | Short-term and Available for Sale | | Trading | | ($ in millions) | December 31, 2018 | | December 31,
2017 | | December 31, 2018 | | December 31,
2017 | Carrying value of fixed income investment portfolio (1) (2) | $ | 4,556.1 |
| | $ | 4,009.8 |
| | $ | 566.2 |
| | $ | 606.4 |
| Percentage of fixed income investment portfolio compared to total investment portfolio (3) | 87.9 | % | | 85.8 | % | | 10.9 | % | | 13.0 | % | | Average duration of fixed income portfolio | 4.0 years |
| | 4.4 years |
| | 4.3 years |
| | 5.1 years |
| | | | | | | | | | | Interest-rate risk increase/(decrease) in market value | | | | | | | | | +100 basis points - $ | $ | (175.0 | ) | | $ | (169.8 | ) | | $ | (23.4 | ) | | $ | (29.7 | ) | +100 basis points - % (4) | (3.8 | )% | | (4.2 | )% | | (4.1 | )% | | (4.9 | )% | | - 100 basis points - $ | $ | 186.8 |
| | $ | 184.7 |
| | $ | 25.3 |
| | $ | 32.5 |
| - 100 basis points - % (4) | 4.1 | % | | 4.6 | % | | 4.5 | % | | 5.4 | % | | | | | | | | | | | Credit-spread risk increase/(decrease) in market value | | | | | | | | | +100 basis points - $ | $ | (185.5 | ) | | $ | (183.8 | ) | | $ | (24.8 | ) | | $ | (30.4 | ) | +100 basis points - % (4) | (4.1 | )% | | (4.6 | )% | | (4.4 | )% | | (5.0 | )% | | - 100 basis points - $ | $ | 173.0 |
| | $ | 148.6 |
| | $ | 22.6 |
| | $ | 24.6 |
| - 100 basis points - % (4) | 3.8 | % | | 3.7 | % | | 4.0 | % | | 4.1 | % |
______________________ | | | (1) | Total fixed income securities include fixed-maturity investments available for sale, trading securities and short-term investments and exclude reinvested cash collateral held under securities lending agreements. At December 31, 2018 and 2017, fixed income securities shown above also include $97.1 million and $134.1 million, respectively, invested in certain fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheets, as well as $17.8 million and $20.7 million, respectively, in fixed income securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
| | | (2) | At December 31, 2017, equity securities, including our fixed income exchange-traded funds included in this table, were classified as available for sale in our consolidated balance sheet. At December 31, 2018, in accordance with the new accounting guidance adopted for 2018, equity securities are no longer classified as available for sale in our consolidated balance sheet and changes in fair value for equity securities are recognized through earnings. As a result, at December 31, 2018, the fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheet are included in trading securities in this table. See Note 2 of Notes to Consolidated Financial Statements for additional details on the implementation of this new accounting guidance. |
| | | (3) | Total investment portfolio comprises total investments per the consolidated balance sheets including securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
| | | (4) | Change in value expressed as a percentage of the market value of the related fixed income portfolio. |
The average duration of our total fixed income portfolio was 4.0 years at December 31, 2018 compared to 4.5 years at December 31, 2017. To assist us in setting duration targets for the investment portfolio, we analyze: (i) the interest-rate sensitivities of our liabilities, including prepayment risk associated with premium cash flows and credit losses; (ii) entity specific cash flows under various economic scenarios; (iii) return, volatility and correlation of specific asset classes and the interconnection with our liabilities; and (iv) our current risk appetite. Securities Lending Agreements. Radian Guaranty and Radian Reinsurance from time to time enter into certain short-term securities lending agreements with third-party Borrowers for the purpose of increasing the yield on our investment securities portfolio with minimal incremental risk. Market factors, including changes in interest rates, credit spreads and equity prices, may impact the timing or magnitude of cash outflows for the return of cash collateral. For the purpose of illustrating our interest-rate risk and credit-spread risk, we have included our fixed income securities (which include certain exchange-traded funds) loaned in the sensitivity table above. As of December 31, 2018 and December 31, 2017, the carrying value of these securities was $17.8 million and $20.7 million, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Under our securities lending agreements, the Borrower generally may return the loaned securities to us at any time, which would require us to return the cash and other collateral within the standard settlement period for the loaned securities on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with the cash collateral by maintaining the cash collateral in a short-term money-market fund with daily availability. The counterparty risk under these programs is reduced by the amounts of collateral received. On a daily basis, the value of the underlying securities that we have loaned to the Borrowers is compared to the value of cash and securities collateral we received from the Borrowers, and additional cash or securities are requested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the intermediary. We also have the right to request the return of the loaned securities at any time. For additional information on our securities lending agreements, see Note 6 of Notes to Consolidated Financial Statements. Foreign Exchange Rate Risk As of December 31, 2018 and 2017, we did not hold any foreign currency denominated securities in our investment portfolio. Exchange gains and losses on foreign currency transactions from our foreign operations have not been material due to the limited amount of business performed in those locations. Currency risk is further limited because, in general, both the revenues and expenses of our foreign operations are denominated in the same functional currency, based on the country in which the operations occur. Equity Market Price Equity Investments at December 31, 2018. At December 31, 2018, the market value and cost of the equity securities in our investment portfolio were $130.6 million and $139.4 million, respectively. These amounts include market value and cost of fixed income exchange-traded funds of $96.9 million and $102.7 million, respectively, which are subject to interest-rate risk and credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks. The remaining $33.7 million and $36.7 million of market value and cost, respectively, of equity securities at December 31, 2018, primarily consists of publicly-traded business development company equity securities and equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2018, our exposure to changes in equity market prices is not significant. Equity Investments at December 31, 2017. At December 31, 2017, the market value and cost of the equity securities in our investment portfolio were $162.8 million and $163.1 million, respectively. These amounts include market value and cost of fixed income exchange-traded funds of $134.0 million and $135.0 million, respectively, which are subject to interest-rate risk and credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks. The remaining $28.8 million and $28.1 million of market value and cost, respectively, of equity securities at December 31, 2017, consists of publicly-traded business development company equity securities and equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2017, our exposure to changes in equity market prices was not significant. See “Item 1. Business—Investment Policy and Portfolio” for additional information on risk management.
| | | Item 8. | Financial Statements and Supplementary Data. |
| | | | Index to Consolidated Financial Statements | | Annual Financial Statements: | PAGE | | | | | | Financial Statements as of December 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016: | | | | | | | | | | | | | Notes to Consolidated Financial Statements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REPORT ON MANAGEMENT’S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the Consolidated Financial Statements and other financial information presented in this annual report. The accompanying Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimations and judgments as required. Our board of directors exercises its responsibility for the financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with management and with PricewaterhouseCoopers LLP, the independent registered public accounting firm retained to audit our Consolidated Financial Statements, both privately and with management present, to review accounting, auditing, internal control and financial reporting matters. The accompanying report of PricewaterhouseCoopers LLP is based on its audit, which it is required to conduct in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), and which includes the consideration of our internal control over financial reporting to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. Richard G. Thornberry Chief Executive Officer J. Franklin Hall Senior Executive Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theBoard of Directors and Stockholders of Radian Group Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Radian Group Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, changes in common stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(3) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP Philadelphia, PA February 28, 2019
We have served as the Company’s auditor since 2007.
| | | | | | | | | | Radian Group Inc. | | CONSOLIDATED BALANCE SHEETS | | | December 31,
2018 | | December 31,
2017 | | (In thousands, except per-share amounts) | | | | | Assets | | | | | Investments (Note 6) | | | | | Fixed-maturities available for sale—at fair value (amortized cost $4,098,962 and $3,426,217) | $ | 4,021,575 |
| | $ | 3,458,719 |
| | Trading securities—at fair value | 469,071 |
| | 606,401 |
| | Equity securities—at fair value (cost of $139,377 and $163,106) | 130,565 |
| | 162,830 |
| | Short-term investments—at fair value (includes $11,699 and $19,357 of reinvested cash collateral held under securities lending agreements) | 528,403 |
| | 415,658 |
| | Other invested assets—at fair value (amortized cost at December 31, 2017) | 3,415 |
| | 334 |
| | Total investments | 5,153,029 |
| | 4,643,942 |
| | Cash | 95,393 |
| | 80,569 |
| | Restricted cash | 11,609 |
| | 15,675 |
| | Accounts and notes receivable | 78,652 |
| | 72,558 |
| | Deferred income taxes, net (Note 10) | 131,643 |
| | 229,567 |
| | Goodwill and other acquired intangible assets, net (Note 7) | 58,998 |
| | 64,212 |
| | Prepaid reinsurance premium (Note 2) | 417,628 |
| | 386,509 |
| | Other assets (Note 9) | 367,700 |
| | 407,849 |
| | Total assets | $ | 6,314,652 |
| | $ | 5,900,881 |
| | Liabilities and Stockholders’ Equity |
| | | | Unearned premiums | $ | 739,357 |
| | $ | 723,938 |
| | Reserve for losses and loss adjustment expenses (“LAE”) (Note 11) | 401,361 |
| | 507,588 |
| | Senior notes (Note 12) | 1,030,348 |
| | 1,027,074 |
| | Reinsurance funds withheld (Note 2) | 321,212 |
| | 288,398 |
| | Other liabilities (Note 13) | 333,659 |
| | 353,845 |
| | Total liabilities | 2,825,937 |
| | 2,900,843 |
| | Commitments and Contingencies (Note 14) |
| |
| | Stockholders’ equity | | | | | Common stock: par value $.001 per share; 485,000 shares authorized at December 31, 2018 and 2017; 231,132 and 233,417 shares issued at December 31, 2018 and 2017, respectively; 213,473 and 215,814 shares outstanding at December 31, 2018 and 2017, respectively | 231 |
| | 233 |
| | Treasury stock, at cost: 17,660 and 17,603 shares at December 31, 2018 and 2017, respectively | (894,870 | ) | | (893,888 | ) | | Additional paid-in capital | 2,724,733 |
| | 2,754,275 |
| | Retained earnings | 1,719,541 |
| | 1,116,333 |
| | Accumulated other comprehensive income (loss) (Note 18) | (60,920 | ) | | 23,085 |
| | Total stockholders’ equity | 3,488,715 |
| | 3,000,038 |
| | Total liabilities and stockholders’ equity | $ | 6,314,652 |
| | $ | 5,900,881 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF OPERATIONS | | | Year Ended December 31, | | (In thousands, except per-share amounts) | 2018 | | 2017 | | 2016 | | Revenues: | | | | | | | Net premiums earned—insurance | $ | 1,014,007 |
| | $ | 932,773 |
| | $ | 921,769 |
| | Services revenue | 144,972 |
| | 155,103 |
| | 168,894 |
| | Net investment income | 152,475 |
| | 127,248 |
| | 113,466 |
| | Net gains (losses) on investments and other financial instruments | (42,476 | ) | | 3,621 |
| | 30,751 |
| | Other income | 4,028 |
| | 2,886 |
| | 3,572 |
| | Total revenues | 1,273,006 |
| | 1,221,631 |
| | 1,238,452 |
| | Expenses: | | | | | | | Provision for losses | 104,641 |
| | 135,154 |
| | 202,788 |
| | Policy acquisition costs | 25,265 |
| | 24,277 |
| | 23,480 |
| | Cost of services | 98,124 |
| | 104,599 |
| | 114,174 |
| | Other operating expenses | 280,818 |
| | 267,321 |
| | 244,896 |
| | Restructuring and other exit costs (Note 1) | 6,053 |
| | 17,268 |
| | — |
| | Interest expense | 61,490 |
|
| 62,761 |
|
| 81,132 |
| | Loss on induced conversion and debt extinguishment (Note 12) | — |
| | 51,469 |
| | 75,075 |
| | Impairment of goodwill (Note 7) | — |
| | 184,374 |
| | — |
| | Amortization and impairment of other acquired intangible assets | 12,429 |
| | 27,671 |
| | 13,221 |
| | Total expenses | 588,820 |
| | 874,894 |
| | 754,766 |
| | Pretax income | 684,186 |
| | 346,737 |
| | 483,686 |
| | Income tax provision | 78,175 |
|
| 225,649 |
|
| 175,433 |
| | Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | | | | | | | | Net income per share: | | | | | | | Basic | $ | 2.83 |
| | $ | 0.56 |
| | $ | 1.46 |
| | Diluted | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | | | | | | | | Weighted-average number of common shares outstanding—basic | 214,267 |
| | 215,321 |
| | 211,789 |
| | Weighted-average number of common and common equivalent shares outstanding—diluted | 218,553 |
| | 220,406 |
| | 229,258 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | Other comprehensive income (loss), net of tax (Note 18): | | | | | | | Unrealized gains (losses) on investments: | | | | | | | Unrealized holding gains (losses) arising during the period | (97,356 | ) | | 31,903 |
| | 8,782 |
| | Less: Reclassification adjustment for net gains (losses) included in net income | (10,270 | ) | | (2,642 | ) | | 2,251 |
| | Net unrealized gains (losses) on investments | (87,086 | ) | | 34,545 |
| | 6,531 |
| | Foreign currency translation adjustments: | | | | | | | Unrealized foreign currency translation adjustments | 5 |
| | 150 |
| | (474 | ) | | Less: Reclassification adjustment for liquidation of foreign subsidiary and other adjustments included in net income | 1 |
| | (721 | ) | | — |
| | Net foreign currency translation adjustments | 4 |
| | 871 |
| | (474 | ) | | Net actuarial gains | 129 |
| | 64 |
| | 25 |
| | Other comprehensive income (loss), net of tax | (86,953 | ) | | 35,480 |
| | 6,082 |
| | Comprehensive income | $ | 519,058 |
| | $ | 156,568 |
| | $ | 314,335 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Common Stock | | | | | | | Balance, beginning of period | $ | 233 |
| | $ | 232 |
| | $ | 224 |
| | Impact of extinguishment of convertible senior notes (Note 12) | — |
| | — |
| | 17 |
| | Issuance of common stock under incentive and benefit plans | 1 |
| | 1 |
| | — |
| | Shares repurchased under share repurchase program (Note 15) | (3 | ) | | — |
| | (9 | ) | | Balance, end of period | 231 |
| | 233 |
| | 232 |
| | | | | | | | | Treasury Stock | | | | | | | Balance, beginning of period | (893,888 | ) | | (893,332 | ) | | (893,176 | ) | | Repurchases of common stock under incentive plans | (982 | ) | | (556 | ) | | (156 | ) | | Balance, end of period | (894,870 | ) | | (893,888 | ) | | (893,332 | ) | | | | | | | | | Additional Paid-in Capital | | | | | | | Balance, beginning of period | 2,754,275 |
| | 2,779,891 |
| | 2,716,618 |
| | Issuance of common stock under incentive and benefit plans | 2,859 |
| | 8,635 |
| | 2,117 |
| | Stock-based compensation | 17,649 |
| | 13,491 |
| | 18,257 |
| | Impact of extinguishment of convertible senior notes (Note 12) | — |
| | (52,700 | ) | | 143,078 |
| | Cumulative effect of adoption of the accounting standard update for share-based payment transactions | — |
| | 756 |
| | — |
| | Termination of capped calls (Note 12) | — |
| | 4,208 |
| | — |
| | Shares repurchased under share repurchase program (Note 15) | (50,050 | ) | | (6 | ) | | (100,179 | ) | | Balance, end of period | 2,724,733 |
| | 2,754,275 |
| | 2,779,891 |
| | | | | | | | | Retained Earnings | | | | | | | Balance, beginning of period | 1,116,333 |
| | 997,890 |
| | 691,742 |
| | Net income | 606,011 |
| | 121,088 |
| | 308,253 |
| | Dividends declared | (2,140 | ) | | (2,154 | ) | | (2,105 | ) | | Cumulative effect of adopting the accounting standard update for financial instruments | 2,061 |
| | — |
| | — |
| | Cumulative effect of adopting the accounting standard update for the reclassification of certain tax effects from accumulated other comprehensive income | (2,724 | ) | | — |
| | — |
| | Cumulative effect of adoption of the accounting standard update for share-based payment transactions, net of tax | — |
| | (491 | ) | | — |
| | Balance, end of period | 1,719,541 |
| | 1,116,333 |
| | 997,890 |
| | | | | | | |
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Accumulated Other Comprehensive Income (Loss) | | | | | | | Balance, beginning of period | 23,085 |
| | (12,395 | ) | | (18,477 | ) | | Cumulative effect of adopting the accounting standard update for financial instruments | 224 |
| | — |
| | — |
| | Cumulative effect of adopting the accounting standard update for reclassification of certain tax effects from accumulated other comprehensive income | 2,724 |
| | — |
| | — |
| | Net unrealized gains (losses) on investments, net of tax | (87,086 | ) | | 34,545 |
| | 6,531 |
| | Net foreign currency translation adjustment, net of tax | 4 |
| | 871 |
| | (474 | ) | | Net actuarial gains | 129 |
| | 64 |
| | 25 |
| | Balance, end of period | (60,920 | ) | | 23,085 |
| | (12,395 | ) | | | | | | | | | Total Stockholders’ Equity | $ | 3,488,715 |
| | $ | 3,000,038 |
| | $ | 2,872,286 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (In thousands) | Year Ended December 31, | | 2018 | | 2017 | | 2016 | | Cash flows from operating activities: | | | | | | | Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | Net (gains) losses on investments and other financial instruments | 42,476 |
| | (3,621 | ) | | (30,751 | ) | | Loss on induced conversion and debt extinguishment | — |
| | 51,469 |
| | 75,075 |
| | Deferred income tax provision | 120,573 |
| | 166,527 |
| | 170,887 |
| | Impairment of goodwill | — |
| | 184,374 |
| | — |
| | Amortization and impairment of other acquired intangible assets | 12,429 |
| | 27,797 |
| | 13,221 |
| | Depreciation, other amortization, and other impairments, net | 56,661 |
| | 58,038 |
| | 57,795 |
| | Change in: |
|
| |
|
| |
|
| | Accounts and notes receivable | (4,599 | ) | | 3,628 |
| | (16,011 | ) | | Prepaid reinsurance premiums | (31,119 | ) | | (157,071 | ) | | (188,947 | ) | | Unearned premiums | 15,419 |
| | 42,716 |
| | 862 |
| | Reserve for losses and LAE | (109,642 | ) | | (252,681 | ) | | (216,135 | ) | | Reinsurance funds withheld | 32,814 |
| | 130,397 |
| | 158,001 |
| | Other assets | 43,562 |
| | (16,491 | ) | | (7,662 | ) | | Other liabilities | (106,799 | ) | | 4,405 |
| | 57,136 |
| | Net cash provided by (used in) operating activities | 677,786 |
| | 360,575 |
| | 381,724 |
| | | | | | | | | Cash flows from investing activities: | | | | | | | Proceeds from sales of: | | | | | | | Fixed-maturity investments available for sale | 728,584 |
| | 888,219 |
| | 687,173 |
| | Trading securities | 58,317 |
| | 194,784 |
| | 290,855 |
| | Equity securities | 95,697 |
| | 38,318 |
| | 74,868 |
| | Proceeds from redemptions of: | | | | | | | Fixed-maturity investments available for sale | 457,595 |
| | 463,548 |
| | 337,630 |
| | Trading securities | 54,329 |
| | 79,296 |
| | 123,645 |
| | Purchases of: | | | | | | | Fixed-maturity investments available for sale | (1,875,069 | ) | | (1,947,916 | ) | | (1,990,652 | ) | | Equity securities | (69,160 | ) | | (213,469 | ) | | (830 | ) | | Sales, redemptions and (purchases) of: | | | | | | | Short-term investments, net | (108,325 | ) | | 324,258 |
| | 334,456 |
| | Other assets and other invested assets, net | 2,590 |
| | 882 |
| | 2,489 |
| | Net cash received (transferred) in sale of subsidiaries | — |
| | (650 | ) | | — |
| | Purchases of property and equipment, net | (26,008 | ) | | (28,676 | ) | | (35,542 | ) | | Acquisitions, net of cash acquired | (7,964 | ) | | (86 | ) | | (150 | ) | | Net cash provided by (used in) investing activities | (689,414 | ) | | (201,492 | ) | | (176,058 | ) |
| | | | | | | | | | | | | | Radian Group Inc. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (In thousands) | Year Ended December 31, | | 2018 | | 2017 | | 2016 | | Cash flows from financing activities: | | | | | | | Dividends paid | (2,140 | ) | | (2,154 | ) | | (2,105 | ) | | Issuance of senior notes, net | — |
| | 442,163 |
| | 343,417 |
| | Purchases and redemptions of senior notes | — |
| | (593,527 | ) | | (445,072 | ) | | Proceeds from termination of capped calls | — |
| | 4,208 |
| | — |
| | Issuance of common stock | 1,385 |
| | 7,132 |
| | 717 |
| | Purchases of common shares | (50,053 | ) | | (6 | ) | | (100,188 | ) | | Credit facility commitment fees paid | (1,510 | ) | | (1,993 | ) | | — |
| | Change in secured borrowings (Note 13) | 39,342 |
| | 19,357 |
| | — |
| | Proceeds from secured borrowings (with terms greater than 3 months) | 56,449 |
| | — |
| | — |
| | Payments of secured borrowings (with terms greater than 3 months) | (20,917 | ) | | — |
| | — |
| | Excess tax benefits from stock-based awards | — |
| | — |
| | 333 |
| | Repayments of other borrowings | (170 | ) | | (264 | ) | | (371 | ) | | Net cash provided by (used in) financing activities | 22,386 |
| | (125,084 | ) | | (203,269 | ) | | Effect of exchange rate changes on cash and restricted cash | — |
| | 431 |
| | (481 | ) | | Increase (decrease) in cash and restricted cash | 10,758 |
| | 34,430 |
| | 1,916 |
| | Cash and restricted cash, beginning of period | 96,244 |
| | 61,814 |
| | 59,898 |
| | Cash and restricted cash, end of period | $ | 107,002 |
| | $ | 96,244 |
| | $ | 61,814 |
| | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Income taxes paid (received) (Note 10) | $ | 8,364 |
| | $ | 94,328 |
| | $ | (673 | ) | | Interest paid | 56,688 |
| | 57,453 |
| | 65,531 |
|
See Notes to Consolidated Financial Statements.
Radian Group Inc. Notes to Consolidated Financial Statements
1. Description of Business and Recent Developments We are a diversified mortgage and real estate services business, providing both credit-related insurance coverage and other credit risk management solutions, as well as a broad array of mortgage, real estate and title services. We have two reportable business segments—Mortgage Insurance and Services. Mortgage Insurance Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as other credit risk management solutions, to mortgage lending institutions and mortgage credit investors. We provide our mortgage insurance products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Private mortgage insurance plays an important role in the U.S. housing finance system because it promotes affordable home ownership and helps protect mortgage lenders, investors and other beneficiaries by mitigating default-related losses on residential mortgage loans. Generally, these loans are made to home buyers who make down payments of less than 20% of the purchase price for their home or, in the case of refinancings, have less than 20% equity in their home. Private mortgage insurance also facilitates the sale of these low down payment loans in the secondary mortgage market, most of which are currently sold to the GSEs. Our total direct primary mortgage insurance RIF was $56.7 billion as of December 31, 2018. The GSEs and state insurance regulators impose various capital and financial requirements on our insurance subsidiaries. These include Risk-to-capital, other risk-based capital measures and surplus requirements, as well as the PMIERs financial requirements discussed below. Failure to comply with these capital and financial requirements may limit the amount of insurance that our mortgage insurance subsidiaries may write or prohibit our mortgage insurance subsidiaries from writing insurance altogether. The GSEs and state insurance regulators also possess significant discretion with respect to our mortgage insurance subsidiaries and all aspects of their business. See Note 19 for additional regulatory information. PMIERs. In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. At December 31, 2018, Radian Guaranty is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements. The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. The GSEs may amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer, as well as the approved insurer’s financial condition. In addition, the GSEs have a broad range of consent rights under the PMIERs and require private mortgage insurers to obtain the prior consent of the GSEs before taking certain actions, which may include entering into various intercompany agreements and commuting or reinsuring risk, among others. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, the GSEs could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty. From time to time, we enter into reinsurance transactions as a component of our long-term risk distribution strategy to manage our capital position and risk profile, which includes managing Radian Guaranty’s capital position under the PMIERs financial requirements. The credit that we receive under the PMIERs financial requirements for these transactions is subject to initial and ongoing review by the GSEs. Services Our Services segment is primarily a fee-for-service business that offers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers. Our mortgage services help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
real estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive suite of title insurance products, title settlement services and both traditional and digital closing services. 2018 Developments Capital and Liquidity Actions. On August 9, 2017, Radian Group’s board of directors authorized the Company to repurchase up to $50 million of its common stock. The Company completed this program during the first half of 2018 by purchasing 3.0 million shares at an average price of $16.56 per share, including commissions. On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions until expiration of the program on July 31, 2019. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program. See Note 15 for additional information. Reinsurance. As part of Radian’s long-term risk distribution strategy, in November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an initial RIF of $9.1 billion. In addition, Radian Guaranty entered into a separate excess-of-loss reinsurance agreement for up to $21.4 million of coverage, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re on those Monthly Premium Policies. See Note 8 for additional information. IRS Matter. Radian finalized a settlement with the IRS which resolved the issues and concluded all disputes related to the IRS Matter. In the three-month period ended June 30, 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the settlement with the IRS as well as the reversal of certain previously accrued state and local tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit. See Note 10 for additional information. Restructuring and Other Exit Costs. As a result of the Company’s continued implementation of its 2017 plan to restructure the Services business, for the year ended December 31, 2018, pretax restructuring charges of $2.5 million were recognized, which include $2.0 million in cash expenses. For the year ended December 31, 2017, pretax restructuring charges of $17.3 million were recognized, including $6.8 million of cash expenses. This initiative was completed during 2018 and, for the two-year period ending December 31, 2018, we recognized total restructuring charges of $19.8 million, consisting of: (i) asset impairment charges (including the loss recognized on the sale of our EuroRisk business) of $10.8 million; (ii) employee severance and benefit costs of $7.4 million; (iii) facility and lease termination costs of $1.3 million; and (iv) contract termination and other restructuring costs of $0.3 million. See Note 7 for additional information, including the events that led to the restructuring plan. We review assets for impairment in accordance with the accounting guidance for long-lived assets. As part of this assessment, during 2018, we incurred $3.6 million of other exit costs associated with impairment of internal-use software that was in addition to the asset impairment charges recognized as part of the restructuring charges associated with our Services business. 2. Significant Accounting Policies Basis of Presentation Our consolidated financial statements are prepared in accordance with GAAP and include the accounts of Radian Group Inc. and its subsidiaries. All intercompany accounts and transactions, and intercompany profits and losses, have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation. We refer to Radian Group Inc. together with its consolidated subsidiaries as “Radian,” the “Company,” “we,” “us” or “our,” unless the context requires otherwise. We generally refer to Radian Group Inc. alone, without its consolidated subsidiaries, as “Radian Group.” Unless otherwise defined in this report, certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Use of Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our consolidated financial statements include our best estimates and assumptions, actual results may vary materially. Reserve for Losses and LAE We establish reserves to provide for losses and LAE, which include the estimated costs of settling claims in our Mortgage Insurance segment, in accordance with the accounting standard regarding accounting and reporting by insurance enterprises. Although this standard specifically excludes mortgage insurance from its guidance relating to the reserve for losses, because there is no specific guidance for mortgage insurance, we establish reserves for mortgage insurance as described below, using the guidance contained in this standard supplemented with other accounting guidance. Estimating our loss reserves involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities. The models, assumptions and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty. As such, we cannot be certain that our reserve estimate will be adequate to cover ultimate losses on incurred defaults. For example, our mortgage insurance loss reserves generally increase as defaulted loans age, because historically, as defaulted loans age, they have been more likely to result in foreclosure, and therefore, have been more likely to result in a claim payment. While we believe this remains accurate, following the financial crisis, there are a significant number of loans in our defaulted portfolio that have been in default for an extended period of time, but which have not been subject to foreclosure, and therefore, have not resulted in claims. As a result, significant uncertainty remains with respect to the ultimate resolution of these aged defaults. This uncertainty requires management to use considerable judgment in estimating the rate at which these loans will result in claims. Commutations and other negotiated terminations of our insured risks in our Mortgage Insurance segment provide us with an opportunity to exit exposures for an agreed upon payment, or payments, sometimes at an amount less than the previously estimated ultimate liability. Once all exposures relating to such policies are extinguished, all reserves for losses and LAE and other balances relating to the insured policies are generally reversed, with any remaining net gain or loss recorded through provision for losses. We take into consideration the specific contractual and economic terms for each individual agreement when accounting for our commutations or other negotiated terminations, which may result in differences in the accounting for these transactions. In our Mortgage Insurance business, the default and claim cycle begins with the receipt of a default notice from the loan servicer. Reserves for losses are established upon receipt of notification from servicers that a borrower has missed two monthly payments, which is when we consider a loan to be in default for financial statement and internal tracking purposes. We also establish reserves for associated LAE, consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process. We maintain an extensive database of claim payment history, and use models based on a variety of loan characteristics to determine the likelihood that a default will reach claim status. With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. For purposes of reserve modeling, loans are aggregated into groups using a variety of factors. The attributes currently used to define the groups for purposes of developing various assumptions include, but are not limited to, the Stage of Default, the Time in Default and type of insurance (i.e., primary or pool). We use an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. With respect to new defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received from September 2017 through February 2018, we assume a lower gross Default to Claim Rate than for new defaults with similar characteristics from other areas, due to our expectations based on past experience with other natural disasters, that a significant portion of these defaults will not result in claims. The Default to Claim Rate also includes our estimates with respect to expected Rescissions and Claim Denials, which have the effect of reducing our Default to Claim Rates. We forecast the impact of our Loss Mitigation Activity in protecting us against fraud, underwriting negligence, breach of representation and warranties, inadequate documentation of submitted claims and other items that may give rise to Rescissions or cancellations and Claim Denials, to help determine the Default to Claim
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Rate. Our Loss Mitigation Activities have resulted in challenges from certain lender and servicer customers, which have resulted in some reversals of our decisions regarding Rescissions, Claim Denials and Claim Curtailments in the ordinary course. Although we believe that our Loss Mitigation Activities are justified under our policies, certain challenges have resulted in disputes and litigation, which if resolved unfavorably to us, could require us to reassume the risk on, and increase loss reserves for, those policies or pay additional claims. See Note11for additional information. Our Master Policies specify the time period during which a suit or action arising from any right of the insured under the policy must be commenced. The assumptions embedded in our estimated Default to Claim Rate on our in-force default inventory include an adjustment to our estimated Rescissions and Claim Denials to account for the fact that we expect a certain number of policies to be reinstated and ultimately to be paid, as a result of valid challenges by such policy holders. After estimating the Default to Claim Rate, we estimate Claim Severity based on the average of recently observed severity rates within product type, type of insurance, and Time in Default cohorts. These average severity estimates are then applied to individual loan coverage amounts to determine reserves. Similar to the Default to Claim Rate, Claim Severity also is impacted by the length of time that loans are in default and by our Loss Mitigation Activity. For claims under our primary mortgage insurance, the coverage percentage is applied to the claim amount, which consists of the unpaid loan principal, plus past due interest (for which our liability is contractually capped in accordance with the terms of our Master Policies) and certain expenses associated with the default, to determine our maximum liability. Therefore, Claim Severity generally increases the longer that a loan is in default. In addition, we estimate the impact that the amount that Claim Curtailments due to servicer noncompliance with our insurance policies and servicing guidelines have on the amount that we ultimately will have to pay with respect to claims. As part of our claims review process, we assess whether defaulted loans were serviced appropriately in accordance with our insurance policies and servicing guidelines. If a servicer failed to satisfy its servicing obligations, our insurance policies provide that we may curtail the claim payment for such default, and in some circumstances, cancel coverage or deny the claim. We do not establish reserves for loans that are in default if we believe that we will not be liable for the payment of a claim with respect to that default unless a reserve for premium deficiency is required. We generally do not establish loss reserves for expected future claims on insured mortgages that are not in default. See “—Reserve for Premium Deficiency” below for an exception to this general principle. IBNR and Other Reserves We also establish reserves for defaults that we estimate have been incurred but have not been reported to us on a timely basis by the servicer, as well as for previous Rescissions, Claim Denials and Claim Curtailments that we estimate will be reinstated and subsequently paid. We generally give the policyholder up to 30 days to challenge our decision to rescind coverage before we consider a policy to be rescinded and remove it from our defaulted inventory; therefore, we currently expect only a limited percentage of policies that were rescinded to be reinstated. We currently expect a significant percentage of claims that were denied to be resubmitted as a perfected claim and ultimately paid. Most often, a Claim Denial is the result of a servicer’s inability to provide the loan origination file or other servicing documents for review. Under the terms of our Master Policies with our lending customers, our policyholders have up to one year after the acquisition of borrower’s title to provide to us the necessary documents to perfect a claim. All estimates are periodically reviewed and adjustments are made as they become necessary. The impact to our reserve due to estimated future Loss Mitigation Activities incorporates our expectations regarding the number of policies that we expect to be reinstated as a result of our claims rebuttal process. Rescissions, Claim Denials and Claim Curtailments may occur for various reasons, including, without limitation, underwriting negligence, fraudulent applications and appraisals, breach of representations and warranties and inadequate documentation, primarily related to our Legacy Portfolio.insurance written in years prior to and including 2008. The level of Rescissions, Claim Denials and Claim Curtailments has been declining in recent periods as our defaulted Legacy Portfolio continuesdefaults related to insurance written in years prior to and including 2008 continue to decline, and we expect this trend to continue. In addition, with respect to claims decisions on the population of Future Legacy Loans covered under the BofA Settlement Agreement, Radian Guaranty has agreed, subject to certain limited exceptions and conditions, that it will limit Rescissions, Claim Denials or Claim Curtailments. See Note 11 for additional information about the BofA Settlement Agreement. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. Under the accounting standard regarding contingencies, an estimated loss is accrued only if we determine that the loss is probable and can be reasonably estimated. For populations of disputed Rescissions, Claim Denials and Claim Curtailments where we determine that a settlement is probable and that a loss can be reasonably estimated, we reflect our best estimate of the expected loss related to the populations under discussion in our financial statements, primarily as a component of our IBNR reserve. While our reserves include our best estimate of such losses, the outcome of the discussions or potential legal proceedings that could ensue is uncertain, and it is reasonably possible that a loss exists in excess of the amount accrued. Included in our loss reserves is an estimate related
Radian Group Inc. Notes to a potential additional payment to Freddie Mac under the Freddie Mac Agreement, which is dependent upon the Loss Mitigation Activity on the population of loans subject to that agreement. Our reserve related to this potential additional payment is based on the estimated Rescissions, Claim Denials, Claim Curtailments and cancellations for this population of loans, determined using assumptions that are consistent with those utilized to determine our overall loss reserves. See Note 11 for additional information about the Freddie Mac Agreement.Consolidated Financial Statements (Continued)
Senior management regularly reviews the modeled frequency, Rescission, Claim Denial, Claim Curtailments and Claim Severity estimates, which are based on historical trends, as described above. If recent emerging or projected trends differ significantly from the historical trends used to develop the modeled estimates, management evaluates these trends and determines how they should be considered in its reserve estimates. Reserve for PDRPremium Deficiency Insurance enterprises are required to establish a PDR if the net present value of the expected future losses and expenses for a particular product line exceeds the net present value of expected future premiums and existing reserves for that product line. We reassess our expectations for premiums, losses and expenses for our mortgage insurance business at least quarterly and update our premium deficiency analyses accordingly. Expected future expenses include consideration of maintenance costs associated with maintaining records relating to insurance contracts and with the processing of premium collections. We also consider investment income in the premium deficiency calculation through the use of our pre-tax investment yield to discount certain cash flows for this analysis. For our mortgage insurance business, we group our mortgage insurance products into two categories: first-lien and Second-lien. To assesssecond-lien mortgage loans. As of December 31, 2018 and 2017, the need for a PDR on our first-lien insurance portfolio, we develop loss projections based on modeled loan defaults related to our current RIF. This projection is based on recent trends in default experience, severity and ratescombination of defaulted loans moving to claim (such Default to Claim Rates arethe net present value of our estimates of Rescissions and Claim Denials), as well as recent trends in the rate at which loans are prepaid.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
For our Second-lien insurance business, we projectexpected future premiums and losses using historical results to help determine future performance for both prepayments and claims. An estimated expense factor is then applied, andexisting reserves (net of reinsurance recoverables) significantly exceeded the result is discounted using a rate of return that approximates our pre-tax investment yield. This net present value less any existing reserves,of our future expected losses and expenses associated with our first lien mortgage insurance portfolio. Our second-lien PDR is recorded as a premium deficiency and the reserve is updated at least quarterly based on actual results for that quarter, along with updated transaction level projections.component of other liabilities.
Fair Value of Financial Instruments Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with GAAP, we established a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below: | | | Level I | — Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| | | Level II | — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and |
| | | Level III | — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available. |
For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy. Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5. All changes in fair value of trading securities, equity securities (effective January 1, 2018) and certain other assets are included in our consolidated statements of operations. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. All changes in the fair value of available for sale securities are recorded in AOCIaccumulated other comprehensive income (loss). Insurance Premiums—Revenue Recognition Mortgage insurance premiums written on an annual or multi-year basis are initially recorded as unearned premiums and earned over time. Annual premiums are amortized on a monthly, straight-line basis. Multi-year premiums are amortized over the terms of the contracts in relation to the anticipated claim payment pattern based on historical industry experience. PremiumsPremium
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
s written on a monthly basis are earned over the period that coverage is provided. When we rescind insurance coverage on a loan, we refund all premiums received in connection with such coverage. Premium revenue is recognized net of our accrual for estimated premium refunds due to Rescissions or other factors. With respect to our reinsurance transactions, ceded premiums written on an annual or multi-year basis are initially set up as prepaid reinsurance and are amortized in a manner consistent with the recognition of income on direct premiums.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Deferred Policy Acquisition Costs Incremental, direct costs associated with the successful acquisition of mortgage insurance business, consisting of compensation and other policy issuance and underwriting expenses, are initially deferred and reported as deferred policy acquisition costs. Amortization of these costs for each underwriting year book of business is expensed in proportion to estimated gross profits over the estimated life of the policies. This includes accruing interest on the unamortized balance of deferred policy acquisition costs. Ceding commissions received under our reinsurance arrangements related to these costs are also deferred and accounted for using similar assumptions, including certain amounts received under our reinsurance transactions.assumptions. See Notes 8 and 9 for additional details. Estimates of expected gross profit, including the Persistency Rate and loss development assumptions for each underwriting year used as a basis for amortization, are evaluated quarterly and the total amortization recorded to date is adjusted by a charge or credit to our consolidated statements of operations if actual experience or other evidence suggests that previous estimates should be revised. Considerable judgment is used in evaluating these estimates and the assumptions on which they are based. The use of different assumptions may have a significant effect on the amortization of deferred policy acquisition costs. Revenue Recognition—Services Revenue The FASB has issued an update to the accounting standard regarding revenue recognition, Revenue from Contracts with Customers, which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from our contracts with customers to provide services. We adopted this update effective January 1, 2018, using the modified retrospective approach. The principle of this update requires an entity to recognize revenue representing the transfer of services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those services, recognized as the performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to the new standard as this update did not change revenue recognition principles related to our investments and insurance products, which together represented the majority of our total revenue for 2018 and are subject to other GAAP guidance discussed elsewhere within our disclosures. This update is primarily applicable to revenues from our Services segment. See Note 1 “—Services” for information about the services we offer. The table below represents the disaggregation of Services revenues by revenue type: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Services segment revenue | | | | | | | Mortgage Services | $ | 80,314 |
| | $ | 83,405 |
| | $ | 102,244 |
| | Real Estate Services | 58,874 |
| | 55,095 |
| | 58,056 |
| | Title Services | 10,263 |
| | 23,333 |
| | 16,949 |
| Total (1) | $ | 149,451 |
| | $ | 161,833 |
| | $ | 177,249 |
|
______________________ | | | (1) | Includes inter-segment revenues of $3.2 million, $6.7 million, and $8.4 million in 2018, 2017 and 2016, respectively. For 2018, amounts exclude $7.7 million of Services segment net premiums earned—insurance and net investment income, as both are excluded from the scope of the revenue recognition standard. See Note 4 for segment information. |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Our Services segment revenues are recognized over time and measured each period based on the progress to date as services are performed and made available to customers. Our contracts with customers, including payment terms, are generally short-term in nature; therefore, any impact related to timing is immaterial. Revenue recognized related to services made available to customers and billed is reflected in accounts and notes receivable. Revenue recognized related to services performed and not yet billed is recorded in unbilled receivables and reflected in other assets. We have no material bad-debt expense. The following represents balances related to Services contracts as of the dates indicated: | | | | | | | | | | (In thousands) | December 31, 2018 | | December 31, 2017 | | Accounts Receivable - Services Contracts | $ | 15,461 |
| | $ | 17,391 |
| | Unbilled Receivables - Services Contracts | 19,917 |
| | 22,257 |
| | Deferred Revenues - Services Contracts | 3,204 |
| | 3,235 |
|
Revenue expected to be recognized in any future period related to remaining performance obligations, such as contracts where revenue is recognized when pervasive evidenceas invoiced and contracts with variable consideration related to undelivered performance obligations, is not material. Fee-for-Service Contracts Generally, our contracts with our clients do not include minimum volume commitments and can be terminated at any time by our clients. Although some of an arrangement exists,our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a significant portion of our engagements are transactional in nature and may be performed in connection with securitizations, loan sales, loan purchases or other transactions. Due to the service has been performed, the fee is fixed and determinable and collectiontransactional nature of the resulting receivable is reasonably assured. Theour business, our Services segment derives most of its revenuerevenues may fluctuate from professional service activities. A portion of these activitiesperiod to period as transactions are provided under “time-and-materials” billing arrangements. Services revenue consisting of billed fees and pass-through expenses is recorded as work is performed and expenses are incurred. Services revenue also includes expenses billed to clients, which includes travel and other out-of-pocket expenses, and other reimbursable expenses.
The Services segment also derives revenue from REO management activities, and is generally paid a fixed feecommenced or a percentage of the sale proceeds upon the sale of a property. Services revenue is recognized when the sale of a property closes and the client has confirmed receipt of the sale proceeds from a buyer. In certain instances, fees are received at the time that an asset is assigned to Radian for REO management. These fees are recorded as deferred revenue and are recognized on a straight-line basis over the average period of time required to sell an asset and complete the earnings process.
The Services segment also generates additional revenue utilizing a percentage-of-sales contract. Through the use of Services’ proprietary technology, property leads are sent to select clients. Services recognizes revenue for these transactions based on a percentage of the sale, upon the client’s successful closing on the property.
The Services segment also provides certain services under multiple element arrangements, including valuations, title reviews and tax lien reviews. Contracts for these services include provisions requiring the client to pay a per-unit price for services that have been performed if the client cancels the contract. Each service qualifies as a separate unit of accounting on a per-unit basis, and we recognize revenue as each individual service is performed.
completed. We do not recognize revenue or expense related to amounts advanced by us and subsequently reimbursed by clients for maintenance or repairs, of REO properties because we aredo not take control of the primary obligor and we have minimal credit risk.service prior to the client taking control. We record an expense if an advance is made by us that is not in accordance with a client contract, and the client is not obligated to reimburse us. Due to the nature of the services provided, our Services arrangements with customers may include any of the following three basic types of contracts: Fixed-Price Contracts. We use fixed-price contracts in our real estate valuation and component services, our loan review, underwriting and due diligence services as well as our title and closing services. We also use fixed-price contracts in our surveillance business for our servicer oversight services and RMBS surveillance services, and in our asset management business activities. Under fixed-price contracts we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price or day rate. Each service qualifies as a separate performance obligation and revenue is recognized as the service performed is made available to the client. Time-and-Expense Contracts. The Services segment also derives a portion of its revenue from professional service activities under time-and-expense contracts. In these types of contracts, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. These contracts are used in our loan review, underwriting and due diligence services. Services revenue consisting of billed time fees and pass-through expenses is recorded over time and based on the progress to date as services are performed and made available to customers. Services revenue may also include expenses billed to clients, which includes travel and other out-of-pocket expenses, and other reimbursable expenses. Percentage-of-Sale Contracts. Under percentage-of-sale contracts, we are paid a contractual percentage of the sale proceeds upon the sale of each property. These contracts are only used for a portion of our REO management services and our real estate brokerage services. In addition, through the use of our proprietary technology, property leads are sent to select clients. Revenue attributable to services provided under a percentage-of-sale contract is recognized over time and measured based on the progress to date and typically coincides with the client’s successful closing on the property. The revenue recognized for these transactions is based on a percentage of the sale. In certain instances, fees are received at the time that an asset is assigned to Radian for management. These fees are recorded as deferred revenue and are recognized over time based on progress to date and the availability to customers. Cost of Services Cost of services consists primarily of employee compensation and related payroll benefits, the cost of billable labor assigned to revenue-generating activities, as well as corresponding travel and related expenses incurred in providing such services to clients in our Services segment. Cost of services also includes costs paid to outside vendors, including real estate
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
agents that provide valuation and related services, as well as data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. Cost of services does not include an allocation of overhead costs.
Title Insurance – Premiums and Reserve for Losses and LAE
Title insurance premiums are typically due and earned in full when the real estate transaction is closed. Premiums generally are calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state.
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NotesWe provide for losses associated with title insurance policies, closing protection letters and other risk-based products based upon our historical experience and other factors by a charge to Consolidated Financial Statements - (Continued)
expense when the related premium revenue is recognized. The resulting reserve for IBNR claims, together with the reserve for known claims, reflects management’s best estimate of the total costs required to settle all incurred claims, and are considered to be adequate for such purpose.
Income Taxes We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our DTAsdeferred tax assets and DTLsdeferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. DTAsDeferred tax assets and DTLsdeferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the DTAdeferred tax asset or DTLdeferred tax liability is expected to be realized or settled. In regards to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold. We are required to establish a valuation allowance against our DTAdeferred tax assets when it is more likely than not that all or some portion of our DTAdeferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our DTAdeferred tax assets will be realized in future periods. Our framework for assessing the recoverability of our DTAs requires consideration of all available evidence, including:
whether there are cumulative losses from previous years;
future projections of taxable income within the applicable carryback and carryforward periods, including the sustainability of our forecasts of future taxable income under potential stress scenarios;
the degree of certainty regarding our projected incurred losses;
future reversals of existing taxable temporary differences; and
potential tax planning strategies.
Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the full year of 20162018 and 2015.2017. When estimating our full year 20162018 and 20152017 effective tax rates, we adjust our forecasted pre-tax income for gains and losses on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for discretelyas Discrete Items at the applicable federal tax rate. On December 22, 2017, the TCJA was enacted into law. We were required to recognize the accounting effects of the TCJA in the period of enactment, including remeasuring our deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” which provides guidance on accounting for the tax effects of the TCJA for which the accounting was incomplete. To the extent that a company’s accounting for certain income tax effects of the TCJA was incomplete but a reasonable estimate could be made, a company was required to record provisional estimates in the financial statements, during a measurement period not to extend beyond one year of the enactment date. Since the TCJA was passed late in the fourth quarter of 2017, we accounted for the tax effects of the TCJA on a provisional basis and determined reasonable estimates for those effects, which were included in our financial statements as of December 31, 2017. As a result of finalizing our interpretation of related guidance, we completed our accounting in the fourth quarter of 2018 during the one-year measurement period from the enactment date. No material adjustments to our provisional amounts were required. Risks and Uncertainties Radian Group and its subsidiaries are subject to risks and uncertainties that could affect amounts reported in our financial statements in future periods. Our future performance and financial condition are subject to significant risks and uncertainties that could cause actual results to be materially different from our estimates and forward-looking statements. Foreign Currency Revaluation/Translation Assets and liabilities denominated in foreign currencies are revalued or translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains and losses, net of deferred taxes, resulting from translation are included in AOCIaccumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses resulting from transactions in foreign currency are recorded in our statements of operations.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Cash and Restricted Cash ($ in thousands) Included in our restricted cash balances as of December 31, 20162018 were: (i) funds for a mortgage insurance reserve policy held in escrow for any future duties, rights and liabilities; (ii) funds held as collateral under our insurance trust agreements related to health care benefits; (iii) funds held in trust for the benefit of certain policyholders; (iv)(iii) escrow funds held for servicer liabilities; and (v)(iv) escrow funds held for title services obligations. Total cash and restricted cash shown in the consolidated statement of cash flows as of December 31, 20162018 of $61,814 is comprised of$107.0 million comprise cash and restricted cash of $52,149$95.4 million and $9,665,$11.6 million, respectively, as shown on the consolidated balance sheet as of December 31, 2016.2018. Total cash and restricted cash shown in the consolidated statement of cash flows as of December 31, 20152017 of $59,898 is comprised of$96.2 million comprise cash and restricted cash of $46,898$80.5 million and $13,000,$15.7 million, respectively, as shown on the consolidated balance sheet as of December 31, 2015.2017. Within our consolidated statements of cash flows, we classify cash receipts and cash payments related to items measured at fair value according to their nature and purpose. Because our investment activity for trading securities relates to overall strategic initiatives and is not trading related, it is recorded as cash flows from investing activities.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Investments We group assetsfixed-maturity securities in our investment portfolio into one of three main categories: held to maturity, available for sale or trading securities. Fixed-maturity securities for which we have the positive intent and ability to hold to maturity, if any, are classified as held to maturity and are reported at amortized cost. Trading securities are securities that are purchased and held primarily for the purpose of selling them in the near term, and are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities not classified as held to maturity or trading securities are classified as available for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as AOCI. Investments classified as tradingaccumulated other comprehensive income (loss). Equity securities consist of holdings in common stock, preferred stock and exchange traded funds, which, effective January 1, 2018, are reportedall recorded at fair value with unrealized gains and losses reported as a separate componentin income. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities that were available for sale were classified in accumulated other comprehensive income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of three12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. See Notes 5 and 6 for further discussion on the fair value of investments. We record an other-than-temporary impairment adjustment on a security with an unrealized loss if we intend to sell the impaired security, if it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis, or if the present value of cash flows we expect to collect is less than the amortized cost basis of the security. If a sale is likely, the security is classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, losses on securities that are other-than-temporarily impaired are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in AOCI,accumulated other comprehensive income (loss), net of taxes. A credit loss is determined to exist if the present value of discounted cash flows expected to be collected from the security is less than the amortized cost basis of the security. The present value of discounted cash flows is determined using the original yield of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors in addition to the above, including, but not limited to, the following: the extent and the duration of the decline in value; the reasons for the decline in value (e.g., credit event, interest related or market fluctuations); and the financial position, access to capital and near term prospects of the issuer, including the current and future impact of any specific events. Securities Lending Agreements Securities lending agreements, in which we loan certain securities in our investment portfolio to third parties for short periods of time in exchange for collateral consisting of cash and other securities, are treated as collateralized financing arrangements in our consolidated balance sheets. In all of our securities lending agreements, the securities that we transfer to Borrowers (loaned securities) may be transferred or loaned by the Borrowers; however, pursuant to the terms of these agreements, we maintain effective control over all loaned securities, including: (i) retaining ownership of the securities;
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
(ii)receiving the related investment or other income; and (iii) having the right to request the return of the loaned securities at any time. We report such securities within other assets in our consolidated balance sheets. We receive cash or other securities as collateral for such loaned securities. Any cash collateral may be invested in liquid assets. Cash collateral, which is reinvested for our benefit by the intermediary in accordance with the investment guidelines contained in the securities lending and collateral agreements, is reflected in short-term investments, with an offsetting liability recognized in other liabilities for the obligation to return the cash collateral to the Borrower. Securities collateral we receive from Borrowers is held on deposit for the Borrower’s benefit and we may not transfer or loan such securities collateral unless the Borrower is in default. Therefore, such securities collateral is not reflected in our consolidated financial statements given that the risks and rewards of ownership are not transferred to us from the Borrowers. See Note 6 for additional information. Fees received and paid in connection with securities lending agreements are recorded in net investment income and interest expense, respectively, on the consolidated statements of operations. Accounts and Notes Receivable Accounts and notes receivable primarily consist of accrued premiums receivable due from our mortgage insurance customers, amounts billed and due from our Services customers for services our Services segment has performed, and profit commission receivable, if any, related to our reinsurance transactions. See Note 8 for details. Accounts and notes receivable are carried at their estimated collectible amounts, net of any allowance for doubtful accounts, and are periodically evaluated for collectability based on past payment history and current economic conditions. Accounts and notes receivable exclude unbilled receivables totaling $19.9 million, which represent receivables for services performed that are not yet billed. Unbilled receivables are presented in other assets. Company-Owned Life Insurance (“COLI”) We are the beneficiary of insurance policies on the lives of certain of our current and past officers and employees. We have recognized the amount that could be realized upon surrender of the insurance policies in other assets in our consolidated balance sheets. See Note 9 for additional information. Property and Equipment Property and equipment is carried at cost, net of depreciation. For financial statement reporting purposes, computer hardware and software is generally depreciated over three or five years, furniture and furniture, fixtures is depreciated over seven years, and office equipment is depreciated over sevenfive years. Leasehold improvements are depreciated over the lesser of the estimated useful life of the asset improved or the remaining term of the lease. For income tax purposes, we use accelerated depreciation methods. See Note 9 for additional information.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Goodwill and Other Acquired Intangible Assets, Net Goodwill and other acquired intangible assets were established primarily in connection with our acquisition of Clayton. Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that were not individually identified and separately recognized, and includes the value of discounted expected future cash flows of Clayton, Clayton’s workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment at the reporting unit level. A reporting unit represents a business for which discrete financial information is available; more than one reporting unit may be aggregated into a single reporting unit if they have similar economic characteristics. Events that could result in an interim assessment of goodwill impairment and/or a potential impairment charge include, but are not limited to: (i) significant under-performance relative to historical or projected future operating results; (ii) significant changes in the strategy for the Services segment; (iii) significant negative industry or economic trends; and (iv) a decline in Radian’s market capitalization below book value if such decline is attributable to the Services segment. Management regularly updates certain assumptions related to our projections, including the likelihood of achieving the assumed potential revenues from new initiatives and business strategies, and if these or other items have a significant negative impact on the reporting unit’s projections we may perform additional analysis to determine whether an impairment charge is needed. Lower earnings over sustained periods also can lead to impairment of goodwill, which could result in a charge to earnings. The value of goodwill is primarily supported by revenue projections, which are mostly driven by projected transaction volume and margins. In performing the interim quantitative analysis for our goodwill impairment test as of June 30, 2017, we elected to early adopt the update to the accounting standard regarding goodwill and other intangibles, which simplified the subsequent measurement of goodwill by eliminating step two of the goodwill impairment test. Under this guidance, if indicators for
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
impairment are present, we perform a quantitative analysis to evaluate our long-lived assets for potential impairment, and then determine the amount of the goodwill impairment by comparing a reporting unit’s fair value to its carrying amount. After adjusting the carrying value for any impairment of other intangibles or long-lived assets, an impairment charge is recognized for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value, up to the full amount of the goodwill allocated to the reporting unit. Intangible assets, other than goodwill, primarily consist of customer relationships, technology, trade name and trademarks, client backlog and non-competition agreements. Customer relationships represent the value of the specifically acquired customer relationships and are valued using the excess earnings approach using estimated client revenues, attrition rates, implied royalty rates and discount rates. The excess earnings approach estimates the present value of expected earnings in excess of a traditional return on business assets. Technology represents proprietary software used for loan review, underwriting and due diligence, managing the REO disposition process, performing surveillance of mortgage loan servicers, real estate valuations and client workflow solutions. Trade name and trademarks primarily reflect the value inherent in the recognition of the “Clayton” name and its reputation. For purposes of our intangible assets, we use the term client backlog to refer to the estimated present value of fees to be earned for services performed on loans currently under surveillance or REO assets under management. The value of a non-competition agreement is an appraisal of potential lost revenues that would arise from an individual leaving to work for a competitor or initiating a competing enterprise. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset. The calculation of the estimated fair value of goodwill and other acquired intangibles is performed primarily using an income approach and requires the use of significant estimates and assumptions that are highly subjective in nature, such as attrition rates, discount rates, future expected cash flows and market conditions. The most significant assumptions relate to the valuation of goodwill and customer relationships. In particular, future expected cash flows include estimated transaction volumes that are not currently contracted, as well as volume projections associated with non-agency RMBS securitizations, for which current market conditions are not favorable. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. For more information on our accounting for goodwill and other intangibles, including our impairment analysis policy, see Note 7. Held-For-Sale Classification
We report a business as held for sale when management is committed to a formal plan to sell the assets, the business is available for immediate sale and is being actively marketed at a price that is reasonable in relation to its fair value, an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, the sale is probable and expected to be completed within one year, and it is deemed unlikely that significant changes to the plan will be made or that the plan will be withdrawn. A business classified as held for sale is reflected at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the consolidated balance sheets in the period in which the business is classified as held for sale. After a business is classified as held for sale, depreciation and amortization expense is not recognized on its assets.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Discontinued Operations
We report the results of operations of a business as discontinued operations if the business is classified as held for sale, the operations and cash flows of the business have been or will be eliminated from our ongoing operations as a result of a disposal transaction and we will not have any significant continuing involvement in the operations of the business after the disposal transaction. In the period in which the business meets the criteria of a discontinued operation, its results are reported in income or loss from discontinued operations in the consolidated statements of operations for current and prior periods, and include any required adjustment of the carrying amount to its fair value less cost to sell. In addition, tax is allocated to continuing operations and discontinued operations. The amount of tax allocated to discontinued operations is the difference between the tax originally allocated to continuing operations and the tax allocated to the restated amount of income from continuing operations in each period.
Accounting for Share-Based Compensation The stock-based compensation cost related to share-based liability awards is based on the fair value as of the measurement date. The compensation cost for equity instruments is measured based on the grant-date fair value at the date of issuance. For share-based awards with performance conditions related to our own operations, the expense recognized is dependent on the probability of the performance measure being achieved. Compensation cost is generally recognized over the periods that an employee provides service in exchange for the award. Effective January 1, 2017, upon the implementation of the update to the accounting standard regarding stock-based compensation, windfalls and shortfalls resulting from cancellations, expirations or exercises of stock options are reflected in the consolidated statements of operations as part of our income tax provision, as they occur. Prior to 2017, we applied the short-cut method, under the accounting standard regarding share-based payment, to account for the windfall tax benefits that were expected to result from the exercise of stock options. See Note 1516 for further information. Purchases of Convertible Debt Prior to Maturity We account for the purchases of our outstanding convertible debt as induced conversions of convertible debt in accordance with the accounting standard regarding derecognition of debt with conversion and other options, and the accounting standard regarding debt modifications and extinguishments. The accounting standards require the recognition through earnings of an inducement charge equal to the fair value of the consideration delivered in excess of the consideration issuable under the original conversion terms. The remaining consideration delivered and transaction costs incurred are required to be allocated between the extinguishment of the liability component and the reacquisition of the equity component. Therefore, we recognize a loss on induced conversion and debt extinguishment equal to the sum of: (i) the inducement charge; (ii) the difference between the fair value and the carrying value of the liability component of the purchased debt; (iii) transaction costs allocated to the debt component; and (iv) unamortized debt issuance costs related to the purchased debt.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Reinsurance We cede insurance risk through the use of reinsurance contracts and follow reinsurance accounting for those transactions where significant risk is transferred. Loss reserves and unearned premiums are established before consideration is given to amounts related to our reinsurance agreements. In accordance with the terms of the Single Premium QSR Transaction,Program, rather than making a cash payment or transferring investments for ceded premiums written, Radian Guaranty holds the related amounts to collateralize the reinsurers’ obligations and has established a corresponding funds withheld liability. Any loss recoveries and any potential profit commission to Radian Guaranty will be realized from this account. The reinsurers’ share of earned premiums is paid from this account on a quarterly basis. This liability also includes an interest credit on funds withheld, which is recorded as ceded premiums at a rate specified in the agreement and, depending on experience under the contract, may be paid to either Radian Guaranty or the reinsurers. The ceding commission earned for premiums ceded pursuant to this transaction is attributable to other underwriting costs (including any related deferred policy acquisition costs). The unamortized portion of the ceding commission in excess of our related acquisition cost is reflected in other liabilities. Ceded premiums written are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of income on direct premiums. See Note 8 for further discussion of our reinsurance transactions. Accelerated Share RepurchaseVariable Interest Entity
In 2015,As a provider of mortgage insurance we hadmay enter into contracts with variable interest entities (“VIEs”). VIEs include corporations, trusts or partnerships in which equity investors have: (i) insufficient equity at risk to allow it to finance its activities without additional subordinated financial support and (ii) at-risk equity holders that, as a group, do not have the characteristics of a controlling financial interest.
We perform an ASR programevaluation to determine whether we are required to consolidate the VIE’s assets and liabilities in our consolidated financial statements, based on whether we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is the variable interest holder that consistedis determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the combinationVIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that potentially could be significant to the VIE. See Note 8 for additional information. Restructuring and Other Exit Costs Restructuring and other exit costs include items such as asset impairment charges (including loss from the sale of a business line), employee severance and benefit costs, facility and lease termination costs, contract terminations and other costs of restructuring or exiting activities. The timing of the purchasefuture expense and associated cash payments for restructuring and other exit costs is dependent on the type of Radian Group common stock from an investment bank and a forward contract with that investment bank indexed to Radian Group common stock.exit cost. We accountedreview assets for the ASR programimpairment in accordance with the provisionsaccounting guidance for long-lived assets. The loss on sale of a business line is calculated by the accounting standards regarding derivativesexcess of its carry amount over the sale price. Generally, our employee severance and hedging for contracts indexed to an entity’s own stock, and the accounting standard regarding equity. The up-front payment to the investment bank asbenefit costs are part of the ASR program was accountedCompany’s ongoing benefit arrangement and are recognized when probable and estimable. A liability for as a reduction to stockholders’ equityfacility and lease contract termination costs is recognized at the date we cease the use of rights conveyed by the contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. Other contract termination and exit costs include future costs that will be incurred, which are recognized in our consolidated balance sheetstotal when they no longer will benefit the Company. The liabilities for restructuring and other exit costs are recorded in the second quarter of 2015, the period in which the payment was made. The shares of Radian Group common stock received were retired, resulting in a decrease in shares issued and outstanding and a corresponding increase in unissued shares in the periods delivered. We reflect the ASR program as a repurchase of common stock in the periods delivered for purposes of calculating earnings per share and as forward contracts indexed to the company’s own common stock. The ASR program met all of the applicable criteria for equity classification, and therefore, was not accounted for as a derivative instrument.other liabilities.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Recent Accounting Pronouncements Accounting Standards Adopted During 2016 In April 2015, the FASB issued an update to the accounting standard for the accounting of internal-use software. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The provisions of this update are effective for interim and annual periods beginning after December 15, 2015. The implementation of this update, effective January 1, 2016, did not have a material impact to our financial position, results of operations or cash flows.
In May 2015, the FASB issued an update to the accounting standard for the accounting of short-duration insurance contracts by insurance entities. The amendments in this update require insurance entities to disclose certain information about the liability for unpaid claims and claim adjustment expenses. The additional information required is focused on improvements in disclosures regarding insurance liabilities, including the timing, nature and uncertainty of future cash flows related to insurance liabilities and the effect of those cash flows on the statement of comprehensive income. The disclosures required by this update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. We adopted this update effective December 31, 2016. See Note 11 for additional disclosures.
In August and November 2016, the FASB issued updates to the accounting standard regarding the statement of cash flows. The updates reduce diversity in practice over the presentation and classification of certain cash receipts and cash payments. Specifically, the revisions provide guidance related to certain cash flow issues, including a requirement that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows. These updates are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, and we elected to early adopt these updates effective December 31, 2016. As a result of the early adoption of these updates, there were no changes in the presentation or classification of cash receipts and cash payments in the statement of cash flows; however, restricted cash is now included with cash and cash equivalents in the beginning and ending cash balances, retrospectively for all the periods presented.
Accounting Standards Not Yet Adopted
2018.In May 2014, the FASB issued an update to the accounting standard regarding revenue recognition. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This update is not expected to change revenue recognition principles related to our investments and insurance products, which represent a significant portion of our total revenues. This update is primarily applicable to revenues from our Services segment. In July 2015, the FASB delayed the effective date for this updated standard for public companies to interim and annual periods beginning after December 15, 2017, and subsequently issued various clarifying updates. EarlyOur adoption is permitted. This of this standard, permits the use of the retrospective or cumulative effective transition method. We are currently in the process of categorizing the Services revenues to evaluate theJanuary 1, 2018, had no impact toon our financial statements and futurestatements. The disclosures as a result of the updates.required by this update are included above in “—Revenue Recognition—Services.”
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
In January 2016, the FASB issued an update that makes certain changes to the standard for the accounting of financial instruments. Among other things, the update requires: (i) equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (iv) separate presentation in other comprehensive income of the portion of the total change in the fair value
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. In February 2018, the FASB issued technical corrections related to this update, which addresses common questions regarding the application and adoption of the new guidance and the subsequent amendments. As a result of adopting these updates, equity securities are no longer classified as available for sale securities and changes in fair value are recognized through earnings. Consequently, we recorded a cumulative effect adjustment to retained earnings from accumulated other comprehensive income representing unrealized losses related to equity securities in the amount of $0.2 million, net of tax. In addition, we elected to utilize net asset value as a practical expedient to measure certain other investments, which resulted in an increase to other invested assets with an offset to retained earnings in the amount of $2.3 million, net of tax. Our adoption of both of these updates, effective January 1, 2018, resulted in a net increase to retained earnings of $2.1 million. See Notes 5 and 6 for additional information. In January 2017, the FASB issued an update to the accounting standard regarding business combinations. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. We adopted this update effective January 1, 2018 and it did not have a material impact on our financial statements. In February 2018, the FASB issued an update to the accounting standard regarding income statement reporting of comprehensive income and reclassification of certain tax effects from accumulated other comprehensive income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, for reporting periods for which financial statements have not been available for issuance. We elected to early adopt this update effective January 1, 2018. As a result we recorded a reclassification adjustment from accumulated other comprehensive income to retained earnings in the amount of $2.7 million. See Note 10 for additional information regarding the TCJA. In August 2018, the FASB issued an update to the accounting standard regarding the disclosure requirements for fair value measurements. The amendments in this update remove certain disclosure requirements regarding transfers between Level I and Level II assets as well as the requirement to disclose the valuation process for Level III assets. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, withincluding adoption in an interim period. We elected to early adopt the exceptionfull update as of the “own credit” provision. We are currently evaluating theDecember 31, 2018 and it did not have a material impact toon our financial statements and future disclosures as a result of this update, but we do not expect the impact to be material due to the current amount of our investments in equity securities and our investment strategy.or disclosures. Accounting Standards Not Yet Adopted.In February 2016, the FASB issued an update that replaces the existing accounting and disclosure requirements for leases of property, plant and equipment. The update requires lessees to recognize, as of the lease commencement date, assets and liabilities for all leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Pursuant to the new standard, the liability initially recognized for the lease obligation is equal to the present value of the lease payments not yet made, discounted over the lease term at the implicit interest rate of the lease, if available, or otherwise at the lessee’s incremental borrowing rate. The lessee is also required to recognize an asset for its right to use the underlying asset for the lease term, based on the liability subject to certain adjustments, such as for initial direct costs. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortization of the right-of-use asset. Quantitative disclosures are required for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also required regarding the nature of the leases, such as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. ThisIn July 2018 the FASB issued a further update is effectivecontaining certain targeted improvements to the accounting and disclosure requirements for public companies for fiscal yearsleases, including an additional (and optional) transition method to recognize the cumulative-effect adjustment as of the beginning after December 15, 2018, including interim periods within those fiscal years. Earlyof the period of adoption, is permitted. The new standard must be adopted by applyingrather than recognizing the new guidancecumulative-effect adjustment as of the beginning of the earliest comparative period presented, usingpresented. We expect to elect the optional transition method to recognize the cumulative-effect adjustment as of the beginning $50 million, which represents a modified retrospective transition approach with certain optional practical expedients. We are currently evaluatingright of use asset, and a corresponding net increase in other liabilities for the impactsame amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the amendments, as well as implement any necessary changes to our financial statementscontrol environment and future disclosuresreporting processes to reflect the requirements of the amendments. See Note 14 for additional information about our leases. However, we do not expect the adoption of this standard to impact our stockholders’ equity, results of operations or liquidity. In addition, we expect to elect the practical expedients for transitioning existing leases to the new standard as of the effective date. As a result of this update. In March 2016, the FASB issued an update to the accounting standards for share-based payment transactions, including: (i) accounting for income taxes; (ii) classification of excess tax benefits on the statement of cash flows; (iii) forfeitures; (iv) minimum statutory tax withholding requirements; (v) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes; (vi)applying the practical expedientexpedients: (i) we are not required to reassess expired or existing contracts to determine if they contain additional leases; (ii) we are not required to reassess the lease classification for estimating the expected term;expired and (vii) intrinsic value. Among other things, the update requires: (i) all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement as they occur; (ii) recognition of excess tax benefits, regardless of whether the benefits reduce taxes payable in the current period;existing leases; and (iii) excess tax benefitswe are not required to be classified along with other cash flows as an operating activity, rather than separated from other income tax cash flows as a financing activity. For companies with significant share-based compensation, these changes may result in more volatile effective tax rates and net earnings, and result in additional dilution in earnings per share calculations. Thisreassess initial direct costs for existing leases. The update is effective for public companies for fiscal years beginning after December 15, 2016. Our adoption of this update, effectiveus on January 1, 2017, had2019 and upon our adoption, we expect to record an immaterial impact onincrease in other assets of approximately $50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statementsstatement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 for additional information about our leases.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
of the period of adoption.$50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at implementation. As a result of implementation of this new standard, however,our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the potentialamendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 for limited increased volatility inadditional information about our effective tax rate, which would impact our results of operations.leases. In June 2016, the FASB issued an update to the accounting standard regarding the measurement of credit losses on financial instruments.instruments and certain other assets. This update requires that financial assets measured at their amortized cost basis be presented at the net (of allowance for credit losses) amount expected to be collected. Credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. This update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as offor the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is not applicable to credit losses associated with our mortgage insurance policies. We are currently evaluating the impact toon our financial statements and future disclosures as a result of this update.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
In October 2016,March 2017, the FASB issued an update to the accounting standard regarding receivables. The new standard requires certain premiums on purchased callable debt securities to be amortized to the accountingearliest call date. The amortization period for income taxes. Thiscallable debt securities purchased at a discount will not be impacted. The provisions of this update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This update isare effective for public companies for fiscal years beginning after December 15, 2017,2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in the firstan interim period ofperiod. We do not expect the adoption year. We are currently evaluating the impactof this update to have a material effect on our financial statements as a result of this update.and disclosures. In January 2017,August 2018, the FASB issued an update to the accounting standard regarding goodwillthe accounting for long-duration insurance contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be reviewed at least annually; (ii) defines and other intangibles.simplifies the measurement of market risk benefits; (iii) simplifies the amortization of deferred acquisition costs; and (iv) enhances the required disclosures about long-duration contracts. This update simplifiesis effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the subsequent measurement of goodwill by eliminating step twopotential impact of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value. The provisionsadoption of this update. In August 2018, the FASB issued an update to the accounting standard regarding the capitalization of implementation costs for activities performed in a cloud computing arrangement that is a service contract. The new standard aligns the accounting for implementation costs of hosting arrangements that are service contracts with the accounting for capitalizing internal-use software. This update is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with earlyincluding interim periods within those fiscal years. Early adoption is permitted, forincluding adoption in an interim or annual goodwill impairment tests performed after January 1, 2017.period. We intend to early adoptare currently evaluating the potential impact of the adoption of this update effective as ofand do not expect it to have a material effect on our goodwill impairment test in 2017.
financial statements and disclosures.
3. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, while diluted net income per share is computed by dividing net income attributable to common sharesstockholders by the sum of the weighted averageweighted-average number of common shares outstanding and the weighted averageweighted-average number of dilutive potential common shares. Dilutive potential common shares relate to our stock-basedshare-based compensation arrangements and our outstanding convertible senior notes.notes, if any. For all calculations, the determination of whether potential common shares are dilutive or anti-dilutive is based on net income from continuing operations.income.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
The calculation of the basic and diluted net income per share was as follows: | | | | | | | | | | | | | | | Year Ended December 31, | | | 2018 | | 2017 | | 2016 | | (In thousands, except per-share amounts) | | | | | | Net income—basic | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
| Adjustment for dilutive Convertible Senior Notes due 2019, net of tax (1) | — |
| | (215 | ) | | 5,816 |
| Net income —diluted | $ | 606,011 |
| | $ | 120,873 |
| | $ | 314,069 |
| | | | | | | | Average common shares outstanding—basic | 214,267 |
| | 215,321 |
| | 211,789 |
| | Dilutive effect of Convertible Senior Notes due 2017 | — |
| | 323 |
| | 207 |
| | Dilutive effect of Convertible Senior Notes due 2019 | — |
| | 457 |
| | 14,263 |
| Dilutive effect of stock-based compensation arrangements (2) | 4,286 |
| | 4,305 |
| | 2,999 |
| | Adjusted average common shares outstanding—diluted | 218,553 |
| | 220,406 |
| | 229,258 |
| | | | | | | | | Net income per share: | | | | | | | | | | | | | | Basic | $ | 2.83 |
| | $ | 0.56 |
| | $ | 1.46 |
| | | | | | | | | Diluted | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2016 | | 2015 | | 2014 | | (In thousands, except per-share amounts) | | | | | | | Net income from continuing operations: | | | | | | Net income from continuing operations—basic | $ | 308,253 |
| | $ | 281,539 |
| | $ | 1,259,574 |
| Adjustment for dilutive Convertible Senior Notes due 2019, net of tax (1) | 5,816 |
| | 14,758 |
| | 14,372 |
| Net income from continuing operations—diluted | $ | 314,069 |
| | $ | 296,297 |
| | $ | 1,273,946 |
| | | | | | | | | Net income: | | | | | | Net income from continuing operations—basic | $ | 308,253 |
| | $ | 281,539 |
| | $ | 1,259,574 |
| | Income (loss) from discontinued operations, net of tax | — |
| | 5,385 |
| | (300,057 | ) | Net income—basic | 308,253 |
| | 286,924 |
| | 959,517 |
| Adjustment for dilutive Convertible Senior Notes due 2019, net of tax (1) | 5,816 |
| | 14,758 |
| | 14,372 |
| Net income—diluted | $ | 314,069 |
| | $ | 301,682 |
| | $ | 973,889 |
| | | | | | | | Average common shares outstanding—basic | 211,789 |
| | 199,910 |
| | 184,551 |
| Dilutive effect of Convertible Senior Notes due 2017 (2) | 207 |
| | 6,293 |
| | 8,465 |
| | Dilutive effect of Convertible Senior Notes due 2019 | 14,263 |
| | 37,736 |
| | 37,736 |
| Dilutive effect of stock-based compensation arrangements (2) | 2,999 |
| | 2,393 |
| | 3,150 |
| | Adjusted average common shares outstanding—diluted | 229,258 |
| | 246,332 |
| | 233,902 |
| | | | | | | | | Net income per share: | | | | | | | | | | | | | | Basic: | | | | | | | Net income from continuing operations | $ | 1.46 |
| | $ | 1.41 |
| | $ | 6.83 |
| | Income (loss) from discontinued operations, net of tax | — |
| | 0.03 |
| | (1.63 | ) | | Net income | $ | 1.46 |
| | $ | 1.44 |
| | $ | 5.20 |
| | | | | | | | | Diluted: | | | | | | | Net income from continuing operations | $ | 1.37 |
| | $ | 1.20 |
| | $ | 5.44 |
| | Income (loss) from discontinued operations, net of tax | — |
| | 0.02 |
| | (1.28 | ) | | Net income | $ | 1.37 |
| | $ | 1.22 |
| | $ | 4.16 |
|
______________________ | | | (1) | As applicable, includes coupon interest, amortization of discount and fees, and other changes in income or loss that would result from the assumed conversion. Included in the year ended December 31, 2017 is a benefit related to our adjustment of estimated accrued expense to actual amounts, resulting from the January 2017 settlement of our obligations on the remaining Convertible Senior Notes due 2019. |
| | | (2) | The following number of shares of our common stock equivalents issued under our stock-basedshare-based compensation arrangements and convertible debt, if any, were not included in the calculation of diluted net income per share because they were anti-dilutive: |
| | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Shares of common stock equivalents | 337 |
| | 353 |
| | 1,042 |
|
| | | | | | | | | | | | Year Ended December 31, | | (in thousands) | 2016 | | 2015 | | 2014 | | Shares of common stock equivalents | 1,042 |
| | 728 |
| | 542 |
|
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
4. Segment Reporting We have two strategic business units that we manage separately—Mortgage Insurance and effective with the June 30, 2014 acquisition of Clayton, our Services segment.Services. Adjusted pretax operating income (loss) for each segment represents segment results on a standalone basis; therefore, inter-segment eliminations and reclassifications required for consolidated GAAP presentation have not been reflected. See Note 18 for information related to discontinued operations. In the fourth quarter of 2016, we completed an organizational change that resulted in a changeWe allocate to our segment financial reporting structure. Previously, contract underwriting activities on behalf of third parties were reported in either the Mortgage Insurance segment or the Services segment,segment: (i) corporate expenses based on the customer relationship. Management responsibilitysegment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the segment; (ii) all interest expense (except for this contract underwriting business was moved entirelyinterest expense related to an intercompany note with terms consistent with the original issued amount of $300 million from the Senior Notes due 2019 that were used to fund our purchase of Clayton, all of which is allocated to our Services segment); and (iii) all corporate cash and investments.
We allocate to our Services segment: (i) corporate expenses based on the segment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the segment and (ii) the allocated interest expense related to the intercompany note as described above. No corporate cash or investments are allocated to the Services segment. This organizational change resultedInter-segment activities are recorded at market rates for segment reporting and eliminated in the transfer to theconsolidation. Contract underwriting activities are reported within our Services segment of revenue and expenses for all contract underwriting performed on behalf of third parties. Mortgage Insurance underwriting continues to be reported as an expense in the Mortgage Insurance segment. This change aligns with recent changes in personnel reporting lines and management oversight, and is consistent with the way the chief operating decision maker began assessing the performance of the reportable segments in the fourth quarter of 2016. As a result, on a segment basis, Services revenue, cost of services and other operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. This change has been reflected in our segment operating results for all periods presented. We include underwriting-related expenses for mortgage insurance, based on a pro-rata volume of mortgage applications excluding third-party contract underwriting services, in our Mortgage Insurance segment’s other operating expenses before corporate allocations. We include underwriting-related expenses for third-party contract underwriting services, based on a pro-rata volume of mortgage applications, in our Services segment’s cost of services and other operating expenses before corporate allocations, as applicable. We allocate
Radian Group Inc. Notes to our Mortgage Insurance segment: (i) corporate expenses based on an allocated percentage of time spent on the Mortgage Insurance segment; (ii) all interest expense except for interest expense related to the Senior Notes due 2019 that were issued to fund our purchase of Clayton; and (iii) all corporate cash and investments.Consolidated Financial Statements (Continued)
We allocate to our Services segment: (i) corporate expenses based on an allocated percentage of time spent on the Services segment and (ii) as noted above, all interest expense related to the Senior Notes due 2019. No material corporate cash or investments are allocated to the Services segment. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation.
Adjusted Pretax Operating Income (Loss) Our senior management, including our Chief Executive Officer (our(Radian’s chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of Radian’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax income (loss) from continuing operations excluding the effects of net gains (losses) on investments and other financial instruments, loss on induced conversion and debt extinguishment, acquisition-related expenses, amortization andor impairment of goodwill and other acquired intangible assets, and net impairment losses recognized in earnings.earnings and losses from the sale of lines of business. Although adjusted pretax operating income (loss) excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (i) not viewed as part of the operating performance of our primary activities or (ii) not expected to result in an economic impact equal to the amount reflected in consolidated pretax income (loss) from continuing operations.income. These adjustments, along with the reasons for their treatment, are described below. | | | (1) | Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses. |
Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses.losses and changes in fair value of other financial instruments. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss). However, we include the change in expected economic loss or recovery associated with our consolidated VIEs, if any, in the calculation of adjusted pretax operating income (loss).
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
| | | (2) | Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss). |
| | | (3) | Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss). |
| | | (4) | Amortization andor impairment of goodwill and other acquired intangible assets. Amortization of acquired intangible assets represents the periodic expense required to amortize the cost of acquired intangible assets over their estimated useful lives. IntangibleAcquired intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss). |
| | | (5) | Net impairment losses recognized in earnings and losses from the sale of lines of business. The recognition of net impairment losses on investments and the impairment of other long-lived assets does not result in a cash payment and can vary significantly in both sizeamount and timing,frequency, depending on market credit cycles.cycles and other factors. Losses from the sale of lines of business are highly discretionary as a result of strategic restructuring decisions, and generally do not occur in the normal course of our business. We do not view these impairment losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss). |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Summarized operating results for our segments as of and for the periods indicated, areyears ended, as applicable, were as follows: | | | | December 31, 2016 (1) | December 31, 2018 | | (In thousands) | Mortgage Insurance | | Services | | Total | Mortgage Insurance | | Services | | Total | Net premiums written—insurance (2) | $ | 733,834 |
| | $ | — |
| | $ | 733,834 |
| | | Decrease (increase) in unearned premiums | 187,935 |
| | — |
| | 187,935 |
| | Net premiums written—insurance (1) | | $ | 991,021 |
| | $ | 7,286 |
| (2) | $ | 998,307 |
| | (Increase) decrease in unearned premiums | | 15,700 |
| | — |
| (2) | 15,700 |
| | Net premiums earned—insurance | 921,769 |
| | — |
| | 921,769 |
| 1,006,721 |
| | 7,286 |
| (2) | 1,014,007 |
| | Services revenue | — |
| | 177,249 |
| | 177,249 |
| — |
| | 148,217 |
| | 148,217 |
| | Net investment income | 113,466 |
| | — |
| | 113,466 |
| 152,102 |
| | 373 |
| (2) | 152,475 |
| | Other income | 3,572 |
| | — |
| | 3,572 |
| 2,794 |
| | 1,234 |
| (2) | 4,028 |
| Total (3) (4) | 1,038,807 |
| | 177,249 |
| | 1,216,056 |
| 1,161,617 |
| | 157,110 |
| | 1,318,727 |
| | | | | | | | | | | | | | Provision for losses | 204,175 |
| | — |
| | 204,175 |
| 104,547 |
| | 408 |
| (2) | 104,955 |
| | Policy acquisition costs | 23,480 |
| | — |
| | 23,480 |
| 25,265 |
| | — |
| | 25,265 |
| | Cost of services | — |
| | 115,369 |
| | 115,369 |
| — |
| | 98,692 |
| | 98,692 |
| | Other operating expenses before corporate allocations | 140,624 |
| | 55,815 |
| | 196,439 |
| 135,372 |
| | 53,250 |
| | 188,622 |
| Restructuring and other exit costs (5) | | — |
| | 2,100 |
| | 2,100 |
| Total (4) | 368,279 |
| | 171,184 |
| | 539,463 |
| 265,184 |
| | 154,450 |
| | 419,634 |
| | Adjusted pretax operating income (loss) before corporate allocations | 670,528 |
| | 6,065 |
| | 676,593 |
| 896,433 |
| | 2,660 |
| | 899,093 |
| | Allocation of corporate operating expenses | 45,178 |
| | 8,533 |
| | 53,711 |
| 80,134 |
| | 11,974 |
| | 92,108 |
| | Allocation of interest expense | 63,439 |
| | 17,693 |
| | 81,132 |
| 43,685 |
| | 17,805 |
| | 61,490 |
| | Adjusted pretax operating income (loss) | $ | 561,911 |
| | $ | (20,161 | ) | | $ | 541,750 |
| $ | 772,614 |
| | $ | (27,119 | ) | | $ | 745,495 |
| | | | | | | | | | | | | | Total assets | $ | 5,506,338 |
| | $ | 356,836 |
| | $ | 5,863,174 |
| $ | 6,138,679 |
| | $ | 175,973 |
| | $ | 6,314,652 |
| | | | | | | | | | NIW (in millions) | $ | 50,530 |
| | | | | |
______________________ | | | (1) | Reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue, cost of services and other operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses.
|
| | (2) | Net of ceded premiums written under the QSR Transactions andProgram, the Single Premium QSR Transaction.Program and the Excess-of-Loss Program. See Note 8 for additional information. |
| | | (2) | Results from inclusion of the operations of EnTitle Direct, a national title insurance and settlement service company, acquired in March 2018. |
| | | (3) | Excludes net losses on investments and other financial instruments of $42.5 million, not included in adjusted pretax operating income. |
| | | (4) | Includes inter-segment revenues and expenses as follows: |
| | | | | | | | | | | December 31, 2018 | | (In thousands) | Mortgage Insurance | | Services | | Inter-segment revenues included in Services segment | $ | — |
| | $ | 3,245 |
| | Inter-segment expenses included in Mortgage Insurance segment | 3,245 |
| | — |
|
| | | (5) | Does not include impairment of long-lived assets and loss from the sale of a business line, which are not components of adjusted pretax operating income. |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | December 31, 2017 | | (In thousands) | Mortgage Insurance | | Services | | Total | Net premiums written—insurance (1) (2) | $ | 818,417 |
| | $ | — |
| | $ | 818,417 |
| (Increase) decrease in unearned premiums (2) | 114,356 |
| | — |
| | 114,356 |
| | Net premiums earned—insurance | 932,773 |
| | — |
| | 932,773 |
| | Services revenue | — |
| | 161,833 |
| | 161,833 |
| | Net investment income | 127,248 |
| | — |
| | 127,248 |
| | Other income | 2,886 |
| | — |
| | 2,886 |
| Total (3) (4) | 1,062,907 |
| | 161,833 |
| | 1,224,740 |
| | | | | | | | | Provision for losses | 136,183 |
| | — |
| | 136,183 |
| | Policy acquisition costs | 24,277 |
| | — |
| | 24,277 |
| | Cost of services | — |
| | 105,812 |
| | 105,812 |
| | Other operating expenses before corporate allocations | 150,975 |
| | 50,969 |
| | 201,944 |
| Restructuring and other exit costs (5) | — |
| | 6,828 |
| | 6,828 |
| Total (4) | 311,435 |
| | 163,609 |
| | 475,044 |
| | Adjusted pretax operating income (loss) before corporate allocations | 751,472 |
| | (1,776 | ) | | 749,696 |
| | Allocation of corporate operating expenses | 55,441 |
| | 14,319 |
| | 69,760 |
| | Allocation of interest expense | 45,016 |
| | 17,745 |
| | 62,761 |
| | Adjusted pretax operating income (loss) | $ | 651,015 |
| | $ | (33,840 | ) | | $ | 617,175 |
| | | | | | | | | Total assets | $ | 5,733,918 |
| | $ | 166,963 |
| (6) | $ | 5,900,881 |
|
______________________ | | | (1) | Net of ceded premiums written under the QSR Program and the Single Premium QSR Program. See Note 8 for additional information. |
| | | (2) | Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk for performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages, resulting in a reduction of $145.7 million in net premiums written. |
| | | (3) | Excludes net gains on investments and other financial instruments of $3.6 million, not included in adjusted pretax operating income. |
| | | (4) | Includes inter-segment revenues and expenses as follows: |
| | | | | | | | | | | December 31, 2017 | | (In thousands) | Mortgage Insurance | | Services | | Inter-segment revenues included in Services segment | $ | — |
| | $ | 6,730 |
| | Inter-segment expenses included in Mortgage Insurance segment | 6,730 |
| | — |
|
| | | (5) | Does not include impairment of long-lived assets and loss from the sale of a business line, which are not components of adjusted pretax operating income. |
| | | (6) | The decrease in total assets for the Services segment at December 31, 2017, as compared to December 31, 2016, is primarily due to the impairment of goodwill and other acquired intangible assets. See Note 7 for further details. |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | December 31, 2016 | | | Mortgage Insurance | | Services | | Total | | (In thousands) | | | | | | Net premiums written—insurance (1) | $ | 733,834 |
| | $ | — |
| | $ | 733,834 |
| | (Increase) decrease in unearned premiums | 187,935 |
| | — |
| | 187,935 |
| | Net premiums earned—insurance | 921,769 |
| | — |
| | 921,769 |
| | Services revenue | — |
| | 177,249 |
| | 177,249 |
| | Net investment income | 113,466 |
| | — |
| | 113,466 |
| | Other income | 3,572 |
| | — |
| | 3,572 |
| Total (2) (3) | 1,038,807 |
| | 177,249 |
| | 1,216,056 |
| | | | | | | | | Provision for losses | 204,175 |
| | — |
| | 204,175 |
| | Policy acquisition costs | 23,480 |
| | — |
| | 23,480 |
| | Cost of services | — |
| | 115,369 |
| | 115,369 |
| | Other operating expenses before corporate allocations | 140,624 |
| | 55,815 |
| | 196,439 |
| Total (3) | 368,279 |
| | 171,184 |
| | 539,463 |
| | Adjusted pretax operating income (loss) before corporate allocations | 670,528 |
| | 6,065 |
| | 676,593 |
| | Allocation of corporate operating expenses | 45,178 |
| | 8,533 |
| | 53,711 |
| | Allocation of interest expense | 63,439 |
| | 17,693 |
| | 81,132 |
| | Adjusted pretax operating income (loss) | $ | 561,911 |
| | $ | (20,161 | ) | | $ | 541,750 |
| | | | | | | | | Total assets | 5,506,338 |
| | 356,836 |
| | 5,863,174 |
|
______________________ | | | (1) | Net of ceded premiums written under the QSR Program and the Single Premium QSR Program. See Note 8 for additional information. |
| | | (2) | Excludes net gains on investments and other financial instruments of $30.8 million, not included in adjusted pretax operating income. |
| | (4)(3) | Includes inter-segment revenues and expenses as follows: |
| | | | | | | | | | | December 31, 2016 | | (In thousands) | Mortgage Insurance | | Services | | Inter-segment revenues included in Services segment | $ | — |
| | $ | 8,355 |
| | Inter-segment expenses included in Mortgage Insurance segment | 8,355 |
| | — |
|
| | | | | | | | | | | December 31, 2016 | | (In thousands) | Mortgage Insurance | | Services | | Inter-segment revenues included in Services segment | $ | — |
| | $ | 8,355 |
| | Inter-segment expenses included in Mortgage Insurance segment | 8,355 |
| | — |
|
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | December 31, 2015 (1) | | (In thousands) | Mortgage Insurance | | Services | | Total | Net premiums written—insurance (2) | $ | 968,505 |
| | $ | — |
| | $ | 968,505 |
| | Decrease (increase) in unearned premiums | (52,597 | ) | | — |
| | (52,597 | ) | | Net premiums earned—insurance | 915,908 |
| | — |
| | 915,908 |
| | Services revenue | — |
| | 163,140 |
| | 163,140 |
| | Net investment income | 81,537 |
| | — |
| | 81,537 |
| | Other income | 2,899 |
| | — |
| | 2,899 |
| Total (3) (4) | 1,000,344 |
| | 163,140 |
| | 1,163,484 |
| | | | | | | | | Provision for losses | 198,433 |
| | — |
| | 198,433 |
| | Policy acquisition costs | 22,424 |
| | — |
| | 22,424 |
| | Cost of services | — |
| | 97,256 |
| | 97,256 |
| | Other operating expenses before corporate allocations | 148,619 |
| | 43,515 |
| | 192,134 |
| Total (4) | 369,476 |
| | 140,771 |
| | 510,247 |
| | Adjusted pretax operating income (loss) before corporate allocations | 630,868 |
| | 22,369 |
| | 653,237 |
| | Allocation of corporate operating expenses | 46,418 |
| | 4,823 |
| | 51,241 |
| | Allocation of interest expense | 73,402 |
| | 17,700 |
| | 91,102 |
| | Adjusted pretax operating income (loss) | $ | 511,048 |
| | $ | (154 | ) | | $ | 510,894 |
| | | | | | | | | Total assets | $ | 5,290,422 |
| | $ | 351,678 |
| | $ | 5,642,100 |
| | | | | | | | | NIW (in millions) | $ | 41,411 |
| | | | |
______________________
| | (1) | Reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue, cost of services and other operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. |
| | (2) | Net of ceded premiums written under the QSR Transactions. See Note 8 for additional information. |
| | (3) | Excludes net gains on investments and other financial instruments of $35.7 million, not included in adjusted pretax operating income. |
| | (4) | Includes inter-segment revenues and expenses as follows: |
| | | | | | | | | | | December 31, 2015 | | (In thousands) | Mortgage Insurance | | Services | | Inter-segment revenues included in Services segment | $ | — |
| | $ | 5,924 |
| | Inter-segment expenses included in Mortgage Insurance segment | 5,924 |
| | — |
|
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | December 31, 2014 (1) | | | Mortgage Insurance | | Services (2) | | Total | | (In thousands) | | | | | | Net premiums written—insurance (3) | $ | 925,181 |
| | $ | — |
| | $ | 925,181 |
| | Decrease (increase) in unearned premiums | (80,653 | ) | | — |
| | (80,653 | ) | | Net premiums earned—insurance | 844,528 |
| | — |
| | 844,528 |
| | Services revenue | — |
| | 78,908 |
| | 78,908 |
| | Net investment income | 65,655 |
| | — |
| | 65,655 |
| | Other income | 4,063 |
| | 1,265 |
| | 5,328 |
| Total (4) (5) | 914,246 |
| | 80,173 |
| | 994,419 |
| | | | | | | | | Provision for losses | 246,865 |
| | — |
| | 246,865 |
| | Change in expected economic loss or recovery for consolidated VIEs | 113 |
| | — |
| | 113 |
| | Policy acquisition costs | 24,446 |
| | — |
| | 24,446 |
| | Cost of services | — |
| | 44,679 |
| | 44,679 |
| | Other operating expenses before corporate allocations | 158,228 |
| | 30,944 |
| | 189,172 |
| Total (5) | 429,652 |
| | 75,623 |
| | 505,275 |
| | Adjusted pretax operating income (loss) before corporate allocations | 484,594 |
| | 4,550 |
| | 489,144 |
| | Allocation of corporate operating expenses | 55,154 |
| | 1,144 |
| | 56,298 |
| | Allocation of interest expense | 81,600 |
| | 8,864 |
| | 90,464 |
| | Adjusted pretax operating income (loss) | $ | 347,840 |
| | $ | (5,458 | ) | | $ | 342,382 |
| | | | | | | | Assets held for sale (6) | $ | — |
| | $ | — |
| | $ | 1,736,444 |
| | Total assets | 4,779,917 |
| | 325,975 |
| | 6,842,336 |
| | | | | | | | | NIW (in millions) | $ | 37,349 |
| | | | |
______________________
| | (1) | Reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue, cost of services and other operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. |
| | (2) | Includes the acquisition of Clayton, effective June 30, 2014. |
| | (3) | Net of ceded premiums written under the QSR Transactions. See Note 8 for additional information. |
| | (4) | Excludes net gains on investments and other financial instruments of $80.1 million, not included in adjusted pretax operating income. |
| | (5) | Includes inter-segment revenues and expenses as follows: |
| | | | | | | | | | | December 31, 2014 | | (In thousands) | Mortgage Insurance | | Services | | Inter-segment revenues included in Services segment | $ | — |
| | $ | 1,723 |
| | Inter-segment expenses included in Mortgage Insurance segment | 1,723 |
| | — |
|
| | (6) | Assets held for sale are not part of the Mortgage Insurance or Services segments. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
The reconciliation of adjusted pretax operating income (loss) to consolidated pretax income from continuing operations is as follows: | | | | | | | | | | | | | | | December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Adjusted pretax operating income (loss): | | | | | | Mortgage insurance (1) | $ | 772,614 |
| | $ | 651,015 |
| | $ | 561,911 |
| Services (1) | (27,119 | ) | | (33,840 | ) | | (20,161 | ) | | Total adjusted pretax operating income | $ | 745,495 |
| | $ | 617,175 |
| | $ | 541,750 |
| | | | | | | | | Net gains (losses) on investments and other financial instruments | (42,476 | ) | | 3,621 |
| | 30,751 |
| | Loss on induced conversion and debt extinguishment | — |
| | (51,469 | ) | | (75,075 | ) | Acquisition-related expenses (2) | (881 | ) | | (105 | ) | | (519 | ) | | Impairment of goodwill | — |
| | (184,374 | ) | | — |
| | Amortization and impairment of other acquired intangible assets | (12,429 | ) | | (27,671 | ) | | (13,221 | ) | Impairment of other long-lived assets (3) | (5,523 | ) | | (10,440 | ) | | — |
| | Consolidated pretax income | $ | 684,186 |
| | $ | 346,737 |
| | $ | 483,686 |
|
| | | | | | | | | | | | | | | December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Adjusted pretax operating income (loss): | | | | | | Mortgage insurance (1) | $ | 561,911 |
| | $ | 511,048 |
| | $ | 347,840 |
| Services (1) | (20,161 | ) | | (154 | ) | | (5,458 | ) | | Total adjusted pretax operating income | $ | 541,750 |
| | $ | 510,894 |
| | $ | 342,382 |
| | | | | | | | Net gains (losses) on investments and other financial instruments (2) | 30,751 |
| | 35,693 |
| | 80,102 |
| | Loss on induced conversion and debt extinguishment | (75,075 | ) | | (94,207 | ) | | — |
| Acquisition-related expenses (3) | (519 | ) | | (1,565 | ) | | (6,680 | ) | | Amortization and impairment of intangible assets | (13,221 | ) | | (12,986 | ) | | (8,648 | ) | | Consolidated pretax income from continuing operations | $ | 483,686 |
| | $ | 437,829 |
| | $ | 407,156 |
|
______________________ | | | (1) | Includes inter-segment expenses and revenues as listed in the notes to the preceding tables. |
| | | (2) | The change in expected economic loss or recovery associated with our previously owned VIEs is included in adjusted pretax operating income above, although it represents amounts that are not included in net income. Therefore, for purposes of this reconciliation, net gains (losses) on investments and other financial instruments has been adjusted by income of $0.1 million for the year ended December 31, 2014 to reverse this item. |
| | (3) | Acquisition-related expenses represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses. |
| | | (3) | For the year ended December 31, 2018, this item comprises other operating expenses of $1.5 million and restructuring and other exit costs of $4.0 million, each as included in the consolidated statement of operations. For the year ended December 31, 2017, the full amount is included in restructuring and other exit costs in the consolidated statement of operations. See Note 1. |
On a consolidated basis, “adjusted pretax operating income” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income is not a measure of total profitability, and therefore should not be considered in isolation or viewed as a substitute for GAAP pretax income. Our definition of adjusted pretax operating income may not be comparable to similarly-named measures reported by other companies. Concentration of Risk As of December 31, 2016,2018, California is the only state that accounted for more than 10% of our mortgage insurance business measured by primary RIF. California accounted for 12.4%12.3% of our Mortgage Insurance segment’s primary RIF at December 31, 2016,2018, compared to 12.8%12.4% at December 31, 2015.2017. California accounted for 14.8%11.9% of our Mortgage Insurance segment’s direct primary NIW for the year ended December 31, 2016,2018, compared to 15.2%14.1% and 17.2%14.8% for the years ended December 31, 20152017 and 2014,2016, respectively. The largestThere was no single mortgage insurance customer (including branches and affiliates), measured by primary NIW,that accounted for 5.7%more than 10% of NIW during 2016, compared to 4.6% and 4.0% from the largest single customer in 2015 and 2014, respectively. Earned premiums from one mortgage insurance customer represented 15%, 16% and 19%or more than 10% of our consolidated revenues (excluding net gains (losses) on investments and other financial instruments) in 2016, 2015 and 2014, respectively.2018, 2017 or 2016.
Net premiums earned attributable to foreign countries and long-lived assets located in foreign countries were immaterial for the periods presented.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
5. Fair Value of Financial Instruments The following is a list of those assets that are measured at fair value by hierarchy level as of December 31, 2016:2018: | | | | | | | | | | | | | | | | | | | December 31, 2016 | | (In thousands) | Level I | | Level II | | Level III | | Total | | Assets at Fair Value | | | | | | | | | Investment Portfolio: | | | | | | | | | U.S. government and agency securities | $ | 237,479 |
| | $ | — |
| | $ | — |
| | $ | 237,479 |
| | State and municipal obligations | — |
| | 358,536 |
| | — |
| | 358,536 |
| | Money market instruments | 431,472 |
| | — |
| | — |
| | 431,472 |
| | Corporate bonds and notes | — |
| | 2,024,205 |
| | — |
| | 2,024,205 |
| | RMBS | — |
| | 388,842 |
| | — |
| | 388,842 |
| | CMBS | — |
| | 507,273 |
| | — |
| | 507,273 |
| | Other ABS | — |
| | 450,128 |
| | — |
| | 450,128 |
| | Foreign government and agency securities | — |
| | 32,807 |
| | — |
| | 32,807 |
| | Equity securities | — |
| | 830 |
| | 500 |
| | 1,330 |
| Other investments (1) | — |
| | 28,663 |
| | 500 |
| | 29,163 |
| Total Investments at Fair Value (2) | 668,951 |
| | 3,791,284 |
| | 1,000 |
| | 4,461,235 |
| | Total Assets at Fair Value | $ | 668,951 |
| | $ | 3,791,284 |
| | $ | 1,000 |
| | $ | 4,461,235 |
|
______________________
| | (1) | Comprising short-term certificates of deposit and commercial paper, included within Level II, and convertible notes of non-reporting issuers, included within Level III. |
| | (2) | Does not include certain other invested assets ($1.2 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value. |
At December 31, 2016, total Level III assets of $1.0 million accounted for less than 0.1% of total assets measured at fair value. Within other investments is a Level III investment which was purchased during the three months ended June 30, 2016, and there were no related gains or losses recorded during the year ended December 31, 2016. Within equity securities is a Level III investment that was purchased during the three months ended June 30, 2015, and there were no related gains or losses recorded during the year ended December 31, 2016. There were no Level III liabilities at December 31, 2016.
There were no investment transfers between Level I, Level II or Level III for the year ended December 31, 2016.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
The following is a list of those assets that are measured at fair value by hierarchy level as of December 31, 2015:
| | | | December 31, 2015 | December 31, 2018 | | | (In thousands) | Level I | | Level II | | Level III | | Total | Level I | | Level II | | Total | | | Assets at Fair Value | | | | | | | | | | | | | | | Investment Portfolio: | | | | | | | | | | | | | | | U.S. government and agency securities | $ | 670,328 |
| | $ | 8,000 |
| | $ | — |
| | $ | 678,328 |
| $ | 199,302 |
| | $ | 28,412 |
| | $ | 227,714 |
| | | State and municipal obligations | — |
| | 341,845 |
| | — |
| | 341,845 |
| — |
| | 324,742 |
| | 324,742 |
| | | Money market instruments | 443,272 |
| | — |
| | — |
| | 443,272 |
| 95,132 |
| | — |
| | 95,132 |
| | | Corporate bonds and notes | — |
| | 1,383,186 |
| | — |
| | 1,383,186 |
| — |
| | 2,564,068 |
| | 2,564,068 |
| | | RMBS | — |
| | 297,097 |
| | — |
| | 297,097 |
| — |
| | 353,224 |
| | 353,224 |
| | | CMBS | — |
| | 544,588 |
| | — |
| | 544,588 |
| — |
| | 591,393 |
| | 591,393 |
| | | Other ABS | — |
| | 371,625 |
| | — |
| | 371,625 |
| — |
| | 705,468 |
| | 705,468 |
| | | Foreign government and agency securities | — |
| | 37,576 |
| | — |
| | 37,576 |
| | | Equity securities | 74,930 |
| | 25,016 |
| | 500 |
| | 100,446 |
| 136,662 |
| | 3,958 |
| | 140,620 |
| | Other investments (1) | — |
| | 99,009 |
| | — |
| | 99,009 |
| — |
| | 175,113 |
| | 175,113 |
| | Total Investments at Fair Value (2) | 1,188,530 |
| | 3,107,942 |
| | 500 |
| | 4,296,972 |
| 431,096 |
| | 4,746,378 |
| | 5,177,474 |
| (3) | | Total Assets at Fair Value | $ | 1,188,530 |
| | $ | 3,107,942 |
| | $ | 500 |
| | $ | 4,296,972 |
| | Total Assets at Fair Value (4) | | $ | 431,096 |
| | $ | 4,746,378 |
| | $ | 5,177,474 |
| (3) |
______________________ | | | (1) | Comprising short-term certificates of deposit and commercial paper. |
| | | (2) | Does not include certain other invested assets ($1.7 million),of $3.4 million that is primarily invested in limited partnership investments valued using the net asset value as a practical expedient. Includes cash collateral held under securities lending agreements of $11.7 million that is reinvested in money market instruments. |
| | | (3) | Includes $27.9 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 for more information. |
| | | (4) | Does not include the fair value of an immaterial embedded derivative, which we have accounted for separately as a freestanding derivative and classified in other assets in our consolidated balance sheet. See Note 8 for more information. |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
The following is a list of those assets that are measured at fair value by hierarchy level as of December 31, 2017: | | | | | | | | | | | | | | | | | December 31, 2017 | | | (In thousands) | Level I | | Level II | | Total | | | Assets at Fair Value | | | | | | | | Investment Portfolio: | | | | | | | | U.S. government and agency securities | $ | 124,969 |
| | $ | 8,023 |
| | $ | 132,992 |
| | | State and municipal obligations | — |
| | 386,111 |
| | 386,111 |
| | | Money market instruments | 213,357 |
| | — |
| | 213,357 |
| | | Corporate bonds and notes | — |
| | 2,304,017 |
| | 2,304,017 |
| | | RMBS | — |
| | 216,749 |
| | 216,749 |
| | | CMBS | — |
| | 503,955 |
| | 503,955 |
| | | Other ABS | — |
| | 676,158 |
| | 676,158 |
| | | Foreign government and agency securities | — |
| | 36,448 |
| | 36,448 |
| | | Equity securities | 175,205 |
| | 860 |
| | 176,065 |
| | Other investments (1) | — |
| | 25,720 |
| | 25,720 |
| | Total Investments at Fair Value (2) | 513,531 |
| | 4,158,041 |
| | 4,671,572 |
| (3 | ) | | Total Assets at Fair Value | $ | 513,531 |
| | $ | 4,158,041 |
| | $ | 4,671,572 |
| (3 | ) |
______________________ | | | (1) | Comprising short-term certificates of deposit and commercial paper. |
| | | (2) | Does not include certain other invested assets of $0.3 million, primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value. Includes cash collateral held under securities lending agreements of $19.4 million reinvested in money market instruments. |
| | | (3) | Includes $28.0 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 for more information. |
At December 31, 2015, total2018 and 2017, there were no material Level III assets of $0.5 million accounted for less than 0.1% of total assets measured at fair value. This investment was purchased during the three months ended June 30, 2015,value, and there were no related gains or losses recorded during the year ended December 31, 2015. There were no Level III liabilities at December 31, 2015. liabilities. There were no investment transfers between Level I, Level IIto or from Level III for the yearyears ended December 31, 2015. Rollforward activity of2018 and 2017. Activity related to Level III assets and liabilities (including realized and unrealized gains and losses, purchases, sales, issuances, settlements and transfers) was immaterial for the years ended December 31, 20162018 and 2015.2017.
Valuation Methodologies for Assets Measured at Fair Value The following are descriptions of our valuation methodologies for financial assets and liabilities measured at fair value. We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we utilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptions for various asset classes and individual securities. We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a review of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our investment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. U.S. government and agency securities. The fair value of U.S. government and agency securities is estimated using observed market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
State and municipal obligations. The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. Money market instruments. The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy. Corporate bonds and notes. The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. RMBS, CMBS, and Other ABS. The fair value of these instruments is estimated based on prices of comparable securities and spreads and observable prepayment speeds. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows. Foreign government and agency securities. The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy. Equity securities. The fair value of these securities is generally estimated using observable market data in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or II of the fair value hierarchy, as observable market data are readily available. A small number of ourFrom time to time, certain equity securities however, aremay be categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data or the use of model-based valuations. Other investments. These securities primarily consist of commercial paper and short-term certificates of deposit,, which are categorized in Level II of the fair value hierarchy. Other investments also contains convertible notes of non-reporting issuers, which are categorized in Level III of theThe fair value hierarchy due to a lack of market-based transaction data.these investments is estimated using market data for comparable instruments of similar maturity and average yield. Other Fair Value Disclosure The carrying value and estimated fair value of other selected assets and liabilities not carried at fair value onin our consolidated balance sheets were as follows as of the dates indicated: | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | | (In thousands) | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | | Assets: | | | | | | | | Other invested assets (1) | $ | — |
| | $ | — |
| | $ | 334 |
| | $ | 3,226 |
| | Liabilities: | | | | | | | | | Senior notes | 1,030,348 |
| | 1,007,687 |
| | 1,027,074 |
| | 1,093,934 |
|
| | | | | | | | | | | | | | | | | | | December 31, 2016 | | December 31, 2015 | | (In thousands) | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | | Assets: | | | | | | | | | Other invested assets | $ | 1,195 |
| | $ | 3,789 |
| | $ | 1,714 |
| | $ | 4,901 |
| | Liabilities: | | | | |
| |
| | Long-term debt | 1,069,537 |
| | 1,214,471 |
| | 1,219,454 |
| | 1,414,875 |
|
| | | (1) | As a result of implementing the update to the standard for the accounting of financial instruments effective January 1, 2018, other invested assets, primarily consisting of investments in limited partnerships, are no longer carried at amortized cost, and instead are valued in our consolidated balance sheets using the net asset value as a practical expedient to estimate fair value. |
Other Invested Assets. The fair value of these assets, primarily invested in limited partnerships, is estimated based on the equity recorded within the financial statements provided by the limited partnerships. These interests are accounted for and carried as cost-method investments.
Long-Term Debt. The carrying amount of long-term debt is net of the equity component of our convertible notes, which is accounted for under the accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). Senior Notes. The fair value is estimated based on the quoted market prices for the same or similar instruments. See Note 12 for further information.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
6. Investments Available for Sale Securities Our available for sale securities within our investment portfolio consisted of the following as of the dates indicated: | | | | December 31, 2016 | December 31, 2018 | | (In thousands) | Amortized Cost | | Fair Value | | Gross Unrealized Gains | | Gross Unrealized Losses | Amortized Cost | | Fair Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fixed-maturities available for sale: | | | | | | | | | | | | | | | | U.S. government and agency securities | $ | 78,931 |
| | $ | 75,474 |
| | $ | 2 |
| | $ | 3,459 |
| $ | 85,532 |
| | $ | 84,070 |
| (1) | $ | 46 |
| | $ | 1,508 |
| | State and municipal obligations | 66,124 |
| | 67,171 |
| | 1,868 |
| | 821 |
| 138,022 |
| | 138,313 |
| | 2,191 |
| | 1,900 |
| | Corporate bonds and notes | 1,463,720 |
| | 1,455,628 |
| | 14,320 |
| | 22,412 |
| 2,288,720 |
| | 2,229,885 |
| | 5,053 |
| | 63,888 |
| | RMBS | 358,262 |
| | 350,628 |
| | 197 |
| | 7,831 |
| 334,843 |
| | 332,142 |
| (2) | 1,785 |
| | 4,486 |
| | CMBS | 429,057 |
| | 428,289 |
| | 2,255 |
| | 3,023 |
| 546,729 |
| | 539,915 |
| | 544 |
| | 7,358 |
| | Other ABS | 433,603 |
| | 434,728 |
| | 2,037 |
| | 912 |
| 712,748 |
| | 704,662 |
| | 814 |
| | 8,900 |
| | Foreign government and agency securities | 24,771 |
| | 24,594 |
| | 148 |
| | 325 |
| | | Other investments | 2,000 |
| | 2,000 |
| | — |
| | — |
| | | | 2,856,468 |
| | 2,838,512 |
| | 20,827 |
| | 38,783 |
| | Equity securities available for sale (1) | 1,330 |
| | 1,330 |
| | — |
| | — |
| | | Total debt and equity securities | $ | 2,857,798 |
| | $ | 2,839,842 |
| | $ | 20,827 |
| | $ | 38,783 |
| | | Total securities available for sale | | 4,106,594 |
| | 4,028,987 |
| (3) | 10,433 |
| | 88,040 |
|
______________________ | | | (1) | Primarily consistsIncludes securities with a fair value of investments$10.7 million serving as collateral for FHLB advances. |
| | | (2) | Includes securities with a fair value of $77.7 million serving as collateral for FHLB advances. |
| | | (3) | Includes $7.4 million of fixed maturity securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in Federal Home Loan Bank stockour consolidated balance sheets, as required in connection with the memberships of Radian Guaranty and Radian Reinsurance in the Federal Home Loan Bank of Pittsburgh.further described below. |
| | | | | | | | | | | | | | | | | | | December 31, 2017 | | (In thousands) | Amortized Cost | | Fair Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fixed-maturities available for sale: | | | | | | | | | U.S. government and agency securities | $ | 69,667 |
| | $ | 69,396 |
| | $ | 96 |
| | $ | 367 |
| | State and municipal obligations | 156,587 |
| | 161,722 |
| | 5,834 |
| | 699 |
| | Corporate bonds and notes | 1,869,318 |
| | 1,894,886 |
| | 33,620 |
| | 8,052 |
| | RMBS | 189,455 |
| | 187,229 |
| | 636 |
| | 2,862 |
| | CMBS | 451,595 |
| | 453,394 |
| | 3,409 |
| | 1,610 |
| | Other ABS | 672,715 |
| | 674,548 |
| | 2,655 |
| | 822 |
| | Foreign government and agency securities | 31,417 |
| | 32,207 |
| | 823 |
| | 33 |
| | Total fixed-maturities available for sale | 3,440,754 |
| | 3,473,382 |
| | 47,073 |
| | 14,445 |
| Equity securities available for sale (2) | 176,349 |
| | 176,065 |
| | 1,705 |
| | 1,989 |
| | Total debt and equity securities | $ | 3,617,103 |
| | $ | 3,649,447 |
| (1) | $ | 48,778 |
| | $ | 16,434 |
|
| | | | | | | | | | | | | | | | | | | December 31, 2015 | | (In thousands) | Amortized Cost | | Fair Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fixed-maturities available for sale: | | | | | | | | | U.S. government and agency securities | $ | 13,773 |
| | $ | 13,752 |
| | $ | — |
| | $ | 21 |
| | State and municipal obligations | 36,920 |
| | 37,900 |
| | 1,100 |
| | 120 |
| | Corporate bonds and notes | 815,024 |
| | 802,193 |
| | 4,460 |
| | 17,291 |
| | RMBS | 226,744 |
| | 224,905 |
| | 625 |
| | 2,464 |
| | CMBS | 415,780 |
| | 406,910 |
| | 69 |
| | 8,939 |
| | Other ABS | 359,452 |
| | 355,494 |
| | 16 |
| | 3,974 |
| | Foreign government and agency securities | 25,663 |
| | 24,307 |
| | 27 |
| | 1,383 |
| | | 1,893,356 |
| | 1,865,461 |
| | 6,297 |
| | 34,192 |
| Equity securities available for sale (1) | 75,538 |
| | 75,430 |
| | — |
| | 108 |
| | Total debt and equity securities | $ | 1,968,894 |
| | $ | 1,940,891 |
| | $ | 6,297 |
| | $ | 34,300 |
|
______________________ | | | (1) | Includes $14.7 million of fixed maturity securities and $13.2 million of equity securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets, as further described below. |
| | | (2) | Primarily consists of a multi-sectorinvestments in fixed-income and equity exchange-traded fund.funds and publicly-traded business development company equities. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Gross Unrealized Losses and Related Fair Values of Available for Sale Securities For securities deemed “available for sale” and that are in an unrealized loss position, the following tables show the gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of the dates indicated:indicated. Included in the amounts as of December 31, 2018, are loaned
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | ($ in thousands) Description of Securities | | Less Than 12 Months | | 12 Months or Greater | | Total | | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | U.S. government and agency securities | | 7 |
| | $ | 73,160 |
| | $ | 3,459 |
| | — |
| | $ | — |
| | $ | — |
| | 7 |
| | $ | 73,160 |
| | $ | 3,459 |
| | State and municipal obligations | | 7 |
| | 30,901 |
| | 821 |
| | — |
| | — |
| | — |
| | 7 |
| | 30,901 |
| | 821 |
| | Corporate bonds and notes | | 185 |
| | 788,876 |
| | 22,135 |
| | 2 |
| | 4,582 |
| | 277 |
| | 187 |
| | 793,458 |
| | 22,412 |
| | RMBS | | 56 |
| | 311,031 |
| | 7,822 |
| | 1 |
| | 1,398 |
| | 9 |
| | 57 |
| | 312,429 |
| | 7,831 |
| | CMBS | | 37 |
| | 218,170 |
| | 2,909 |
| | 2 |
| | 6,585 |
| | 114 |
| | 39 |
| | 224,755 |
| | 3,023 |
| | Other ABS | | 58 |
| | 131,268 |
| | 470 |
| | 16 |
| | 45,886 |
| | 442 |
| | 74 |
| | 177,154 |
| | 912 |
| | Foreign government and agency securities | | 12 |
| | 13,034 |
| | 325 |
| | — |
| | — |
| | — |
| | 12 |
| | 13,034 |
| | 325 |
| | Total | | 362 |
| | $ | 1,566,440 |
| | $ | 37,941 |
| | 21 |
| | $ | 58,451 |
| | $ | 842 |
| | 383 |
| | $ | 1,624,891 |
| | $ | 38,783 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | ($ in thousands)
Description of Securities | | Less Than 12 Months | | 12 Months or Greater | | Total | | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | U.S. government and agency securities | | 1 |
| | $ | 5,752 |
| | $ | 21 |
| | — |
| | $ | — |
| | $ | — |
| | 1 |
| | $ | 5,752 |
| | $ | 21 |
| | State and municipal obligations | | 2 |
| | 11,674 |
| | 120 |
| | — |
| | — |
| | — |
| | 2 |
| | 11,674 |
| | 120 |
| | Corporate bonds and notes | | 117 |
| | 510,807 |
| | 16,773 |
| | 6 |
| | 8,700 |
| | 518 |
| | 123 |
| | 519,507 |
| | 17,291 |
| | RMBS | | 12 |
| | 168,415 |
| | 2,464 |
| | — |
| | — |
| | — |
| | 12 |
| | 168,415 |
| | 2,464 |
| | CMBS | | 58 |
| | 387,268 |
| | 8,939 |
| | — |
| | — |
| | — |
| | 58 |
| | 387,268 |
| | 8,939 |
| | Other ABS | | 96 |
| | 284,998 |
| | 2,559 |
| | 14 |
| | 43,225 |
| | 1,415 |
| | 110 |
| | 328,223 |
| | 3,974 |
| | Foreign government and agency securities | | 18 |
| | 18,733 |
| | 1,095 |
| | 3 |
| | 2,278 |
| | 288 |
| | 21 |
| | 21,011 |
| | 1,383 |
| | Equity securities | | 1 |
| | 74,930 |
| | 108 |
| | — |
| | — |
| | — |
| | 1 |
| | 74,930 |
| | 108 |
| | Total | | 305 |
| | $ | 1,462,577 |
| | $ | 32,079 |
| | 23 |
| | $ | 54,203 |
| | $ | 2,221 |
| | 328 |
| | $ | 1,516,780 |
| | $ | 34,300 |
|
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Impairments due to credit deteriorationsecurities under securities lending agreements that resultare classified as other assets in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security are considered other-than-temporary. Other declines in fair value (for example, due to interest rate changes, sector credit rating changes or company-specific rating changes) that result in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security also may serveour consolidated balance sheets, as a basis to conclude that an other-than-temporary impairment has occurred. To the extentfurther described below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | ($ in thousands) Description of Securities | | Less Than 12 Months | | 12 Months or Greater | | Total | | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | U.S. government and agency securities | | 2 |
| | $ | 27,415 |
| | $ | 796 |
| | 8 |
| | $ | 23,476 |
| | $ | 712 |
| | 10 |
| | $ | 50,891 |
| | $ | 1,508 |
| | State and municipal obligations | | 12 |
| | 41,263 |
| | 955 |
| | 16 |
| | 39,982 |
| | 945 |
| | 28 |
| | 81,245 |
| | 1,900 |
| | Corporate bonds and notes | | 330 |
| | 1,208,430 |
| | 36,284 |
| | 126 |
| | 601,533 |
| | 27,604 |
| | 456 |
| | 1,809,963 |
| | 63,888 |
| | RMBS | | 15 |
| | 92,315 |
| | 782 |
| | 28 |
| | 77,395 |
| | 3,704 |
| | 43 |
| | 169,710 |
| | 4,486 |
| | CMBS | | 62 |
| | 328,696 |
| | 3,973 |
| | 33 |
| | 125,728 |
| | 3,385 |
| | 95 |
| | 454,424 |
| | 7,358 |
| | Other ABS | | 129 |
| | 503,109 |
| | 7,917 |
| | 26 |
| | 89,628 |
| | 983 |
| | 155 |
| | 592,737 |
| | 8,900 |
| | Total | | 550 |
| | $ | 2,201,228 |
| | $ | 50,707 |
| | 237 |
| | $ | 957,742 |
| | $ | 37,333 |
| | 787 |
| | $ | 3,158,970 |
| | $ | 88,040 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | ($ in thousands)
Description of Securities | | Less Than 12 Months | | 12 Months or Greater | | Total | | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | U.S. government and agency securities | | 6 |
| | $ | 23,309 |
| | $ | 129 |
| | 3 |
| | $ | 9,799 |
| | $ | 238 |
| | 9 |
| | $ | 33,108 |
| | $ | 367 |
| | State and municipal obligations | | 21 |
| | 65,898 |
| | 699 |
| | — |
| | — |
| | — |
| | 21 |
| | 65,898 |
| | 699 |
| | Corporate bonds and notes | | 152 |
| | 672,318 |
| | 4,601 |
| | 32 |
| | 139,105 |
| | 3,451 |
| | 184 |
| | 811,423 |
| | 8,052 |
| | RMBS | | 8 |
| | 19,943 |
| | 204 |
| | 26 |
| | 101,812 |
| | 2,658 |
| | 34 |
| | 121,755 |
| | 2,862 |
| | CMBS | | 35 |
| | 139,353 |
| | 1,395 |
| | 4 |
| | 3,518 |
| | 215 |
| | 39 |
| | 142,871 |
| | 1,610 |
| | Other ABS | | 92 |
| | 260,864 |
| | 777 |
| | 7 |
| | 8,297 |
| | 45 |
| | 99 |
| | 269,161 |
| | 822 |
| | Foreign government and agency securities | | 5 |
| | 7,397 |
| | 33 |
| | — |
| | — |
| | — |
| | 5 |
| | 7,397 |
| | 33 |
| | Equity securities | | 13 |
| | 149,785 |
| | 1,989 |
| | — |
| | — |
| | — |
| | 13 |
| | 149,785 |
| | 1,989 |
| | Total | | 332 |
| | $ | 1,338,867 |
| | $ | 9,827 |
| | 72 |
| | $ | 262,531 |
| | $ | 6,607 |
| | 404 |
| | $ | 1,601,398 |
| | $ | 16,434 |
|
Although we determine that a security is deemed to have had an other-than-temporary impairment, an impairment loss is recognized. We recognized an other-than-temporary impairment loss in earnings of $0.5 million due to our intent to sell certain corporate bonds carried at a loss as of December 31, 2016. For the years ended December 31, 2016, 2015 and 2014, there were no credit-related impairment losses recognized in earnings or in AOCI.
We hadheld securities in an unrealized loss position thatas of December 31, 2018, we did not consider those securities to be other-than-temporarily impaired as of December 31, 2016.such date. For all investment categories, the unrealized losses of 12 months or greater duration as of December 31, 2016,2018 were generally caused by interest rate or credit spread movements since the purchase date, and as such, we expect the present value of cash flows to be collected from these securities to be sufficient to recover the amortized cost basis of these securities. As of December 31, 2016, other than as discussed above,2018, we did not have the intent to sell any debt securities in an unrealized loss position and we determined that it is more likely than not that we will not be required to sell the securities before recovery of their cost basis, which may be at maturity; therefore, we did not consider these investments to be other-than-temporarily impaired at December 31, 2018.
Other-than-temporary Impairment Activity. To the extent we determine that a security is deemed to have had an other-than-temporary impairment, an impairment loss is recognized. While we recognized other-than-temporary impairment losses in
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
earnings during the years ended December 31, 2018, 2017 and 2016, there were no other-than-temporary impairment losses recognized in accumulated other comprehensive income (loss) for those periods. For the year ended December 31, 2018, we recorded other-than-temporary impairment losses in earnings of $1.7 million due to our intent to sell certain: (i) corporate bonds and notes and (ii) state and municipal obligations, each with an amortized cost basis greater than their fair value. While we recognized other-than-temporary impairment losses related to our intent to sell securities, there were no credit-related other-than-temporary impairment losses recognized in earnings during the year ended December 31, 2018. For the year ended December 31, 2017, we recorded other-than-temporary impairment losses in earnings of $1.4 million. These losses comprised $0.4 million due to our intent to sell certain corporate bonds at a loss and $1.0 million due to credit deterioration, which included $0.5 million related to a convertible note of a non-public company issuer included in debt securities and $0.5 million related to a privately-placed equity security. For the year ended December 31, 2016, we recorded other-than-temporary impairment losses in earnings of $0.5 million due to our intent to sell certain corporate bonds at a loss. While we recognized other-than-temporary impairment losses related to our intent to sell securities in earnings, there were no credit-related other-than-temporary impairment losses recognized in earnings during the year ended December 31, 2016. Trading Securities The trading securities within our investment portfolio, which are recorded at fair value, consisted of the following as of the dates indicated: | | | | | | | | | | | | December 31, | | | (In thousands) | 2018 | | 2017 | | | Trading securities: | | | | | | State and municipal obligations | $ | 168,359 |
| | $ | 214,841 |
| | | Corporate bonds and notes | 228,151 |
| | 307,271 |
| | | RMBS | 21,083 |
| | 29,520 |
| | | CMBS | 51,478 |
| | 50,561 |
| | | Foreign government and agency securities | — |
| | 4,241 |
| | | Total | $ | 469,071 |
|
| $ | 606,434 |
| (1) |
| | | | | | | | | | | December 31, | | (In thousands) | 2016 | | 2015 | | Trading securities: | | | | | U.S. government and agency securities | $ | 33,042 |
| | $ | 129,913 |
| | State and municipal obligations | 259,573 |
| | 303,946 |
| | Corporate bonds and notes | 453,617 |
| | 580,993 |
| | RMBS | 38,214 |
| | 72,192 |
| | CMBS | 78,984 |
| | 137,678 |
| | Other ABS | 8,219 |
| | 16,131 |
| | Foreign government and agency securities | 8,213 |
| | 13,268 |
| | Equity securities | — |
| | 25,016 |
| | Total | $ | 879,862 |
| | $ | 1,279,137 |
|
| | | (1) | At December 31, 2017, includes a de minimis amount of loaned securities under securities lending agreements that are classified as other assets in our consolidated balance sheets, as further described below. |
Securities Lending Agreements For tradingDuring the third quarter of 2017, we commenced participation in a securities that were held at December 31, 2016 and 2015,lending program whereby we had net unrealized gains of $16.8 million during 2016, compared to net unrealized losses of $25.2 million during 2015.
As of December 31, 2016 and 2015,loan certain securities in our investment portfolio included noto Borrowers for short periods of time. These securities lending agreements are collateralized financing arrangements whereby we transfer securities to third parties through an intermediary in exchange for cash or other securities. However, pursuant to the terms of countries that have obligations that have been under particular stress duethese agreements, we maintain effective control over all loaned securities. Although we report such securities at fair value within other assets in our consolidated balance sheets, rather than in investments, the detailed information provided in this Note includes these securities. See Notes 2 and 9 for additional information.
Under our securities lending agreements, the Borrower is required to economic uncertainty, potential restructuring and ratings downgrades.provide to us collateral, consisting of cash or securities, in amounts generally equal to or exceeding (i) 102% of the value of the loaned securities (105% in the case of foreign securities) or (ii) another agreed-upon percentage not less than 100% of the market value of the loaned securities. Any cash collateral we receive may be invested in liquid assets. For the years ended December 31, 2016, 2015 and 2014, we did not sell or transfer any fixed-maturity investments classified as held to maturity. For the years ended December 31, 2016, 2015 and 2014, we did not transfer any securities from the available for sale or trading categories.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
The Borrower generally may return the loaned securities to us at any time, which would require us to return the collateral within the standard settlement period for the loaned securities on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with cash collateral by maintaining the cash collateral in a short-term money-market fund with daily availability. The credit risk under these programs is reduced by the amounts of collateral received. On a daily basis, the value of the underlying securities that we have loaned to the Borrowers is compared to the value of cash and securities collateral we received from the Borrowers, and additional cash or securities are requested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the intermediary. Key balances related to our securities lending agreements at December 31, 2018, consisted of the following: | | | | | | | | | | (In thousands) | December 31, 2018 | | December 31, 2017 | Loaned securities: (1) | | | | | U.S. government and agency securities | $ | 9,987 |
| | $ | — |
| | Corporate bonds and notes | 7,818 |
| | 13,862 |
| | Foreign government and agency securities | — |
| | 867 |
| | Equity securities | 10,055 |
| | 13,235 |
| | Total loaned securities, at fair value | $ | 27,860 |
| | $ | 27,964 |
| | | | | | | Total loaned securities, at amortized cost | $ | 28,992 |
| | 27,846 |
| Securities collateral on deposit from Borrowers (2) | 16,815 |
| | 9,342 |
| Reinvested cash collateral, at estimated fair value (3) | 11,699 |
| | 19,357 |
|
______________________ | | | (1) | Our securities loaned under securities lending agreements are reported at fair value within other assets in our consolidated balance sheets. All of our securities lending agreements are classified as overnight and revolving. None of the amounts are subject to offsetting. |
| | | (2) | Securities collateral on deposit with us from Borrowers may not be transferred or re-pledged unless the Borrower is in default, and is therefore not reflected in our consolidated financial statements. |
| | | (3) | All cash collateral received has been reinvested in accordance with the securities lending agreements and is included in short-term investments in our consolidated balance sheets. Amounts payable on the return of cash collateral under securities lending agreements are included within other liabilities in our consolidated balance sheets. |
Net Investment Income Net investment income consisted of: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Investment income: | | | | | | | Fixed-maturities | $ | 141,552 |
| | $ | 122,890 |
| | $ | 115,880 |
| | Equity securities | 7,157 |
| | 4,318 |
| | 86 |
| | Short-term investments | 10,270 |
| | 5,453 |
| | 3,086 |
| | Other | 976 |
| | 987 |
| | 1,161 |
| | Gross investment income | 159,955 |
| | 133,648 |
| | 120,213 |
| | Investment expenses | (7,480 | ) | | (6,400 | ) | | (6,747 | ) | | Net investment income | $ | 152,475 |
| | $ | 127,248 |
| | $ | 113,466 |
|
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Investment income: | | | | | | | Fixed-maturities | $ | 115,880 |
| | $ | 81,127 |
| | $ | 62,352 |
| | Equity securities | 86 |
| | 4,539 |
| | 6,287 |
| | Short-term investments | 3,086 |
| | 745 |
| | 246 |
| | Other | 1,161 |
| | 600 |
| | 1,848 |
| | Gross investment income | 120,213 |
| | 87,011 |
| | 70,733 |
| | Investment expenses | (6,747 | ) | | (5,474 | ) | | (5,078 | ) | | Net investment income | $ | 113,466 |
| | $ | 81,537 |
| | $ | 65,655 |
|
Net Gains (Losses) on Investments and Other Financial Instruments Net realized and unrealized gains (losses), including impairment losses, on investments and other financial instruments consisted of: | | | | Year Ended December 31, | Year Ended December 31, | | (In thousands) | 2016 |
| 2015 |
| 2014 | 2018 |
| 2017 |
| 2016 | | Net realized gains (losses) on investments: | | | | | | | | | | | | Fixed-maturities held to maturity | $ | — |
| | $ | — |
| | $ | (9 | ) | | Fixed-maturities available for sale (1) | 4,160 |
| | (1,176 | ) | | (1,599 | ) | $ | (11,256 | ) | | $ | (3,014 | ) | | $ | 4,160 |
| Equities available for sale (2) | (170 | ) | | 69,150 |
| | — |
| | | Trading securities | (237 | ) | | (9,231 | ) | | (6,996 | ) | (1,840 | ) | | (5,995 | ) | | (237 | ) | | Equity securities | | 532 |
| | 368 |
| | (170 | ) | | Short-term investments | (135 | ) | | (24 | ) | | 1 |
| (10 | ) | | (16 | ) | | (135 | ) | | Other invested assets | 631 |
| | 3,267 |
| | — |
| 414 |
| | 22 |
| | 631 |
| | Other gains (losses) | 64 |
| | 110 |
| | 246 |
| 66 |
| | 32 |
| | 64 |
| | Net realized gains (losses) on investments | 4,313 |
| | 62,096 |
| (3) | (8,357 | ) | (12,094 | ) | | (8,603 | ) | | 4,313 |
| | Other-than-temporary impairment losses | (526 | ) | | — |
| | — |
| (1,744 | ) | | (1,420 | ) | | (526 | ) | | Unrealized gains (losses) on trading securities | 27,217 |
| | (27,015 | ) | | 92,226 |
| | | Total gains (losses) on investments | 31,004 |
| | 35,081 |
| | 83,869 |
| | Net unrealized gains (losses) on investment securities (2) | | (27,287 | ) | | 13,230 |
| | 27,217 |
| | Total net gains (losses) on investments | | (41,125 | ) | | 3,207 |
| | 31,004 |
| | Net gains (losses) on other financial instruments | (253 | ) | | 612 |
| | (3,880 | ) | (1,351 | ) | | 414 |
| | (253 | ) | | Net gains (losses) on investments and other financial instruments | $ | 30,751 |
| | $ | 35,693 |
| | $ | 79,989 |
| $ | (42,476 | ) | | $ | 3,621 |
| | $ | 30,751 |
|
______________________
______________________ (1)Components of net realized gains (losses) on fixed-maturities available for sale include: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Gross investment gains from sales and redemptions | $ | 1,986 |
| | $ | 6,052 |
| | $ | 10,326 |
| | Gross investment losses from sales and redemptions | (13,242 | ) | | (9,066 | ) | | (6,166 | ) |
| | | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2016 | | 2015 | | 2014 | | Gross investment gains from sales and redemptions | | $ | 10,326 |
| | $ | 64 |
| | $ | 99 |
| | Gross investment losses from sales and redemptions | | (6,166 | ) | | (1,240 | ) | | (1,698 | ) |
| | | (2) | Net realizedThese amounts include unrealized gains (losses) on equitiesinvestment securities other than securities available for salesale. For 2017 and 2016, the unrealized gains (losses) on investments exclude the net change in unrealized gains and losses on equity securities. Prior to the implementation of the update to the standard for the years ended December 31, 2016 and 2015 representaccounting of financial instruments effective January 1, 2018, the gross amount of losses andunrealized gains respectively, realized for those periods.(losses) associated with equity securities were classified in accumulated other comprehensive income. |
Net Unrealized Gains (Losses) on Investment Securities For each period indicated, the net change in unrealized gains (losses) on investment securities shown below represents a component of net gains (losses) on investments and other financial instruments. The net change in unrealized gains (losses) on trading securities and equity securities that were still held at each period end were as follows: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Net changes in unrealized gains (losses): | | | | | | | Trading securities | $ | (16,462 | ) | | $ | 8,827 |
| | $ | 16,850 |
| Equity securities (1) | (8,886 | ) | | — |
| | — |
| | Net changes in unrealized gains (losses) on investment securities | $ | (25,348 | ) | | $ | 8,827 |
| | $ | 16,850 |
|
______________________ | | (3)(1) | DuringPrior to the second quarterimplementation of 2015, we soldthe update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized losses associated with equity securities were classified in our portfolio and reinvested the proceeds in assets that qualify as PMIERs-compliant Available Assets, recognizing pretax gains of $69.2 million.accumulated other comprehensive income. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Change in Unrealized Gains (Losses) Recorded in Accumulated Other Comprehensive Income (Loss) The change in unrealized gains (losses) recorded in accumulated other comprehensive income (loss) consisted of the following: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Fixed-maturities: | | | | | | | Unrealized holding gains (losses) arising during the period, net of tax | $ | (97,356 | ) | | $ | 32,147 |
| | $ | 8,822 |
| | Less reclassification adjustment for net gains (losses) included in net income (loss), net of tax | (10,270 | ) | | (2,556 | ) | | 2,361 |
| | Net unrealized gains (losses) on investments, net of tax | $ | (87,086 | ) | | $ | 34,703 |
| | $ | 6,461 |
| | | | | | | | Equities (1): | |
| | |
| | |
| | Unrealized holding gains (losses) arising during the period, net of tax | $ | — |
| | $ | (244 | ) | | $ | (40 | ) | | Less reclassification adjustment for net gains (losses) included in net income (loss), net of tax | — |
| | (86 | ) | | (110 | ) | | Net unrealized gains (losses) on investments, net of tax | $ | — |
| | $ | (158 | ) | | $ | 70 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Fixed-maturities: | | | | | | | Unrealized holding gains (losses) arising during the period, net of tax | $ | 8,822 |
| | $ | (24,246 | ) | | $ | 4,531 |
| | Less reclassification adjustment for net gains (losses) included in net income (loss), net of tax | 2,361 |
| | (764 | ) | | (1,039 | ) | | Net unrealized gains (losses) on investments, net of tax | $ | 6,461 |
| | $ | (23,482 | ) | | $ | 5,570 |
| | | | | | | | | Equities: | |
| | |
| | |
| | Unrealized holding gains (losses) arising during the period, net of tax | $ | (40 | ) | | $ | 1,673 |
| | $ | 9,119 |
| | Less reclassification adjustment for net gains (losses) included in net income (loss), net of tax | (110 | ) | | 44,947 |
| | — |
| | Net unrealized gains (losses) on investments, net of tax | $ | 70 |
| | $ | (43,274 | ) | | $ | 9,119 |
|
| | | (1) | Prior to our implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized losses associated with equity securities were classified in accumulated other comprehensive income. Effective January 1, 2018, we measure our equity investments at fair value, with changes in fair value recognized in net income. |
Contractual Maturities The contractual maturities of fixed-maturity investments available for sale are as follows: | | | | December 31, 2016 | December 31, 2018 | | (In thousands) | Amortized
Cost | | Fair
Value | Amortized
Cost | | Fair
Value | Due in one year or less (1) | $ | 40,639 |
| | $ | 40,570 |
| | | Due in one year or less | | $ | 56,350 |
| | $ | 56,067 |
| Due after one year through five years (1) | 316,744 |
| | 317,728 |
| 933,807 |
| | 920,173 |
| Due after five years through ten years (1) | 851,375 |
| | 841,208 |
| 1,142,145 |
| | 1,107,129 |
| Due after ten years (1) | 426,788 |
| | 425,361 |
| 379,972 |
| | 368,899 |
| RMBS (2) | 358,262 |
| | 350,628 |
| 334,843 |
| | 332,142 |
| CMBS (2) | 429,057 |
| | 428,289 |
| 546,729 |
| | 539,915 |
| Other ABS (2) | 433,603 |
| | 434,728 |
| 712,748 |
| | 704,662 |
| | Total | $ | 2,856,468 |
| | $ | 2,838,512 |
| | Total (3) | | $ | 4,106,594 |
| | $ | 4,028,987 |
|
______________________ | | | (1) | Actual maturities may differ as a result of calls before scheduled maturity. |
| | | (2) | RMBS, CMBS, and Other ABS are shown separately, as they are not due at a single maturity date. |
| | | (3) | Available for sale includes securities loaned under securities lending agreements with a fair value of $7.4 million. |
Other As of December 31, 2018 and 2017, our investment portfolio included no securities of countries that have obligations that have been under particular stress due to economic uncertainty, potential restructuring and ratings downgrades. For the years ended December 31, 2018, 2017 and 2016, we did not sell or transfer any fixed-maturity investments classified as held to maturity. For the years ended December 31, 2018, 2017 and 2016, we did not transfer any securities from the available for sale or trading categories. As of December 31, 2018, we did not have any investment in any person and its(including affiliates thereof) that exceeded 10% of our total stockholders’ equity. Securities
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
As of December 31, 2018, Radian had an aggregate amount of $88.4 million of U.S. government and agency securities and RMBS, classified as fixed-maturities available for sale within our investment securities portfolio, serving as collateral for our FHLB advances. There were no FHLB advances outstanding at December 31, 2017. See Note 13 for additional information. Our investments include securities on deposit with various state insurance commissioners amounted to $10.8of $17.6 million and $10.4$11.8 million at December 31, 20162018 and 2015,2017, respectively. At December 31, 2016 and 2015, Radian Guaranty had $63.9 million and $74.7 million, respectively, in a collateral account pursuant to the Freddie Mac Agreement. This collateral account, which contains investments primarily invested in trading securities, is pledged to cover Loss Mitigation Activity on the loans subject to the Freddie Mac Agreement. Subject to certain conditions in the Freddie Mac Agreement, amounts in the collateral account may be released to Radian Guaranty over time to the extent that Loss Mitigation Activity becomes final in accordance with the terms of that agreement. See Note 11 for additional information.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
7. Goodwill and Other Acquired Intangible Assets, Net All of our goodwill and other acquired intangible assets relate to our Services segment, as a result of our acquisition of Clayton in 2014 and its subsequent acquisitions of Red Bell and ValuAmerica in 2015, as discussed further below and in Note 2.segment. The following table shows the changes in the carrying amount of goodwill as of and for the years ended December 31, 20162018 and 2015:2017: | | | | | | | | | | | | | | (In thousands) | Goodwill | | Accumulated Impairment Losses | | Net | | Balance at December 31, 2016 | $ | 197,265 |
| | $ | (2,095 | ) | | $ | 195,170 |
| | Goodwill acquired | 126 |
| | — |
| | 126 |
| | Impairment losses | — |
| | (184,374 | ) | | (184,374 | ) | | Balance at December 31, 2017 | 197,391 |
| | (186,469 | ) | | 10,922 |
| | Goodwill acquired | 3,170 |
| | — |
| | 3,170 |
| | Balance at December 31, 2018 | $ | 200,561 |
| | $ | (186,469 | ) | | $ | 14,092 |
|
The following is a summary of the gross and net carrying amounts and accumulated amortization of our other acquired intangible assets as of the periods indicated: | | | | | | | | | | | | | | (In thousands) | Goodwill | | Accumulated Impairment Losses | | Net | | Balance at December 31, 2014 | $ | 194,027 |
| | $ | (2,095 | ) | | $ | 191,932 |
| | Goodwill acquired | 3,238 |
| | — |
| | 3,238 |
| | Impairment losses | — |
| | — |
| | — |
| | Balance at December 31, 2015 | 197,265 |
| | (2,095 | ) | | 195,170 |
| | Goodwill acquired | — |
| | — |
| | — |
| | Impairment losses | — |
| | — |
| | — |
| | Balance at December 31, 2016 | $ | 197,265 |
| | $ | (2,095 | ) | | $ | 195,170 |
|
| | | | | | | | | | | | | | | December 31, 2018 | | (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Client relationships | $ | 84,000 |
| | $ | (48,227 | ) | (1) | $ | 35,773 |
| | Technology | 17,362 |
| | (13,141 | ) | (2) | 4,221 |
| | Trade name and trademarks | 8,340 |
| | (3,864 | ) | | 4,476 |
| | Non-competition agreements | 185 |
| | (177 | ) | | 8 |
| | Licenses | 463 |
| | (35 | ) | | 428 |
| | Total | $ | 110,350 |
| | $ | (65,444 | ) | | $ | 44,906 |
|
| | | | | | | | | | | | | | | December 31, 2017 | | (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Client relationships | $ | 82,530 |
| | $ | (41,596 | ) | (1) | $ | 40,934 |
| | Technology | 15,250 |
| | (8,922 | ) | (2) | 6,328 |
| | Trade name and trademarks | 8,340 |
| | (3,003 | ) | | 5,337 |
| | Client backlog | 6,680 |
| | (6,006 | ) | | 674 |
| | Non-competition agreements | 185 |
| | (168 | ) | | 17 |
| | Total | $ | 112,985 |
| | $ | (59,695 | ) | | $ | 53,290 |
|
______________________ | | | (1) | Includes an impairment charge of $14.9 million in the quarter ended June 30, 2017. |
| | | (2) | Includes an impairment charge of $0.9 million in the quarter ended June 30, 2017. |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
For the first quarter of 2015, Clayton expanded its service offerings by acquiring Red Bell, a real estate brokerage, valuationyears ended December 31, 2018, 2017 and technology company that provides products2016, amortization expense was $12.4 million, $11.8 million and services that include automated valuation models; broker price opinions used by investors, lenders$13.2 million, respectively. The estimated aggregate expense for 2019 and loan servicers; and advanced technology solutions for: (i) monitoring loan portfolio performance; (ii) tracking non-performing loans; (iii) managing REO assets; and (iv) valuing and selling residential real estate through a secure platform. The transaction was treatedthereafter is as a purchase for accounting purposes, with the excess of the acquisition price over the estimated fair value of the net assets acquired resulting in goodwill of $2.4 million. In addition, in October 2015, Clayton acquired ValuAmerica, a national title agency and appraisal management company with a technology platform that helps mortgage lenders and their vendors streamline and manage their supply chains and operational workflow. The transaction was treated as a purchase for accounting purposes, with the excess of the acquisition price over the estimated fair value of the net assets acquired resulting in goodwill of $0.8 million. Neither of these acquisitions met the criteria to be considered a material business combination. These acquisitions expand Clayton’s scope of services and are consistent with our strategy to be positioned to offer products and services throughout the entire mortgage value chain.follows: The goodwill in these acquisitions | | | | | | (In thousands) | | | 2019 | $ | 8,688 |
| | 2020 | 7,321 |
| | 2021 | 5,907 |
| | 2022 | 5,375 |
| | 2023 | 4,923 |
| | Thereafter | 12,692 |
| | Total | $ | 44,906 |
|
Accounting Policy Considerations Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that wereare not individually identified and separately recognized, and includes the value of the discounted expected future cash flows from these businesses, the workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever events and circumstances indicate potential impairment. Events that could result In the second quarter of 2017, we elected to early adopt the update to the accounting standard regarding goodwill and other intangibles, as discussed in an interim assessment ofNote 2. In accordance with the updated standard, our goodwill impairment and/ortest is a potential impairment loss include, but are not limited to: (i) significant under-performance relativetwo-step process. Step one compares a reporting unit’s estimated fair value to historical or projected future operating results; (ii) significant changes inits carrying value. If the strategy forcarrying amount exceeds the Services segment; (iii) significant negative industry or economic trends; and (iv) a decline in market capitalization below bookestimated fair value, attributablethe second step must be completed to measure the Services segment. Management regularly updates certain assumptions related to our projections, including the likelihoodamount of achieving the assumed potential revenues from new initiatives and business strategies, and if these or other items have a significant negative impact on the reporting unit’s projections we may perform additional analysis to determine whethergoodwill impairment loss, if any. Any excess of the reporting unit’s carrying amount over its estimated fair value is recognized as an impairment charge, is needed. Lower earnings over sustained periods also can leadup to the full amount of the goodwill allocated to the reporting unit, after adjusting the carrying value for any impairment of goodwill, which could result in a charge to earnings. The value of goodwill is primarily supported by revenue projections which are driven primarily by projected transaction volume and margins. We conducted our annual goodwill impairment analysis in the fourth quarters of 2015 and 2016.other intangibles or long-lived assets. For purposes of performing our annual goodwill impairment tests,test, we have concluded that the Services segment constitutes one reporting unit to which all of our recorded goodwill is related.
We generally perform our annual goodwill impairment test during the fourth quarter of each year, using balances as of the prior quarter. However, if there are events and circumstances that indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, we will perform additional analysis on an interim basis. As part of our goodwill impairment assessment, we estimate the fair value of the reporting unit using primarily an income approach and, at a lower weighting, a market approach. The key driver in our fair value analysis is forecasted future cash flows. For financial reporting purposes, other acquired intangible assets with finite lives will be amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset, as follows: | | | | | | Estimated Useful Life | | Client relationships | 5 years | - | 15 years | | Technology | 3 years | - | 8 years | | Trade name and trademarks | 6 years | - | 10 years | | Licenses | 10 years | | | | Non-competition agreements | 2 years | - | 3 years |
For additional information on our accounting policies for goodwill and other acquired intangible assets, see Note 2. Impairment Analysis 2018 Activity Goodwill. We conducted our annual goodwill impairment analysis in the fourth quarter of 2018. Although the goodwill associated with our fourth quarter 2018 acquisitions is included in our goodwill as of December 31, 2018, these recent acquisitions were excluded from our impairment analysis as of the measurement date.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
As part of our annual goodwill impairment assessment in 2016,2018, we estimated the fair value of the reporting unit using primarily an income approach and, to a lesser extent, a market approach. The key factor in our fair value analysis was forecasted future cash flows, which were less than originally had been expected at the acquisition date. Given that the current goodwill impairment analysis relies significantly on projected high growth rates of future cash flows, failure to meet those projections may result in an impairment in a future period.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
We considered both positive and negative factors and concluded that, after considering all of the factors and evidence available, there is no impairment of goodwill as of December 31, 2016. The goodwill impairment test is a two-step process as required by the accounting standard related to intangible assets. Step one compares a reporting unit’s estimated fair value to its carrying value. If the carrying amount exceeds the estimated fair value, the second step must be completed to measure the amount of the reporting unit’s goodwill impairment loss, if any. In 2016,2018 because the estimated fair value of the reporting unit exceeded our carrying amount. TheOther Acquired Intangible Assets. As of December 31, 2018, we also evaluated the recoverability of our other acquired intangible assets. Factors affecting the estimated fair value of our goodwill, as described above, were also considered in estimating the recoverability of our other acquired intangible assets. Based on our analysis, there was no impairment indicated for other acquired intangible assets, as the carrying amounts were estimated to be recoverable from future cash flows. As of December 31, 2018, the balance of client relationships and technology includes recently acquired assets from our fourth quarter 2018 acquisitions. These recently acquired assets were excluded from our recoverability analysis.
2017 Activity Goodwill. We performed an interim goodwill impairment test as of June 30, 2017, due to events and circumstances identified during our June 30, 2017 qualitative analysis that indicated that it was more likely than not that the fair value was less than the carrying amount. We performed our qualitative assessment of goodwill at June 30, 2017, focusing on the impact of certain key factors affecting our Services segment, including: (i) decisions related to changes in the business strategy for our Services segment determined in the second quarter of 2017, following isour Chief Executive Officer’s evaluation of both existing products and new product development opportunities and (ii) second quarter 2017 results for our Services segment which were negatively impacted by market trends. Our expectation that these market trends would persist negatively impacted our projected future cash flows compared to the projections used in our prior valuation. Our Chief Executive Officer joined Radian in March 2017 and initiated a summaryreview to evaluate the strategic direction of the grossServices segment. Based on this strategic review, in the second quarter of 2017, we made several decisions with respect to business strategy for the segment in order to reposition the Services business to drive future growth and net carrying amountsprofitability. We determined to: (i) discontinue certain initiatives, as discussed below and accumulated amortization(ii) shift the strategy of the Services segment to focus on core products and services that, in the current market environment, are expected to have higher growth potential, to produce more predictable, recurring revenue streams over time and to better align with our market expertise and the needs of our customers. Our strategic decisions included an intent to scale back or, in certain cases, discontinue certain planned or existing initiatives, such as discontinuing a new product line which, based on a market study received in the second quarter of 2017, would have required significant additional investment to achieve the growth rates that had been expected. The impact of the strategic decisions determined during the second quarter resulted in a meaningful reduction in the fair value of the Services segment since the previous annual impairment test. During the second quarter of 2017, the Services segment performed below forecasted levels. In combination with the recent underperformance of the Services segment, the anticipated business and growth opportunities for certain business lines in our Services segment had been impacted by: (i) market demand, which was lower than anticipated; (ii) increased competition, including with respect to product alternatives and pricing; and (iii) delays in the realization of efficiencies and margin improvements associated with certain technology initiatives. The demand for certain products and services had decreased due to several factors. Given the decreased volume of refinancings in the mortgage market that began in the first half of 2017, our customers had excess internal capacity which they were choosing to utilize and as a result they were less reliant on outsourcing to us. Additionally, due to market and competitive pressures, we renewed the contract terms with one of our largest customers during the second quarter of 2017, with lower pricing and volumes than expected in order to retain the engagement. We also experienced lower than expected customer acceptance for certain of our current and proposed products and services. The impact of these factors, partially offset by related future expense reductions, constituted a majority of the decline in the fair value of the Services segment since the previous annual impairment test. Our quantitative valuation analysis, performed in connection with our annual goodwill impairment analysis in 2016, relied heavily on achieving the growth rates in our projected future cash flows. The impact of the market trends observed during the second quarter of 2017, which we expected to continue, together with our strategic decisions discussed above, resulted in changes to our expected product mix and the expected growth rates associated with various initiatives, which in turn generated material reductions to our forecasted net cash flows. Given the significant negative impact that the market trends and our strategic decisions would have on the timing and amount of our projected future cash flows in comparison to our original projections, we performed a quantitative analysis of the associated goodwill and other acquired intangible assets as of andJune 30, 2017.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
As a result of the quantitative goodwill analysis, we recorded an impairment charge of $184.4 million for the yearthree months ended June 30, 2017, to date periods indicated: | | | | | | | | | | | | | | | December 31, 2016 | | (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Client relationships | $ | 83,316 |
| | $ | (19,696 | ) | | $ | 63,620 |
| | Technology | 15,250 |
| | (5,497 | ) | | 9,753 |
| | Trade name and trademarks | 8,340 |
| | (2,125 | ) | | 6,215 |
| | Client backlog | 6,680 |
| | (5,235 | ) | | 1,445 |
| | Non-competition agreements | 185 |
| | (160 | ) | | 25 |
| | Total | $ | 113,771 |
| | $ | (32,713 | ) | | $ | 81,058 |
| | | | | | | | | | December 31, 2015 | | (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Client relationships | $ | 83,471 |
| | $ | (11,038 | ) | | $ | 72,433 |
| | Technology | 15,100 |
| | (2,949 | ) | | 12,151 |
| | Trade name and trademarks | 8,340 |
| | (1,243 | ) | | 7,097 |
| | Client backlog | 6,680 |
| | (4,184 | ) | | 2,496 |
| | Non-competition agreements | 185 |
| | (115 | ) | | 70 |
| | Total | $ | 113,776 |
| | $ | (19,529 | ) | | $ | 94,247 |
|
Generally, for tax purposes, substantiallyreduce the carrying amount of the Services segment to its estimated fair value. As discussed further below, prior to finalizing this amount, we also evaluated the recoverability of the segment’s other acquired intangible assets and recorded impairment charges of $15.8 million related to the Services segment’s other acquired intangible assets. See “—Other Acquired Intangible Assets,” below. Substantially all of our goodwill and other acquired intangible assets arewill continue to be deductible and will be amortized over afor tax purposes in accordance with the originally scheduled amortization period of approximately 15 years. For financial
During the fourth quarter of 2017, we elected to perform a qualitative annual goodwill impairment analysis, which requires us to assess all relevant events and circumstances that could affect the significant inputs used to determine the fair value of the reporting purposes,unit. We considered factors such as: (i) the increase in and timing of revenues during the third and fourth quarters of 2017 (as compared to the forecasted amounts for the same periods); (ii) the impact to projected cash flows, a significant input used to determine the fair value of the reporting unit, associated with the TCJA enacted in the fourth quarter of 2017; (iii) our recent interim goodwill impairment test and recognition of impairment charges; and (iv) the recent sale of a business line. Based on our qualitative assessment in the fourth quarter of 2017, we concluded that it was not “more likely than not” that the fair value of the Services reporting unit was less than its carrying amount as of December 31, 2017. Other Acquired Intangible Assets. As of June 30, 2017, we evaluated the recoverability of our other acquired intangible assets. Factors affecting the estimated fair value of our goodwill, as described above, also affected the estimated recoverability of our other acquired intangible assets. Based on our analysis in the second quarter of 2017, impairment was indicated for the Services segment’s client relationships and technology, related to certain product lines that were affected by the factors above. There was no impairment indicated for the remaining intangible assets, with finite lives willas the remaining carrying amounts were estimated to be amortized over their applicablerecoverable despite the decline in projected earnings. Client relationships represent the value of the specifically acquired customer relationships and are valued using the excess earnings approach using estimated useful lives in a manner that approximatesclient revenues, attrition rates, implied royalty rates and discount rates. The excess earnings approach estimates the patternpresent value of expected economic benefit from each intangible asset, as follows: | | | | | | Estimated Useful Life | Client relationships | 3 years | - | 15 years | Technology | 3 years | - | 8 years | Trade name and trademarks | | | 10 years | Client backlog | 3 years | - | 5 years | Non-competition agreements | 2 years | - | 3 years |
Radian Group Inc.
Notesearnings in excess of a traditional return on business assets. For the three months ended June 30, 2017, we recorded an impairment charge of $14.9 million related to Consolidated Financial Statements - (Continued)
the segment’s client relationships, primarily due to the changes in estimated client revenues based on the factors discussed above. The remaining carrying value of client relationships is supported by projected earnings.
For the yearsthree months ended December 31, 2016, 2015 and 2014, amortization expense was $13.2 million, $13.0 million and $8.6 million, respectively. The amortization expense for 2014 includesJune 30, 2017, we also recorded an impairment losscharge of $2.1$0.9 million related to technology, representing the estimated unrecoverable value of a small subsidiary within our Services segmentportion of the acquired proprietary software used to provide services in a product line impacted by the factors described above. The remaining carrying value of technology was supported by technology that we acquiredexpected to continue to use in 2013. The estimated aggregate amortization expense for 2017 and thereafter is as follows: | | | | | | (In thousands) | | | 2017 | $ | 12,646 |
| | 2018 | 12,052 |
| | 2019 | 10,793 |
| | 2020 | 9,185 |
| | 2021 | 7,375 |
| | Thereafter | 29,007 |
| | Total | $ | 81,058 |
|
its current form, in either the same or an alternative capacity.
8. Reinsurance In our mortgage insurance business, we have useduse reinsurance as apart of our risk distribution strategy, including to manage our capital position and risk management tool to, among other things, manage Radian Guaranty’s regulatory Risk-to-capital and compliance with the PMIERs Financial Requirements.profile. Premiums are ceded under the QSR Transactions, the Single Premium QSR TransactionProgram, the QSR Program and captive arrangements.the Excess-of-Loss Program.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
The effect of reinsurance on our mortgage insurance net premiums written and earned is as follows: | | | | Year Ended December 31, | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Net premiums written—insurance: | | | | | | | | | | | | Direct | $ | 1,000,111 |
| | $ | 1,009,409 |
| | $ | 982,976 |
| $ | 1,082,285 |
| | $ | 1,032,735 |
| | $ | 1,000,111 |
| | Assumed | 29 |
| | 104 |
| | (882 | ) | 6,901 |
| (1) | 25 |
| | 29 |
| Ceded (1) | (266,306 | ) | | (41,008 | ) | | (56,913 | ) | | Ceded (2) | | (98,165 | ) | | (214,343 | ) | | (266,306 | ) | | Net premiums written—insurance | $ | 733,834 |
| | $ | 968,505 |
| | $ | 925,181 |
| $ | 991,021 |
| | $ | 818,417 |
| | $ | 733,834 |
| | Net premiums earned—insurance: | | | | | | | | | | | | Direct | $ | 999,093 |
| | $ | 973,645 |
|
| $ | 905,502 |
| $ | 1,066,864 |
| | $ | 990,016 |
|
| $ | 999,093 |
| | Assumed | 35 |
| | 43 |
|
| 43 |
| 6,904 |
| (1) | 28 |
|
| 35 |
| Ceded (1) | (77,359 | ) | | (57,780 | ) | | (61,017 | ) | | Ceded (2) | | (67,047 | ) | | (57,271 | ) | | (77,359 | ) | | Net premiums earned—insurance | $ | 921,769 |
| | $ | 915,908 |
| | $ | 844,528 |
| $ | 1,006,721 |
| | $ | 932,773 |
| | $ | 921,769 |
|
______________________ | | | (1) | Includes premiums earned from our participation in certain Front-end and Back-end credit risk transfer programs. |
| | | (2) | Net of profit commission. |
Under the InitialSingle Premium QSR Transaction, Radian Guaranty agreed to cede to the third-party reinsurance provider 20% of its NIW beginning with the business written in the fourth quarter of 2011 up to $1.6 billion of ceded RIF. We have ceded the maximum amount permitted under the InitialProgram
2016 Single Premium QSR Transaction. As of December 31, 2016, RIF ceded under the Initial QSR Transaction declined to $0.6 billion. Radian Guaranty had the ability, at its option, to recapture two-thirds of the reinsurance ceded as part of this transaction on December 31, 2014. However, we chose not to recapture that risk and negotiated an amendment to the transaction pursuant to which we received a $9.2 million profit commission based on experience through December 31, 2014, which increased net premiums earned, and a $15.0 million upfront supplemental ceding commission, the recognition of which has been deferred and is being amortized as a reduction to our policy acquisition costs over approximately five years beginning January 1, 2015. In addition, pursuant to the original agreement and effective January 1, 2015, the ceding commission was reduced from 25% to 20% for two-thirds of the remaining reinsurance ceded under the Initial QSR Transaction.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
In the fourth quarter of 2012, Radian Guaranty and the same third-party reinsurance provider entered into the Second QSR Transaction, pursuant to which Radian Guaranty agreed to cede 20% of its NIW beginning with the business written in the fourth quarter of 2012. Effective April 1, 2013, Radian Guaranty amended the original terms of the Second QSR Transaction to reduce the percentage of all premiums and losses incurred on new business ceded to the reinsurer under this reinsurance agreement on a prospective basis from 20% to 5% with respect to NIW on conventional GSE loans. As of December 31, 2015, we had ceded the maximum of $1.6 billion of RIF under the Second QSR Transaction. As of December 31, 2016, RIF ceded under the Second QSR Transaction declined to $1.0 billion.
Similar to the Initial QSR Transaction, pursuant to the Second QSR Transaction Radian Guaranty had the ability, at its option, to recapture one-half of the reinsurance ceded as of December 31, 2015. Radian Guaranty chose not to recapture that risk and negotiated an amendment to the Second QSR Transaction pursuant to which we received a profit commission of $8.3 million based on performance through December 31, 2015, which increased net premiums earned during 2015. In addition, pursuant to the amendment, Radian Guaranty received an $8.5 million prepaid supplemental ceding commission, the recognition of which has been deferred and is expected to be amortized as a reduction to our other operating expenses over approximately five years. Pursuant to the original agreement and effective January 1, 2016, the ceding commission was reduced from 35% to 30% for one-half of the remaining reinsurance ceded under the Second QSR Transaction.
Agreement.In the first quarter of 2016, in order to proactively manage the risk and return profile of Radian Guaranty’s insured portfolio and continue managing its capital position under the PMIERs Financial Requirementsfinancial requirements in a cost-effective manner, Radian Guaranty entered into the 2016 Single Premium QSR TransactionAgreement with a panel of third-party reinsurers. Under the 2016 Single Premium QSR Transaction,Agreement, effective January 1, 2016, Radian Guaranty began ceding the following Single Premium IIF and NIW, subject to certain conditions: 20% of its existing performing Single Premium Policies written between January 1, 2012 and March 31, 2013; 35% of its existing performing Single Premium Policies written between April 1, 2013 and December 31, 2015; and 35% of its Single Premium NIW from January 1, 2016 to December 31, 2017, subject to a limitation on ceded premiums written equal to $195 million for policies issued between January 1, 2016 and December 31, 2017. Radian Guaranty receives a 25% ceding commission for premiums ceded pursuant to this transaction. Radian Guaranty also receives a profit commission, provided that the loss ratio on the loans covered under the agreement generally remains below 55%. Losses on the ceded risk above this level reduce Radian Guaranty’s profit commission on a dollar-for-dollar basis. Notwithstanding the limitation on ceded premiums for Single Premium NIW written between January 1, 2016 and December 31, 2017, the parties may mutually agree to increase the amount of ceded risk on December 31, 2017. Radian Guaranty is entitled to discontinue ceding new policies under the agreement at the end of any calendar quarter. The agreement is scheduled to terminate on December 31, 2027; however, Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of January 1, 2020, or at the end of any calendar quarter thereafter, which would result in Radian Guaranty reassuming the related RIF in exchange for a net payment from the reinsurer calculated in accordance with the terms of the agreement.
Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk on performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages. As of the effective date, the result of this amendment increased the amount of risk ceded on Single Premium Policies, including for the purposes of calculating any future ceding commissions and profit commissions that Radian Guaranty will earn. It also increased the future amounts of our ceded premiums and ceded losses. RIF ceded under the 2016 Single Premium QSR TransactionAgreement was $6.3 billion as of December 31, 2018, compared to $6.9 billion and $3.8 billion as of December 31, 2016.2017 and 2016, respectively.
2018 Single Premium QSR Agreement. In October 2017, we entered into the 2018 Single Premium QSR Agreement with a panel of third-party reinsurers. Under the 2018 Single Premium QSR Agreement, we expect to cede 65% of our Single Premium NIW beginning with the business written in January 2018, subject to certain conditions that may affect the amount ceded, including a limitation on ceded premiums written equal to $335 million for policies issued between January 1, 2018 and December 31, 2019. Notwithstanding this limitation, the parties may mutually agree to amend the agreement, including with respect to any limitations on the amounts of insurance that may be ceded.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Radian Guaranty receives a 25% ceding commission for premiums ceded pursuant to this transaction. Radian Guaranty also receives an annual profit commission based on the performance of the loans subject to the agreement, provided that the loss ratio on the subject loans is below 56% for that calendar year. Radian Guaranty may discontinue ceding new policies under the agreement at the end of any calendar quarter. The agreement is scheduled to terminate on December 31, 2029. However, Radian Guaranty may terminate this agreement prior to the scheduled date if one or both of the GSEs no longer grant full credit for the reinsurance. Radian Guaranty also has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of January 1, 2022, or at the end of any calendar quarter thereafter. Termination of the agreement would result in Radian Guaranty reassuming the related RIF in exchange for a net payment from the reinsurer calculated in accordance with the terms of the agreement. RIF ceded under the 2018 Single Premium QSR Agreement was $1.9 billion as of December 31, 2018. QSR Program In 2012, Radian Guaranty entered into the QSR Program with a third-party reinsurance provider. Radian Guaranty has ceded the maximum amount permitted under the QSR Program and is no longer ceding NIW under this program. RIF ceded under the QSR Program was $0.9 billion, $1.2 billion and $1.6 billion as of December 31, 2018, 2017 and 2016, respectively. Ceded Premiums, Commissions and Losses The following tables show the amounts related to the QSR Transactions and the Single Premium QSR TransactionProgram and the QSR Program for the periods indicated: | | | | QSR Transactions | | Single Premium QSR Transaction | Single Premium QSR Program | | QSR Program | | | Year Ended December 31, | | Year Ended December 31, | Year Ended December 31, | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | Ceded premiums written (1) | $ | 28,097 |
| | $ | 30,213 |
| | $ | 43,968 |
| | $ | 233,206 |
| | $ | — |
| | $ | — |
| $ | 74,876 |
| | $ | 193,517 |
| | $ | 233,206 |
| | $ | 13,486 |
| | $ | 19,356 |
| | $ | 28,097 |
| Ceded premiums earned (1) | 42,515 |
| | 46,975 |
| | 47,139 |
| | 29,808 |
| | — |
| | — |
| 44,286 |
| | 27,284 |
| | 29,808 |
| | 19,660 |
| | 28,503 |
| | 42,515 |
| | Ceding commissions written | 8,019 |
| | 11,443 |
| | 16,675 |
| | 66,153 |
| | — |
| | — |
| 29,745 |
| | 55,333 |
| | 66,153 |
| | 3,890 |
| | 5,536 |
| | 8,019 |
| Ceding commissions earned (2) | 16,573 |
| | 14,453 |
| | 13,275 |
| | 15,303 |
| | — |
| | — |
| 22,097 |
| | 13,774 |
| | 15,303 |
| | 11,349 |
| | 13,122 |
| | 16,573 |
| | Ceded losses | 1,858 |
| | 1,187 |
| | 2,165 |
| | 2,262 |
| | — |
| | — |
| 4,574 |
| | 2,490 |
| | 2,262 |
| | 512 |
| | 771 |
| | 1,858 |
|
______________________ | | | (1) | Net of profit commission. |
| | | (2) | Includes amounts reported in policy acquisition costs and other operating expenses. |
Excess-of-Loss Program In November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the past, weapplicable percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and other companiesJanuary 1, 2018, with an initial RIF of $9.1 billion. In addition, Radian Guaranty entered into a separate excess-of-loss reinsurance agreement for up to $21.4 million of coverage, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re on those Monthly Premium Policies. Radian Guaranty and its affiliates have retained the first-loss layer of $204.9 million of aggregate losses. Eagle Re and a separate third-party reinsurer provide 90% and 10% coverage, respectively, on the mezzanine layer of up to $214.1 million of losses (in excess of the retained losses of $204.9 million). Eagle Re also provides 100% coverage on the next layer of $241.4 million of aggregate losses. Radian Guaranty and its affiliates will then retain losses in excess of the outstanding reinsurance coverage amount. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the principal balances of the underlying covered mortgages decrease and as claims are paid by Eagle Re. The outstanding reinsurance coverage amount will stop amortizing if certain thresholds are reached, such as if the reinsured mortgages were to experience an elevated level of delinquencies or certain credit enhancement tests were not maintained. Radian Guaranty has rights to terminate the reinsurance agreement upon the occurrence of certain events, including an option to terminate on or after November 25, 2023.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Eagle Re financed its coverage by issuing mortgage insurance-linked notes in an aggregate amount of $434.0 million to unaffiliated investors. The notes mature on November 25, 2028, but are subject to earlier termination by Eagle Re, upon Radian Guaranty’s exercise of its rights to terminate the reinsurance agreement. The notes are non-recourse to any assets of Radian Guaranty or its affiliates. The proceeds of the notes have been deposited into a reinsurance trust account for the benefit of Radian Guaranty, and are required to be the source of reinsurance claim payments to Radian Guaranty and principal repayments on the mortgage insurance-linked notes. Funds in the mortgage insurance industryreinsurance trust account are required to be invested in U.S. government money market funds, cash or U.S. Treasury securities at all times. The reinsurance premium due to Eagle Re is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR plus a contractual risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during the preceding month. As a result, the premiums we pay will vary based on (i) the spread between LIBOR and the rates on the investments held by the reinsurance trust and (ii) the outstanding amount of reinsurance coverage. Radian Guaranty will also participatedpay an additional annual premium to reimburse Eagle Re for expenses in reinsurance arrangementsconnection with mortgage lenders commonly referred to as “captive reinsurance arrangements.” Under captive reinsurance arrangements, a mortgage lender typically established a reinsurance company that assumed partthe issuance of the risk associated with the portfolio of that lender’s mortgages insured by us on a Flow Basis. In return forNotes and Eagle Re’s annual anticipated operating expenses, which are not expected to be material. If the reinsurance company’s assumptionagreement is not terminated after five years from issuance, the reinsurance premium’s risk margin payable to Eagle Re increases by 50%. In connection with our excess of loss reinsurance agreement with Eagle Re, we concluded that (i) the risk transfer requirements for reinsurance accounting were met as Eagle Re is assuming significant insurance risk and has a reasonable possibility of a portionsignificant loss; and (ii) Eagle Re is a variable interest entity (“VIE”). Based on the accounting guidance that addresses VIEs, because Radian does not have: (i) the power to direct the activities of Eagle Re that most significantly affect its economic performance or (ii) the obligation to absorb losses or the right to receive benefits from Eagle Re that potentially could be significant to Eagle Re, we have not consolidated Eagle Re in our consolidated financial statements. We have also concluded that the reinsurance agreement contains an embedded derivative, which we have accounted for separately as a freestanding derivative. See Note 2 for additional accounting policy information. Although the risk we ceded a portiontransfer requirements for reinsurance accounting have been met and there is also no recourse to Radian Guaranty by the holders of the mortgage insurance premiums paidinsurance-linked notes, reinsurance does not relieve us of our obligations to our policyholders. In the event the VIE is unable to meet its obligations to us, our insurance subsidiaries would be liable to make claims payments to our policyholders. In the event that all of the assets in the reinsurance trust (consisting of U.S. government money market funds, cash or U.S. Treasury securities) have become worthless and the VIE is unable to make its payments to us, our maximum potential loss would be the amount of mortgage insurance claim payments for losses on the insured policies, net of the aggregate reinsurance payments already received, up to the full $434.0 million aggregate excess-of-loss reinsurance company.coverage amount. In the same scenario, the related embedded derivative of $1.1 million, currently recorded in other assets, would no longer have value. During the financial crisis, losses increased significantly and almost all captive reinsurance arrangements attached, thereby requiringEagle Re represents our captive reinsurers to make payments to us. The reinsurance recoverable on loss reserves related to captive agreements was $0.4 million at December 31, 2016, compared to $7.3 milliononly variable interest entity as of December 31, 2015.
All of our existing captive reinsurance arrangements are operating on a run-off basis, meaning that no new business is being placed in these captives. We have not entered into any new captives since 2007 and, pursuant2018. The following table presents Eagle Re’s total assets as well as Radian Guaranty’s maximum exposure to consent ordersloss associated with the CFPB and the Minnesota Department of Commerce, we have agreed not to enter into any new captives until 2025. See Note 13 regarding our Consent Order with the Minnesota Department of Commerce. During 2016, our RIF ceded under captive reinsurance arrangements declined to $12.7 millionEagle Re, each as of December 31, 2016, compared to $71.4 million as of December 31, 2015, as we terminated a significant number of captive reinsurance arrangements during the year.2018.
| | | | | | | | | | | | | | | | | | | | | | Maximum Exposure to Loss | | (In thousands) | | Total VIE Assets (1) | | On - Balance Sheet | | Off - Balance Sheet (3) | | Total | | Eagle Re | | $ | 434,034 |
| | $ | 1,114 |
| (2) | $ | 434,034 |
| | 435,148 |
| | Total | | $ | 434,034 |
| | $ | 1,114 |
| | $ | 434,034 |
| | 435,148 |
|
______________________ | | | (1) | Eagle Re’s assets are required to be invested in U.S. government money market funds, cash or U.S. Treasury securities. Eagle Re’s liabilities consist of its mortgage insurance-linked notes of $434.0 million, as described above. |
| | | (2) | Represents the fair value of the related embedded derivative, included in other assets in our consolidated balance sheets. |
| | | (3) | Represents the maximum amount that would be payable in the future by Radian Guaranty to its policyholders on claims, without the benefit of any corresponding reinsurance recoverables, in the event of the combination of two events: (i) all of the assets in the reinsurance trust (consisting of U.S. government money market funds, cash or U.S. Treasury securities) have become worthless and (ii) $660.4 million of claims have been paid on the reinsured RIF. |
Collateral Although we use reinsurance as aone of our risk management tool,tools, reinsurance does not relieve us of our obligations to our policyholders. In the event the reinsurers are unable to meet their obligations to us, our insurance subsidiaries would be liable for any defaulted amounts. However, in all of our reinsurance transactions, the reinsurers have established a trust to help
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
secure our potential cash recoveries. In addition, for the Single Premium QSR Transaction,Program, Radian Guaranty holds amounts received from ceded premiums written to collateralize the reinsurers’ obligations, which is reported in reinsurance funds withheld on theour consolidated balance sheets. Any loss recoveries and profit commissions to Radian Guaranty related to the Single Premium QSR TransactionProgram are expected to be realized from this account.
Other
In our title insurance business, we also use reinsurance as part of our risk distribution strategy. EnTitle Insurance’s reinsurance agreement with a third-party reinsurer provides for coverage of 100% of losses in excess of $1.0 million ultimate net loss on a per claim basis, subject to certain aggregate limits. For the year ended December 31, 2018, the effect of this agreement was immaterial to our results of operations. In addition, on March 27, 2018, EnTitle Insurance entered into a loss portfolio transfer reinsurance transaction in which all policies issued by EnTitle Insurance and outstanding at the time, subject to certain limitations, became reinsured by a third party.
174
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
9. Other Assets The following table shows the components of other assets for the periods indicated: | | | | December 31, | December 31, | | (In thousands) | 2016 | | 2015 | 2018 | | 2017 | | Deposit with the IRS (Note 10) | $ | 88,557 |
| | $ | 88,557 |
| | Deposit with the IRS (1) | | $ | — |
| | $ | 88,557 |
| | Company-owned life insurance | 83,248 |
| | 82,543 |
| 83,377 |
| | 85,862 |
| Property and equipment (1) (2) | 70,665 |
| | 46,802 |
| | Internal-use software (2) | | 51,367 |
| | 48,751 |
| Current federal income tax receivable (1) | | 44,506 |
| | — |
| Property and equipment (3) | | 37,090 |
| | 38,291 |
| | Accrued investment income | 29,255 |
| | 25,620 |
| 34,878 |
| | 31,389 |
| | Loaned securities (Note 6) | | 27,860 |
| | 27,964 |
| | Unbilled receivables | | 19,917 |
| | 22,257 |
| | Deferred policy acquisition costs | 14,127 |
| | 14,267 |
| 17,311 |
| | 16,987 |
| | Reinsurance recoverables | 7,368 |
| | 11,044 |
| 14,402 |
| | 8,492 |
| | Other | 50,615 |
| | 45,096 |
| 36,992 |
| | 39,299 |
| | Total other assets | $ | 343,835 |
| | $ | 313,929 |
| $ | 367,700 |
| | $ | 407,849 |
|
______________________ | | | (1) | In 2018, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit. As such, the remaining balances of the deposits with the IRS as of December 31, 2018 are included in current federal income tax receivable. In January 2019, we received $33 million of the $58 million refund from the IRS and expect to receive the remaining $25 million in the coming months. See Note 10 for additional information regarding the IRS Matter. |
| | | (2) | Internal-use software, at cost, has been reduced by accumulated amortization of $60.3 million and $48.4 million at December 31, 2018 and 2017, respectively, as well as $5.1 million of impairment charges in 2018. Amortization expense was $11.4 million, $10.7 million and $6.0 million for the years ended December 31, 2018, 2017 and 2016 respectively. |
| | | (3) | Property and equipment at cost, less accumulated depreciation of $118.5$62.9 million and $106.9$57.6 million at December 31, 20162018 and 2015,2017, respectively. Depreciation expense was $11.7$8.0 million, $6.7$6.9 million and $4.2$5.6 million for the years ended December 31, 2016, 20152018, 2017 and 20142016 respectively. |
| | (2) | Includes $49.7 million and $35.9 million in 2016 and 2015, respectively, related to our technology upgrade project. |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
10. Income Taxes Income Tax Provision (Benefit) The components of our consolidated income tax provision (benefit) from continuing operations are as follows: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Current provision (benefit) | $ | (42,398 | ) | | $ | 59,122 |
| | $ | 4,546 |
| | Deferred provision | 120,573 |
| | 166,527 |
| | 170,887 |
| | Total income tax provision | $ | 78,175 |
| | $ | 225,649 |
| | $ | 175,433 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Current provision (benefit) | $ | 4,546 |
| | $ | 120 |
| | $ | (26,575 | ) | | Deferred provision (benefit) | 170,887 |
| | 156,170 |
| | (825,843 | ) | | Total income tax provision (benefit) | $ | 175,433 |
| | $ | 156,290 |
| | $ | (852,418 | ) |
The reconciliation of taxes computed at the statutory tax rate of 21% in 2018 and 35% in 2017 and 2016 to the provision (benefit) for income taxes on continuing operations is as follows: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Provision for income taxes computed at the statutory tax rate | $ | 143,679 |
| | $ | 121,358 |
| | $ | 169,290 |
| | Change in tax resulting from: |
|
| |
|
| |
|
| | Repurchase premium on convertible notes | — |
| | (96 | ) | | 9,988 |
| | State tax provision (benefit), net of federal impact | 5,570 |
| | (15,641 | ) | | (8,974 | ) | | Valuation allowance | (1,856 | ) | | 18,197 |
| | 10,663 |
| | Remeasurement of net deferred tax assets due to the TCJA | — |
| | 102,617 |
| | — |
| | Impact related to settlement of IRS Matter | (73,585 | ) | | — |
| | — |
| | Other, net | 4,367 |
| | (786 | ) | | (5,534 | ) | | Provision for income taxes | $ | 78,175 |
| | $ | 225,649 |
| | $ | 175,433 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Provision for income taxes computed at the statutory tax rate | $ | 169,290 |
| | $ | 153,240 |
| | $ | 142,504 |
| | Change in tax resulting from: |
|
| |
|
| |
|
| | Repurchase premium on convertible notes | 9,988 |
| | (6,674 | ) | | — |
| | State tax (benefit) | (8,974 | ) | | (7,619 | ) | | (451 | ) | | Valuation allowance | 10,663 |
| | 11,931 |
| | (995,008 | ) | | Other, net | (5,534 | ) | | 5,412 |
| | 537 |
| | Provision (benefit) for income taxes | $ | 175,433 |
| | $ | 156,290 |
| | $ | (852,418 | ) |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Deferred Tax Assets and Liabilities The significant components of our net deferred tax assets and liabilities from continuing operations are summarized as follows: | | | | | | | | | | | December 31, | | (In thousands) | 2018 | | 2017 | | Deferred tax assets: | | | | | Accrued expenses | $ | 17,487 |
| | $ | 30,267 |
| | Unearned premiums | 34,686 |
| | 35,035 |
| | Differences in fair value of financial instruments | 1,115 |
| | — |
| | Net unrealized loss on investments | 16,297 |
| | — |
| | State income taxes | 67,069 |
| | 68,577 |
| | Partnership investments | — |
| | 47,991 |
| | Loss reserves | 1,044 |
| | 1,397 |
| | Alternative minimum tax credit carryforward | — |
| | 57,086 |
| | Goodwill and intangibles | 35,068 |
| | 36,947 |
| | Deferred policy acquisition and ceding commission costs | 15,288 |
| | 14,888 |
| | Share-based compensation | 10,776 |
| | 10,190 |
| | Other | 13,091 |
| | 16,421 |
| | Total deferred tax assets | 211,921 |
| | 318,799 |
| | Deferred tax liabilities: | |
| | |
| | Partnership investments | 639 |
| | — |
| | Differences in fair value of financial instruments | — |
| | 3,833 |
| | Net unrealized gain on investments | — |
| | 6,792 |
| | Depreciation | 12,201 |
| | 11,138 |
| | Other | 2,942 |
| | 2,446 |
| | Total deferred tax liabilities | 15,782 |
| | 24,209 |
| | Less: Valuation allowance | 64,496 |
| | 65,023 |
| | Net deferred tax asset | $ | 131,643 |
| | $ | 229,567 |
|
Tax Reform On December 22, 2017, H.R.1, the TCJA, was signed into law. In accordance with the provisions of the accounting standard regarding accounting for income taxes, changes in tax rates and tax law are accounted for in the period of enactment, which, for federal legislation, is the date the President signed the bill into law. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%, repealed the corporate alternative minimum tax and modified certain limitations on executive compensation. Under GAAP, the effect of tax rate changes on deferred tax balances is recorded as a component of the income tax provision related to continuing operations for the period in which the new tax law is enacted. Accordingly, in 2017, we recognized a non-cash income tax expense of $102.6 million related to the remeasurement of our net deferred tax assets, which was included as a component of the income tax provision for the year ended December 31, 2017. Additionally, as a result of finalizing our interpretation of related guidance, we completed our accounting in the fourth quarter of 2018 during the one-year measurement period from the enactment date, as provided under Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” issued by the SEC staff in December 2017. No material adjustments to our provisional amounts were required. For periods beginning after December 31, 2017, we began realizing a significant reduction in our annualized effective tax rate, before considering Discrete Items, primarily due to the reduction in the federal corporate tax rate from 35% to 21%.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | December 31, | | (In thousands) | 2016 | | 2015 | | DTAs: | | | | | Accrued expenses | $ | 41,219 |
| | $ | 38,456 |
| | Unearned premiums | 67,538 |
| | 87,609 |
| | NOL | 179,128 |
| | 342,002 |
| | Differences in fair value of financial instruments | — |
| | 7,767 |
| | Net unrealized loss on investments | 6,285 |
| | 9,801 |
| | State income taxes | 51,875 |
| | 46,914 |
| | Partnership investments | 73,918 |
| | 74,309 |
| | Loss reserves | 3,801 |
| | 4,720 |
| | Alternative minimum tax credit carryforward | 7,367 |
| | 5,923 |
| | Other | 49,511 |
| | 34,241 |
| | Total DTAs | 480,642 |
| | 651,742 |
| | DTLs: | |
| | |
| | Convertible and other long-term debt | 2,212 |
| | 16,654 |
| | Differences in fair value of financial instruments | 1,758 |
| | — |
| | Depreciation | 10,626 |
| | 6,397 |
| | Other | 7,356 |
| | 14,516 |
| | Total DTLs | 21,952 |
| | 37,567 |
| Less: Valuation allowance | 46,892 |
| | 36,230 |
| | Net DTA | $ | 411,798 |
| | $ | 577,945 |
|
Current and Deferred Taxes As of December 31, 2016,2018, we recorded a net current income tax payablereceivable of $130.9$43.8 million, which primarily consistsrelates to the unused portion of our qualified deposits relating to our IRS settlement, partially offset by liabilities of $33.6 million related to applying the standards of accounting for uncertainty in income taxes, and a current federal income tax recoverable of $3.5 million. Before consideration of uncertain tax positions, wetaxes. We have approximately $653.8$2.2 million of U.S. NOL carryforwards, $7.4 millionrelated to our March 2018 acquisition of alternative minimum tax credit carryforwards and $5.6 million of research and development tax credit carryforwards as of December 31, 2016.EnTitle, which is subject to limitation under IRC Section 382. To the extent not utilized, the U.S. NOL carryforwards will expire duringby tax years 2030 through 2032, the research and development tax credit carryforwards will expire during tax years 2031 through 2036 and the alternative minimum tax credit carryforwards have no expiration date.year 2038. Certain entities within our consolidated group have also generated DTAsdeferred tax assets of approximately $52$67.7 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Valuation Allowances At each balance sheet date, we assess our need forWe are required to establish a valuation allowance against our DTA, based on whetherdeferred tax assets when it is more likely than not that all or some portion of our DTAdeferred tax assets will not be realized. We weigh the potential effect ofAt each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative evidence, with the weight givennegative. This requires management to the evidence commensurate with the extent to which it can be objectively verified. In the fourth quarter of 2014, we reversed substantially all ofexercise judgment and make assumptions regarding whether our previously established DTA valuation allowance based on our analysis of significant positive, objectively verifiable evidence that outweighed all negative evidence and supported a conclusion that it was more-likely-than-not that substantially all of the Company’s DTAsdeferred tax assets will be realized.
In evaluating negative evidence, consideration was given to the extensive U.S. NOL Carryforward period. Based on management’s projections, including adverse scenarios consideredrealized in our sensitivity analysis, we expect to fully utilize our U.S. NOL Carryforward over approximately the next two years. Additionally, we currently have no Section 382 or other limitations on our ability to utilize our existing NOL.
future periods. We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to DTAsdeferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $46.9$64.5 million at December 31, 20162018 and $36.2$65.0 million at December 31, 2015.2017. Tax Benefit Preservation PlanMeasures Our ability to fully use ourWe currently have a tax assets such as NOLs and tax credit Carryforwards would be substantially limited if we experience an “ownership change” within the meaning of Section 382. Section 382 rules governing when a change in ownership occurs are complex and subject to interpretation; however, in general, an ownership change would occur if any “five-percent shareholders,” as defined under Section 382, collectively increase their ownership by more than 50 percentage points over a rolling three-year period. As of December 31, 2016, we have not experienced an ownership change under Section 382. However, if we were to experience a change in ownership under Section 382 in a future period, then we may be limited in our ability to fully utilize our NOL and tax credit Carryforwards in future periods.
In 2009, we adopted a Tax Benefit Preservation Plan (the “Plan”), which, as amended, was approved by our stockholders at our 2010, 2013 and 2016 annual meetings. We also adoptedbenefit preservation plan, together with certain amendments to our amended and restated bylaws (the “Bylaw Amendment”) and at our 2010, 2013 and 2016 annual meetings, our stockholders approved certain amendments to our amended and restated certificate of incorporation (the “Charter Amendment”(collectively, our “Tax Benefit Preservation Measures”). These steps were taken, that was established to protect our ability to utilize our NOLs and other tax assets and to attemptattributes by attempting to prevent an “ownership change” under U.S. federal income tax rules by discouraging andrules. Our Tax Benefit Preservation Measures expire in most cases restricting certain transfers of our common stock that would: (i) create or result in a person becoming a five-percent shareholder under Section 382 or (ii) increase the stock ownership of any existing five-percent shareholder under Section 382. The continued effectiveness of the Plan, the Bylaw Amendment and the Charter Amendment are subject to periodic examination by the Board and the reapproval of the Plan and the Charter Amendment by our stockholders every three years. There can be no assurance that our stockholders will reapprove the Plan and the Charter Amendment if we elect to present them to our stockholders again in the future.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
2019.
IRS Matter As previously disclosed,In July 2018, we arefinalized a settlement with the IRS related to adjustments we had been contesting adjustments resultingthat resulted from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposesopposed the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and has proposed denying the associated tax benefits of these items. We appealed these proposed adjustments
This settlement with the IRS resolved the issues and concluded all disputes related to Appealsthe IRS Matter. In the three-month period ended June 30, 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the settlement with the IRS as well as the reversal of certain previously accrued state and madelocal tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury of $85to settle its $31 million in June 2008 relatingobligation to the 2000 through 2004 tax years and $4 million in May 2010 relating to the 2005 through 2007 tax years in order to avoid the accrual of incremental above-market-rate interest with respect to the proposed adjustments. We attempted to reach a compromised settlement with Appeals, but in September 2014 we received Notices of Deficiency covering the 2000 through 2007 tax years that assert unpaid taxes and penalties of $157 million. The Deficiency Amount has not been reduced to reflect our NOL carryback ability. As of December 31, 2016, there also would be interest of approximately $136 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (estimated in the aggregate to be approximately $35 million as of December 31, 2016) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of $105 million, which are primarily associated with the disallowance of the previously filed carryback of our 2008 NOL to the 2006 and 2007 tax years. We currently believe that the disallowance of our 2008 NOL carryback is a precautionary position by the IRS, and that we will ultimately maintainin 2019, the benefit of this NOL carryback claim.
On December 3, 2014, we petitioned the Tax Court to litigate the Deficiency Amount. On September 1, 2015, we received a notice that the case had been scheduled for trial. However, the parties jointly filed, and the Tax Court approved, motions for continuance in this matter to postpone the trial date. Also, in February 2016, the Tax Court approved a joint motion to consolidate for trial, briefing and opinion our case with a similar case involving MGIC Investment Corporation. During 2016, we held several meetings withCompany expects the IRS in an attempt to reach a compromised settlementrefund to Radian the remaining $58 million that was previously on the issues presented in our dispute. In January 2017, the parties informed the Tax Court that they believe they have reached a basisdeposit. See Note 9 for a compromised settlement on the primary issues present in the case. The resolution must be reported to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCTadditional information about the matter. If we are unable to complete a compromised settlement, then the ongoing litigation could take several years to resolve and may result in substantial legal expenses. We can provide no assurance regarding the outcome of any such litigation or whether a compromised settlement with the IRS will ultimately be reached. We currently believe that an adequate provision for income taxes has been made for the potential liabilities that may result from this matter. However, if the ultimate resolution of this matter produces a result that differs materially from our current expectations, there could be a material impact on our effective tax rate, results of operations and cash flows.these qualified deposits.
Unrecognized Tax Benefits As of December 31, 2016,2018, we have $68.1$16.6 million of unrecognized tax benefits including $63.5 million of interest and penalties, that would affect the effective tax rate, if recognized. We have no interest or penalty accrued as of December 31, 2018. Our policy for the recognition of interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision, (benefit), of which $1.8 million, $0.8$2.2 million and $2.5$1.8 million were recorded for the years ended December 31, 2017 and 2016, 2015respectively. In 2018, we recorded an income tax benefit of $61.6 million for interest and 2014, respectively.penalties primarily related to our IRS settlement.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
A reconciliation of the beginning and ending unrecognized tax benefits is as follows: | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | Balance at beginning of period | $ | 123,951 |
| | $ | 123,028 |
| | Tax positions related to the current year: | | | | | Increases | 5,058 |
| | 2,343 |
| | Tax positions related to prior years: | | | | | Increases | 26,465 |
| | 24,122 |
| | Decreases | (43,146 | ) | | (1,437 | ) | | Settlements with taxing authorities | (52,353 | ) | | — |
| | Lapses of applicable statute of limitation | (26,423 | ) | | (24,105 | ) | | Balance at end of period | $ | 33,552 |
| | $ | 123,951 |
|
| | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | Balance at beginning of period | $ | 124,246 |
| | $ | 120,223 |
| | Tax positions related to the current year: |
|
| |
|
| | Increases | 1,203 |
| | 6,461 |
| | Decreases | (1,835 | ) | | (336 | ) | | Tax positions related to prior years: |
|
| |
|
| | Increases | 22,389 |
| | 22,734 |
| | Decreases | (1,406 | ) | | (2,102 | ) | | Lapses of applicable statute of limitation | (21,569 | ) | | (22,734 | ) | | Balance at end of period | $ | 123,028 |
| | $ | 124,246 |
|
Radian Group Inc.
NotesOur total net unrecognized tax benefits decreased by $90.4 million from December 31, 2017 to Consolidated Financial Statements - (Continued)
In previous years, we tookDecember 31, 2018, primarily due to a return position$43.1 million decrease in various jurisdictions that we are not required to remit taxes with regard to the income generated from our investment in certain partnership interests. Although we believe that theseprior year tax positions are more likely than notand a $52.4 million decrease due to succeed if adjudicated, measurementsettlements with taxing authorities. The settlement of the potential amountIRS Matter was the primary contributor to both of liability for state and local taxes and the potential for penalty and interest thereon is performed on a quarterly basis. Ourthese decreases. These decreases were partially offset by an increase of $26.5 million in our net unrecognized tax benefits related to prior years increased by $20.9 million during 2016.years. This net increase primarily reflects the impact of unrecognized tax benefits associated with our recognition of certain premium income. Although unrecognized tax benefits for this item decreased by $21.6 million due to the expiration of the applicable statute of limitations for the taxable period ended December 31, 2012,2014, the related amounts continued to impact subsequent years resultingand resulted in a corresponding increase to the unrecognized tax benefits related primarily to the 2013 taxable year.
As discussed above, we believe we have reached a basis for a compromised settlement with the IRS on the primary issues present in our case. The resolution must be reported to the JCT for review and cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the matter. However, overbenefits. Over the next 12twelve months, if we are able to achieve a compromised settlement with the IRS, then it is estimated that approximately $70.0 million ofour unrecognized tax benefits in the above tabular reconciliation may be reversed pursuantdecrease by approximately $6.5 million due to the accounting standard for uncertainexpiration of the applicable statute of limitations relating to the 2015 tax positions.
In the event we are not successful in defenseyear. The statute of limitations related to our tax positions taken for U.S. federal consolidated income tax purposes, andreturn remains open for which we have recorded unrecognized tax benefits, then such adjustments originating in NOL or NOL carryback years may serve as a reduction to our existing NOL.
The following calendar tax years listed2015-2017. Additionally, among the entities within our consolidated group, various tax years remain open to potential examination by major jurisdiction, remain subject to examination:state and local taxing authorities.
| | | U.S. Federal Corporation Income Tax (1)
| 2000 - 2007, 2013 - 2015 | Significant State and Local Jurisdictions (2)
| 2000 - 2015 |
______________________
| | (1) | For the 2000 through 2007 calendar tax years, we petitioned the Tax Court to litigate the IRS Notices of Deficiency resulting from the examination of our 2000 through 2007 consolidated federal income tax returns. This litigation relates to the recognition of certain tax benefits associated with our investment in a portfolio of non-economic REMIC residual interests. |
| | (2) | California, Florida, Georgia, New York, Ohio, Pennsylvania and New York City. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
11. Losses and Loss Adjustment Expenses All of the balance and activity of our consolidatedOur reserve for losses and loss adjustment expense relateLAE, at the end of each period indicated, consisted of:
| | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | Mortgage Insurance loss reserves | $ | 397,891 |
| | $ | 507,588 |
| Services loss reserves (1) | 3,470 |
| | — |
| | Total reserve for losses and LAE | $ | 401,361 |
| | $ | 507,588 |
|
______________________ | | | (1) | A majority of this amount is subject to reinsurance, with the related reinsurance recoverables reported in other assets in our consolidated balance sheet, and relates to the acquisition of EnTitle Direct, completed on March 27, 2018. See Note 8 for information about our use of reinsurance in our title insurance business. |
Radian Group Inc. Notes to the Mortgage Insurance segment. Consolidated Financial Statements (Continued)
The following table shows our mortgage insurance reserve for losses and LAE by category at the end of each period indicated: | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | Reserves for losses by category: | | | | | Prime | $ | 379,845 |
| | $ | 480,481 |
| | Alt-A | 148,006 |
| | 203,706 |
| | A minus and below | 101,653 |
| | 129,352 |
| IBNR and other (1) | 71,107 |
| | 83,066 |
| | LAE | 18,630 |
| | 26,108 |
| Reinsurance recoverable (2) | 6,816 |
| | 8,286 |
| | Total primary reserves | 726,057 |
| | 930,999 |
| | Pool | 31,853 |
| | 42,084 |
| | IBNR and other | 673 |
| | 1,118 |
| | LAE | 932 |
| | 1,335 |
| Reinsurance recoverable (2) | 35 |
| | — |
| | Total pool reserves | 33,493 |
| | 44,537 |
| | Total first-lien reserves | 759,550 |
| | 975,536 |
| Second-lien and other (3) | 719 |
| | 863 |
| | Total reserve for losses | $ | 760,269 |
| | $ | 976,399 |
|
| | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | Reserves for losses by category: | | | | | Prime | $ | 231,169 |
| | $ | 285,022 |
| | Alt-A and A minus and below | 119,527 |
| | 170,873 |
| | IBNR and other | 13,864 |
| | 16,021 |
| | LAE | 10,271 |
| | 13,349 |
| Reinsurance recoverable (1) | 10,992 |
| | 8,315 |
| | Total primary reserves | 385,823 |
| | 493,580 |
| Total pool reserves (2) | 11,640 |
| | 13,463 |
| | Total First-lien reserves | 397,463 |
| | 507,043 |
| Other (3) | 428 |
| | 545 |
| | Total reserve for losses | $ | 397,891 |
| | $ | 507,588 |
|
______________________ | | | (1) | Primarily related to expected payments underRepresents ceded losses on reinsurance transactions, including the Freddie Mac Agreement.QSR Program and the Single Premium QSR Program. These amounts are included in the reinsurance recoverables reported in other assets in our consolidated balance sheets. |
| | | (2) | Represents ceded losses on captive transactions, the QSR TransactionsIncludes reinsurance recoverable of $17 thousand and the Single Premium QSR Transaction.$35 thousand as of December 31, 2018 and December 31, 2017, respectively. |
| | | (3) | Does not include our Second-liensecond-lien PDR that is included in other liabilities. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
For the periods indicated, the following table presents information relating to our mortgage insurance reserve for losses, including our IBNR reserve and LAE, but excluding our Second-liensecond-lien mortgage loan PDR: | | | | Year Ended December 31, | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Balance at January 1, | $ | 976,399 |
| | $ | 1,560,032 |
| | $ | 2,164,353 |
| $ | 507,588 |
| | $ | 760,269 |
| | $ | 976,399 |
| Less: reinsurance recoverables (1) | 8,286 |
| | 26,665 |
| | 38,363 |
| | Less: Reinsurance recoverables (1) | | 8,350 |
| | 6,851 |
| | 8,286 |
| | Balance at January 1, net of reinsurance recoverables | 968,113 |
| | 1,533,367 |
| | 2,125,990 |
| 499,238 |
| | 753,418 |
| | 968,113 |
| | Add losses and LAE incurred in respect of default notices reported and unreported in: | | | | | | | | Add: Losses and LAE incurred in respect of default notices reported and unreported in: | | | | | | | Current year (2) | 206,383 |
| | 229,061 |
| | 351,184 |
| 135,291 |
| | 185,486 |
| | 206,383 |
| | Prior years | (3,516 | ) | | (29,647 | ) | | (105,545 | ) | (31,699 | ) | | (49,286 | ) | | (3,516 | ) | | Total incurred | 202,867 |
| | 199,414 |
| | 245,639 |
| 103,592 |
| | 136,200 |
| | 202,867 |
| | Deduct paid claims and LAE related to: | | | | | | | | Deduct: Paid claims and LAE related to: | | | | | | | Current year (2) | 11,410 |
| | 10,837 |
| | 13,562 |
| 5,856 |
| | 25,011 |
| | 11,410 |
| | Prior years | 406,152 |
| | 753,831 |
| | 824,700 |
| 210,092 |
| | 365,369 |
| | 406,152 |
| | Total paid | 417,562 |
| | 764,668 |
| | 838,262 |
| 215,948 |
| | 390,380 |
| (3) | 417,562 |
| | Balance at end of period, net of reinsurance recoverables | 753,418 |
| | 968,113 |
| | 1,533,367 |
| 386,882 |
| | 499,238 |
| | 753,418 |
| Add: reinsurance recoverables (1) | 6,851 |
| | 8,286 |
| | 26,665 |
| 11,009 |
| | 8,350 |
| | 6,851 |
| | Balance at December 31, | $ | 760,269 |
| | $ | 976,399 |
| | $ | 1,560,032 |
| $ | 397,891 |
| | $ | 507,588 |
| | $ | 760,269 |
|
______________________ | | | (1) | Related to ceded losses recoverable, if any, on captive reinsurance transactions, the QSR TransactionsProgram and the Single Premium QSR Transaction.Program. See Note 8 for additional information. |
| | | (2) | Related to underlying defaulted loans with a most recent default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
would be considered a current year default. For 2017, includes payments made on pool commutations, in some cases for loans not previously in default. | | | (3) | Includes the payment of $54.8 million made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017. |
Reserve Activity 2018 Activity Loss Reserves. Our mortgage insurance loss reserves at December 31, 2018 declined as compared to December 31, 2017, primarily as a result of the amount of paid claims continuing to outpace losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our incurred losses for 2018, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which declined from 10% at December 31, 2017 to 8% at December 31, 2018. The provision for losses during 2018 was positively impacted by favorable reserve development on prior year defaults, which was primarily driven by a reduction during the period in certain Default to Claim Rate assumptions for these prior year defaults compared to the assumptions used at December 31, 2017. The reductions in Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated. Hurricane Impact 2018/2017. During the third quarter of 2017, Hurricanes Harvey and Irma caused extensive property damage to areas of Texas, Florida and Georgia, as well as other general disruptions including power outages and flooding. Although the mortgage insurance we write protects the lenders from a portion of losses resulting from loan defaults, it does not provide protection against property loss or physical damage. Our Master Policies contain an exclusion against physical damage, including damage caused by floods or other natural disasters. Depending on the policy form and circumstances, we may, among other things, deduct the cost to repair or remedy physical damage above a de minimis amount from a claim payment and/or, under certain circumstances, deny a claim where (i) the property underlying a mortgage in default is subject to unrestored physical damage or (ii) the physical damage is deemed to be the principal cause of default. Following Hurricanes Harvey and Irma, we observed an increase in new primary defaults from FEMA Designated Areas associated with these hurricanes. As expected most of these hurricane-related defaults cured by the end of 2018, and at higher cure rates than the rates for our general population of defaults. We assigned a 3% Default to Claim Rate assumption to the new primary defaults from FEMA Designated Areas associated with Hurricanes Harvey and Irma that were reported subsequent to those two natural disasters and through February 2018. These incremental defaults did not have a material impact on our provision for losses in 2017 or 2018. Claims Paid. Total claims paid decreased for 2018, compared to 2017. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory. In addition, claims paid for 2017 were higher because they included payments that were made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017. 2017 Activity Our loss reserves at December 31, 2017 declined as compared to December 31, 2016, primarily as a result of the amount of paid claims and Cures continuing to outpace losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our total incurred loss for 2017, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which, except as discussed above for FEMA Designated Areas associated with Hurricanes Harvey and Irma, declined from 12% at December 31, 2016 to 10% at December 31, 2017. The provision for losses during 2017 was positively impacted by favorable reserve development on prior year defaults, which was primarily driven by a reduction during the period in certain Default to Claim Rate assumptions for these prior year defaults compared to the assumptions used at December 31, 2016. The reductions in Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated. 2016 Activity Our loss reserves at December 31, 2016 declined as compared to December 31, 2015, primarily as a result of the amount of paid claims continuing to exceed losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our total incurred loss for 2016, and they were impacted primarily by the number of new primary default notices received in the period and our related gross Default to Claim Rate
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
assumption applied to those new defaults, which declined from 13% at December 31, 2015 towas 12% as of December 31, 2016. The impact to incurred losses from reserve development on default notices reported in prior years was not significant during 2016. Total claims paid decreased for 2016 compared to 2015, primarily due to the elevated claim payments in 2015 associated with the BofA Settlement Agreement (discussed below).
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
2015 Activity
Our loss reserve declined in 2015 from December 31, 2014, primarily as a result of the volume of paid claims, Cures and Rescissions and Claim Denials having exceeded new default notices received. Total incurred losses for 2015 decreased by $46.2 million as compared to 2014. This decrease was driven primarily by a continued decline in the number of new current year defaults and a decrease in the Default to Claim Rate assumptions applied to such defaults. During the year ended December 31, 2015, we reduced our gross Default to Claim Rate assumption for new primary defaults from 16% to 13%, based on continued improvement observed in actual claim development trends. This favorable impact to current year defaults was partially offset by a decline in the favorable reserve development from prior year defaults, which, although still positive, provided less of a benefit to our provision for losses in 2015 as compared to 2014. The $29.6 million favorable development on prior year defaults observed in 2015 was driven primarily by a decrease in our actual and estimated Default to Claim Rate assumptions on prior year defaults, as a result of higher Cures than were previously estimated, partially offset by a decline in our estimates for future Rescissions and Claim Denials.
Total paid claims decreased for 2015 as compared to 2014 primarily due to the overall decline in defaulted loans and ongoing reduction in pending claims.
2014 Activity
Our loss reserve declined in 2014 from December 31, 2013, primarily as a result of the volume of paid claims, Cures and Rescissions and Claim Denials having exceeded new default notices received. Total incurred losses during 2014 primarily were the result of new default notices during 2014. The impact to incurred losses from default notices reported in 2014 was partially mitigated by favorable reserve development on prior year defaults, which was driven primarily by higher Cures and lower Claim Severity rates than were previously estimated. Our results of 2014 also include the impact of the BofA Settlement Agreement, as described below.
Reserve Assumptions Default to Claim Rate Our aggregate weighted averageweighted-average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 42% (40%33% (31% excluding pending claims) at December 31, 20162018 compared to 46% (42%31% (29% excluding pending claims) at December 31, 2015.2017. The changeincrease in our Default to Claim Rate in 2016 resulted2018 was primarily fromdriven by a decreasereduction in the proportionnumber of pending claims, which have higher Default to Claim Rates,defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma (which had a decrease in the assumed grosslower Default to Claim Rate for newof 3%). Excluding the impact of defaults from 13%associated with these FEMA Designated Areas, our aggregate weighted-average net Default to 12%, asClaim Rate (net of Claims Denials and Rescissions) was 33% at December 31, 20162018, as well as a decrease in our estimated claim rate on aged defaults not in Foreclosure Stage.compared to 38% at December 31, 2017. As of December 31, 2016,2018, our gross Default to Claim Rates on our primary portfolio ranged from 12%8% for new defaults, to 62%68% for other defaults not in Foreclosure Stage, and 81%75% for Foreclosure Stage Defaults. As of December 31, 2015,2017, these gross Default to Claim Rates ranged from 13%10% for new defaults, to 65%62% for other defaults not in Foreclosure Stage, and 81% for Foreclosure Stage Defaults. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans grouped according to the period in which the default occurred, as measured by the progress toward foreclosure sale and the number of months in default. Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our estimated Default to Claim Rate is generally based on our recent experience. Consideration is also given forto differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory, as well as the estimated impact of the BofA Settlement Agreement, as described below.inventory. Loss Mitigation AlthoughAs our estimatesinsurance written in years prior to and including 2008 has become a smaller percentage of our overall insured portfolio, a reduced amount of Loss Mitigation Activity has occurred with respect to the claims we receive, and we expect this general trend to continue. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses significantly. Our estimate of such net future Loss Mitigation Activities, have been declining, they remain elevated compared to levels experienced before 2009. The elevated levelsinclusive of our rate of Rescissions, Claim Denials and Claim Curtailments have significantly reduced our paid losses and have resulted in a reduction in our loss reserve. Our estimate of net future Loss Mitigation Activitiesclaim withdrawals, reduced our loss reserve as of December 31, 20162018 and 20152017 by approximately $39$32 million and $53$31 million, respectively. The amount of estimated Loss Mitigation Activities incorporated into our reserve analysis at any point in time is affected by a number of factors, including not only our estimated rate of Rescissions, Claim Denials and Claim Curtailments on future claims, but also the volume and attributes of our defaulted insured loans, our estimated Default to Claim Rate and our estimated Claim Severity, among other assumptions. Our assumptions also reflect the estimated impact of the BofA Settlement Agreement, as further discussed below.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
As our Legacy Portfolio has become a smaller percentage of our overall insured portfolio, we have undertaken a reduced amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as in recent years.
Our reported Rescission, Claim Denial and Claim Curtailment activity in any given period is subject to challenge by our lender and servicer customers. We expect that a portion of previous Rescissions will be reinstated and previous Claim Denials will be resubmitted with the required documentation and ultimately paid; therefore, we have incorporated this expectation into our IBNR reserve estimate. Our IBNR reserve estimate of $14.3$11.3 million and $26.610.4 million at December 31, 20162018 and 2015,2017, respectively, includes reserves for this activity. We also accrue for the premiums that we expect to refund to our lender customers in connection with our estimated Rescissions. Sensitivity Analysis We considered the sensitivity of first-lien loss reserve estimates at December 31, 20162018 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 101.0%96.0% of risk exposure at December 31, 2016)2018), we estimated that our loss reserves would change by approximately $6.33.8 million at December 31, 2016.2018. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 42%33% at December 31, 2016,2018, including our assumptions related to Rescissions and Claim Denials), we estimated a $14.510.4 million change in our loss reserves at December 31, 2016.2018. Agreements
BofA Settlement Agreement
On September 16, 2014, Radian Guaranty entered into the BofA Settlement Agreement in order to resolve various actual and potential claims or disputes related to the parties’ respective rights and duties as to mortgage insurance coverage on certain Subject Loans. Implementation of the BofA Settlement Agreement commenced on February 1, 2015 and was effectively completed by December 31, 2015.
The BofA Settlement Agreement provides that all claims decisions by Radian Guaranty on Legacy Loans covered by the agreement (including claims paid, coverage Rescissions, Claim Denials and Claim Curtailments) that were communicated on or before February 13, 2013 will become final and will not be subject to future challenge or adjustment. With respect to a group of loans referred to as Future Legacy Loans, the BofA Settlement Agreement provides that, subject to certain limited exceptions and conditions, Radian Guaranty will limit Rescissions, Claim Denials or Claim Curtailments on these loans. To the extent any such Loss Mitigation Activities previously have been taken on Future Legacy Loans, Radian Guaranty agreed to reinstate coverage and pay a reimbursement amount equal to the difference between the amount actually paid by Radian Guaranty and the eligible claim amount. Radian Guaranty further agreed that with respect to Future Legacy Loans it will not assert any origination error or servicing defect as a basis for a decision not to pay a claim, nor will it effect a Claim Curtailment of such claims; provided however, that Radian Guaranty retains the right to curtail Legacy Loans that were less than 90 days delinquent as of July 31, 2014 (“Potential Claim Curtailment Loans”) and any Future Legacy Loans serviced by a servicer other than the Insureds (a “Protected Claim Curtailment”).
The BofA Settlement Agreement further provides that for certain loans referred to as Servicing Only Loans: (i) if Radian Guaranty effected a claim payment on or before May 30, 2014, any Claim Curtailments on such loans will become final and will not be subject to future challenge, appeal or adjustment and (ii) for claim payments for Servicing Only Loans paid after May 30, 2014, Radian Guaranty will not make any Claim Curtailments (excluding Protected Claim Curtailments, which may continue in the ordinary course) and, to the extent any Claim Curtailments previously have been effected on such loans, Radian Guaranty will pay a reimbursement amount equal to the Claim Curtailment amount. The BofA Settlement Agreement does not affect Radian Guaranty’s right to effect Rescissions or Claim Denials on any Servicing Only Loans and any such Rescissions or Claim Denials will continue to be governed by the applicable Master Policies, subject to certain requirements in the BofA Settlement Agreement regarding the documents required to perfect such claims. Radian Guaranty further agreed not to assert any right to cancel coverage on any Subject Loan for failure to initiate certain proceedings (most commonly foreclosure proceedings) within the timelines set forth in the applicable Master Policies.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Freddie Mac Agreement
In August 2013, Radian Guaranty entered into the Freddie Mac Agreement, related to a group of first-lien mortgage loans guaranteed by Freddie Mac that were insured by Radian Guaranty and were in default as of December 31, 2011. At December 31, 2016 and 2015, Radian Guaranty had $63.9 million and $74.7 million, respectively, in the collateral account pursuant to the Freddie Mac Agreement. Subject to certain conditions in the Freddie Mac Agreement, amounts in the collateral account may be released to Radian Guaranty over time to the extent that Loss Mitigation Activity becomes final in accordance with the terms of that agreement. In accordance with these provisions, Radian Guaranty withdrew $11.7 million from this account in October 2016 related to Loss Mitigation Activity that had become final as of August 31, 2016. Following this withdrawal, if, as of August 29, 2017, the amount of additional Loss Mitigation Activity that has become final in accordance with the Freddie Mac Agreement is less than $64 million, then any shortfall will be paid to Freddie Mac from the funds remaining in the collateral account, subject to certain adjustments designed to allow for any Loss Mitigation Activity that has not become final or any claims evaluation that has not been completed as of that date. As of December 31, 2016, we have $57.4 million, recorded in reserve for losses, that we expect to be paid to Freddie Mac from the funds expected to be remaining in the collateral account as of the August 29, 2017 measurement date.
Additional Disclosures The following tables provide information as of and for the periods indicated about: (i) incurred losses, net of reinsurance; (ii) the total of IBNR liabilities plus expected development on reported claims, included within the net incurred loss amounts; (iii) the cumulative number of reported defaults; and (iv) cumulative paid claims, net of reinsurance. The default year represents the period that a new default notice is first reported to us by loan servicers, related to borrowers that missed two monthly payments. The information about net incurred losses and paid claims development for the years ended prior to 20162018 is presented as supplementary information. | | | | Incurred Losses, Net of Reinsurance | | | | | Incurred Losses, Net of Reinsurance | | | | | | | Year Ended December 31, | | As of December 31, 2016 | Year Ended December 31, | | As of December 31, 2018 | | ($ in thousands) | ($ in thousands) | | | Total of IBNR Liabilities Plus Expected Development on Reported Claims (1) | | Cumulative Number of Reported Defaults (2) | ($ in thousands) | | | Total of IBNR Liabilities Plus Expected Development on Reported Claims (1) | | Cumulative Number of Reported Defaults (2) | | | Unaudited | | | Unaudited | | | | Default Year | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | | | | 2007 | $ | 1,119,529 |
| $ | 1,211,075 |
| $ | 1,051,097 |
| $ | 1,126,173 |
| $ | 1,131,490 |
| $ | 1,135,617 |
| $ | 1,179,600 |
| $ | 1,174,723 |
| $ | 1,175,919 |
| $ | 1,178,745 |
| | $ | 46,136 |
| | 152,336 |
| | | 2008 |
| 1,957,510 |
| 1,715,144 |
| 1,969,581 |
| 2,009,551 |
| 2,018,794 |
| 2,074,295 |
| 2,088,719 |
| 2,110,922 |
| 2,115,083 |
| | 13,021 |
| | 215,837 |
| | | 2009 |
| 1,671,239 |
| 1,894,783 |
| 1,930,263 |
| 1,939,479 |
| 1,974,568 |
| 1,991,796 |
| 2,016,412 |
| 2,018,907 |
| | 1,896 |
| | 213,836 |
| $ | 1,671,239 |
| $ | 1,894,783 |
| $ | 1,930,263 |
| $ | 1,939,479 |
| $ | 1,974,568 |
| $ | 1,991,796 |
| $ | 2,016,412 |
| $ | 2,018,907 |
| $ | 2,022,629 |
| $ | 2,025,828 |
| | $ | 1,572 |
| | 213.836 |
| | 2010 |
| 1,102,856 |
| 1,215,136 |
| 1,192,482 |
| 1,195,056 |
| 1,207,774 |
| 1,220,289 |
| 1,218,264 |
| | 858 |
| | 146,324 |
| | 1,102,856 |
| 1,215,136 |
| 1,192,482 |
| 1,195,056 |
| 1,207,774 |
| 1,220,289 |
| 1,218,264 |
| 1,219,469 |
| 1,221,938 |
| | 1,019 |
| | 146.324 |
| | 2011 |
| 1,058,625 |
| 1,152,016 |
| 1,052,277 |
| 1,050,555 |
| 1,062,579 |
| 1,061,161 |
| | 881 |
| | 118,972 |
| | 1,058,625 |
| 1,152,016 |
| 1,052,277 |
| 1,050,555 |
| 1,062,579 |
| 1,061,161 |
| 1,059,116 |
| 1,060,376 |
| | 970 |
| | 118.972 |
| | 2012 |
| 803,831 |
| 763,969 |
| 711,213 |
| 720,502 |
| 715,646 |
| | 858 |
| | 89,845 |
| | 803,831 |
| 763,969 |
| 711,213 |
| 720,502 |
| 715,646 |
| 714,783 |
| 713,750 |
| | 586 |
| | 89.845 |
| | 2013 |
| 505,732 |
| 405,334 |
| 401,444 |
| 404,333 |
| | 936 |
| | 71,749 |
| | 505,732 |
| 405,334 |
| 401,444 |
| 404,333 |
| 402,259 |
| 400,243 |
| | 344 |
| | 71.749 |
| | 2014 |
| 337,784 |
| 247,074 |
| 265,891 |
| | 1,304 |
| | 58,215 |
| | 337,784 |
| 247,074 |
| 265,891 |
| 264,620 |
| 260,098 |
| | 241 |
| | 58.215 |
| | 2015 |
| 222,555 |
| 198,186 |
| | 2,277 |
| | 49,825 |
| | 222,555 |
| 198,186 |
| 178,042 |
| 183,952 |
| | 292 |
| | 49.825 |
| | 2016 |
| 201,016 |
| | 3,540 |
| | 46,264 |
| | 201,016 |
| 165,440 |
| 149,753 |
| | 428 |
| | 46.264 |
| | 2017 | | | 180,851 |
| 151,802 |
| | 1,212 |
| | 47.283 |
| | 2018 | | | �� | 131,513 |
| | 1,876 |
| | 39.598 |
| | | | Total |
| $ | 9,377,232 |
| |
|
| |
|
| | Total |
| $ | 6,299,253 |
| |
|
| |
|
|
______________________ | | | (1) | Represents reserves as of December 31, 20162018 related to IBNR liabilities and expected development on claims paid related to the Freddie Mac Agreement. As described above, we paid an initial claim amount related to that agreement in 2013.liabilities. |
| | | (2) | Represents total number of new default notices received in each calendar year as compiled monthly based on reports received from loan servicers. As reflected in our Default to Claim Rate assumptions, a significant portion of reported defaults generally do not result in a claim. In certain instances, a defaulted loan may cure, and then subsequently re-default in a later period. Consistent with our reserving practice, each new event of default is treated as a unique occurrence and therefore certain loans that cure and re-default may be included as a reported default in multiple periods. Included in this amount for the year ended December 31, 2018 and December 31, 2017 are 3,776 and 8,862 notices, respectively, of new primary defaults related to the FEMA Designated Areas associated with Hurricanes Harvey and Irma. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
| | | | Cumulative Paid Claims, Net of Reinsurance | Cumulative Paid Claims, Net of Reinsurance | | | Year Ended December 31, | Year Ended December 31, | | (In thousands) | (In thousands) | | (In thousands) | | | | Unaudited | | Unaudited | | | Default Year | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | | 2007 | $ | 100,435 |
| $ | 649,961 |
| $ | 860,777 |
| $ | 995,161 |
| $ | 1,055,536 |
| $ | 1,076,665 |
| $ | 1,098,686 |
| $ | 1,111,468 |
| $ | 1,130,932 |
| $ | 1,140,053 |
| | | 2008 |
| 189,458 |
| 740,578 |
| 1,297,867 |
| 1,635,069 |
| 1,744,559 |
| 1,872,804 |
| 1,932,283 |
| 2,022,019 |
| 2,051,495 |
| | | 2009 |
| 136,413 |
| 619,496 |
| 1,236,210 |
| 1,471,264 |
| 1,711,019 |
| 1,807,031 |
| 1,921,134 |
| 1,958,660 |
| $ | 136,413 |
| $ | 619,496 |
| $ | 1,236,210 |
| $ | 1,471,264 |
| $ | 1,711,019 |
| $ | 1,807,031 |
| $ | 1,921,134 |
| $ | 1,958,660 |
| $ | 1,986,076 |
| $ | 2,004,219 |
| | 2010 |
| 11,810 |
| 394,278 |
| 700,316 |
| 956,598 |
| 1,055,935 |
| 1,145,497 |
| 1,178,546 |
| | 11,810 |
| 394,278 |
| 700,316 |
| 956,598 |
| 1,055,935 |
| 1,145,497 |
| 1,178,546 |
| 1,198,031 |
| 1,210,281 |
| | 2011 |
| 40,392 |
| 323,216 |
| 756,820 |
| 892,959 |
| 982,830 |
| 1,016,855 |
| | 40,392 |
| 323,216 |
| 756,820 |
| 892,959 |
| 982,830 |
| 1,016,855 |
| 1,038,582 |
| 1,048,966 |
| | 2012 |
| 19,200 |
| 295,332 |
| 528,744 |
| 631,982 |
| 672,271 |
| | 19,200 |
| 295,332 |
| 528,744 |
| 631,982 |
| 672,271 |
| 692,291 |
| 702,136 |
| | 2013 |
| 34,504 |
| 191,040 |
| 307,361 |
| 357,087 |
| | 34,504 |
| 191,040 |
| 307,361 |
| 357,087 |
| 379,036 |
| 388,688 |
| | 2014 |
| 13,108 |
| 115,852 |
| 200,422 |
| | 13,108 |
| 115,852 |
| 200,422 |
| 233,607 |
| 246,611 |
| | 2015 |
| 10,479 |
| 84,271 |
| | 10,479 |
| 84,271 |
| 142,421 |
| 163,916 |
| | 2016 |
| 11,061 |
| | 11,061 |
| 76,616 |
| 119,357 |
| | 2017 | | | 24,653 |
| 66,585 |
| | 2018 | | | 5,584 |
| | | | Total |
| $ | 8,670,721 |
| | Total |
| $ | 5,956,343 |
| | | | All outstanding liabilities before 2007, net of reinsurance | | 27,327 |
| | All outstanding liabilities before 2009, net of reinsurance | | 33,479 |
| | | | Liabilities for claims, net of reinsurance (1) | | $ | 733,838 |
| | Liabilities for claims, net of reinsurance (1) | | $ | 376,389 |
|
______________________ | | | (1) | Calculated as follows: |
| | | | | | (In thousands) | | | Incurred losses, net of reinsurance | $ | 6,299,253 |
| | Add: All outstanding liabilities before 2009, net of reinsurance | 33,479 |
| | Less: Cumulative paid claims, net of reinsurance | 5,956,343 |
| | Liabilities for claims, net of reinsurance | $ | 376,389 |
|
| | | | | | | (In thousands) | | | | Incurred losses, net of reinsurance | | $ | 9,377,232 |
| | Add: All outstanding liabilities before 2007, net of reinsurance | | 27,327 |
| | Less: Cumulative paid claims, net of reinsurance | | 8,670,721 |
| | Liabilities for claims, net of reinsurance | | $ | 733,838 |
|
The following table provides a reconciliation of the net incurred losses and paid claims development tables above to the Mortgage Insurance reserve for losses and LAE in the consolidated balance sheet at December 31, 2016:2018: | | | | | | (In thousands) | December 31, 2018 | | Net outstanding liabilities - Mortgage Insurance: | | | Reserve for losses and LAE, net of reinsurance | $ | 376,389 |
| | Reinsurance recoverables on unpaid claims | 11,009 |
| | Unallocated LAE | 10,493 |
| Total gross reserve for losses and LAE (1) | $ | 397,891 |
|
| | | | | | (In thousands) | December 31, 2016 | | Net outstanding liabilities - Mortgage Insurance: | | | Reserve for losses and LAE, net of reinsurance | $ | 733,838 |
| | Reinsurance recoverables on unpaid claims | 6,851 |
| | Unallocated LAE | 19,580 |
| | Total gross reserve for losses and LAE | $ | 760,269 |
|
| | | (1) | Excludes Services reserve for losses and LAE of $3.5 million. |
The following is supplementary information about average historical claims duration as of December 31, 2016,2018, representing the average distribution of when claims are paid relative to the year of default: | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited) | | Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | | Mortgage Insurance | 6.1% | 34.5% | 31.4% | 13.8% | 7.4% | 4.1% | 2.9% | 1.5% | 1.2% | 0.9% |
| | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited) | | Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | | Mortgage Insurance | 5.6% | 34.2% | 29.2% | 14.2% | 7.4% | 4.6% | 3.3% | 2.4% | 1.5% | 0.8% |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
12. Long-Term DebtSenior Notes The carrying value of our long-term debtsenior notes at December 31, 20162018 and 20152017 was as follows: | | | | | | | | | | | | | December 31, | | ($ in thousands) | | 2018 | | 2017 | | 5.500% | Senior Notes due 2019 | $ | 158,324 |
| | $ | 157,636 |
| | 5.250% | Senior Notes due 2020 | 232,729 |
| | 231,834 |
| | 7.000% | Senior Notes due 2021 | 195,867 |
| | 195,146 |
| | 4.500% | Senior Notes due 2024 | 443,428 |
| | 442,458 |
| | | Total Senior Notes | $ | 1,030,348 |
| | $ | 1,027,074 |
|
| | | | | | | | | | | | | December 31, | | ($ in thousands) | | 2016 | | 2015 | | 9.000% | Senior Notes due 2017 | $ | — |
| | $ | 192,261 |
| | 5.500% | Senior Notes due 2019 | 296,907 |
| | 295,751 |
| | 5.250% | Senior Notes due 2020 | 345,308 |
| | 344,113 |
| | 7.000% | Senior Notes due 2021 | 344,362 |
| | — |
| | 3.000% | Convertible Senior Notes due 2017 | 20,947 |
| | 46,115 |
| | 2.250% | Convertible Senior Notes due 2019 | 62,013 |
| | 341,214 |
| | | Total long-term debt | $ | 1,069,537 |
| | $ | 1,219,454 |
|
Extinguishment of Debt 20162017 Activity
Repurchases of Senior Notes due 2019, 2020 and 2021. During the third quarter of 2017, pursuant to cash tender offers, we purchased aggregate principal amounts of $141.4 million, $115.9 million and $152.3 million of our Senior Notes due 2019, 2020 and 2021, respectively. We funded the purchases with $450.8 million in cash (plus accrued and unpaid interest due on the purchased notes). These purchases resulted in a loss on induced conversion and debt extinguishment of $45.8 million. At December 31, 2017, the remaining principal amounts of our outstanding Senior Notes due 2019, 2020 and 2021 were $158.6 million, $234.1 million and $197.7 million, respectively. Repurchases of Convertible Senior Notes due 2017 and 2019. During the second quarter of 2017, we purchased an aggregate principal amount of $21.6 million of our outstanding Convertible Senior Notes due 2017. We funded the purchases with $31.6 million in cash (plus accrued and unpaid interest due on the purchased notes). These purchases of Convertible Senior Notes due 2017 resulted in a loss on induced conversion and debt extinguishment of $1.2 million. In connection with our purchases of Convertible Senior Notes due 2017, we terminated a corresponding portion of the capped call transactions we entered into in 2010 related to the initial issuance of the Convertible Senior Notes due 2017. We received proceeds of $4.1 million for this termination. In November 2016, we announced our intent to exercise our redemption option for the remaining $68.0 million aggregate principal amount of our Convertible Senior Notes due 2019. As a result of the average closing price of our common stock exceeding the conversion price of $10.60 prior to the redemption date, all of the holders of these notes elected to exercise their conversion rights. Radian elected to settle all of the notes surrendered for conversion with cash. We settled our obligations with respect to these conversions on January 27, 2017, with a cash payment of $110.1 million. At the time of settlement, this transaction resulted in a pretax charge of $4.5 million, representing the difference between the fair value and the carrying value, net of unamortized issuance costs, of the liability component of the Convertible Senior Notes due 2019. This transaction also resulted in an aggregate decrease as of the settlement date of 6.4 million diluted shares for the purposes of determining diluted net income per share. As of December 31, 2017, there were no Convertible Senior Notes due 2017 or Convertible Senior Notes due 2019 outstanding.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
2016 Activity Repurchases of Convertible Senior Notes due 2017 and 2019. During 2016, we entered into privately negotiated agreements to purchase, for cash or a combination of cash and shares of Radian Group common stock, aggregate principal amounts of $30.1 million and $322.0 million, respectively, of our outstanding Convertible Senior Notes due 2017 and 2019. We funded the purchases with $235.0 million in cash (plus accrued and unpaid interest due on the purchased notes) and by issuing to certain of the sellers 17.0 million shares of Radian Group common stock. These purchases of Convertible Senior Notes due 2017 and 2019 resulted in a pretax charge of $60.1 million. This loss represents: the $41.8 million market premium representing the excess of the fair value of the total consideration delivered to the sellers of the Convertible Senior Notes due 2017 and 2019 over the fair value of the common stock issuable pursuant to the original conversion terms of the purchased notes; the $17.2 million difference between the fair value and the carrying value, net of unamortized issuance costs, of the liability component of the purchased notes; and the $1.1 million impact of related transaction costs. In connection with our privately negotiated purchases of Convertible Senior Notes due 2017 in March 2016, we terminated a corresponding portion of the capped call transactions we had entered into in 2010 related to the initial issuance of the Convertible Senior Notes due 2017. As a result of this termination, we received consideration of 0.2 million shares of Radian Group common stock, which was valued at $2.6 million based on a stock price on the closing date of $11.86. In accordance with the accounting standards regarding equity and contracts in an entity’s own equity, the total consideration received was recorded as an increase to additional paid-in capital. The shares of Radian Group common stock received were retired, resulting in a decrease in shares issued and outstanding and a corresponding increase in unissued shares. Redemption of Senior Notes due 2017. On August 12, 2016, we redeemed the remaining $195.5 million aggregate principal amount of our Senior Notes due 2017 for the price established in accordance with the indenture governing the notes. We paid $211.3 million in cash (including accrued interest through the redemption date) to holders of the notes at redemption and recorded a loss on debt extinguishment of $15.0 million.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Announced Redemption of Convertible Senior Notes due 2019. In November 2016, we announced our intent to exercise our redemption option for the remaining Convertible Senior Notes due 2019, of which $68.0 million aggregate principal was outstanding at December 31, 2016. Our obligations in connection with this redemption were settled on January 27, 2017. See Note 21 for additional details.
2015 Activity
Repurchase of Convertible Senior Notes due 2017. In June 2015, we entered into privately negotiated agreements with certain holders of our Convertible Senior Notes due 2017 to purchase an aggregate principal amount of $389.1 million of our outstanding Convertible Senior Notes due 2017 for a combination of cash and shares of Radian Group common stock. We funded the purchases with $126.8 million in cash (plus accrued and unpaid interest due on the purchased notes) and by issuing to the sellers 28.4 million shares of Radian Group common stock. These purchases of Convertible Senior Notes due 2017 resulted in a pretax charge of $91.9 million. This charge represents:
the $35.5 million market premium representing the excess of the fair value of the total consideration delivered to the sellers of the Convertible Senior Notes due 2017 over the fair value of the common stock issuable pursuant to the original conversion terms of the purchased notes;
the $52.3 million difference between the fair value and the carrying value of the liability component of the purchased notes; and
the $4.1 million net impact of transaction costs and unamortized debt issuance costs on the purchased notes.
In connection with our June 2015 purchases of our Convertible Senior Notes due 2017, we terminated a corresponding portion of the capped call transactions we had entered into in 2010 related to the initial issuance of the Convertible Senior Notes due 2017. As a result of this termination, we received total consideration of $54.9 million, consisting of 2.3 million shares of Radian Group common stock and $13.2 million in cash. In accordance with the accounting standards regarding equity and contracts in an entity’s own equity, the total consideration received was recorded as an increase to additional paid-in capital. The shares of Radian Group common stock received were retired, resulting in a decrease in shares issued and outstanding and a corresponding increase in unissued shares.
Senior Notes Senior Notes due 2019. In May 2014, in anticipation of the Clayton acquisition, we issued $300 million principal amount of Senior Notes due 2019 and received net proceeds of $293.8 million. TheThese notes mature on June 1, 2019 and bear interest at a rate of 5.500% per annum, payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2014. These notes mature on June 1, 2019. Senior Notes due 2020. In June 2015, we issued $350 million aggregate principal amount of Senior Notes due 2020 and received net proceeds of $343.3 million. These notes mature on June 15, 2020 and bear interest at a rate of 5.250% per annum, payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2015. Senior Notes due 2021. In March 2016, we issued $350 million aggregate principal amount of Senior Notes due 2021 and received net proceeds of $343.4 million. These notes mature on March 15, 2021 and bear interest at a rate of 7.000% per annum, payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2016. Senior Notes due 2024. In September 2017, we issued $450 million aggregate principal amount of Senior Notes due 2024 and received net proceeds of $442.2 million. These notes mature on October 1, 2024 and bear interest at a rate of 4.500% per annum, payable semi-annually on April 1 and October 1 of each year, with interest payments commencing on April 1, 2018. Redemption Terms in Senior Notes. We have the option to redeem the Senior Notes due 2019, 2020, 2021 and 20212024 in whole or in part, at any time or from time to time prior to maturity, at a redemption price equal to the greater of: (i) 100% of the aggregate principal amount of the notes to be redeemed or (ii) a “make-whole amount,” which is the sum of the present valuevalues of the remaining scheduled payments of principal and interest (excluding any portion of interest accrued to the redemption date) in respect of the notes to be redeemed, discounted to the redemption date at the applicable treasury rate plus 50 basis points, plus, in each case, accrued and unpaid interest thereon to, but excluding, the redemption date.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Covenants in Senior Notes. The Senior Notes due 2019, 2020, 2021 and 20212024 have covenants customary for securities of this nature, including covenants related to the payments of the notes, reports, compliance certificates and modification of the covenants. Additionally, the applicable indentures governing the Senior Notes due 2019, 2020 and 2021 include covenants restricting us from encumbering the capital stock of a
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
designated subsidiary (as defined in the respective indentures for the notes) or disposing of any capital stock of any designated subsidiary unless either all of the stock is disposed of or we retain more than 80% of the stock. Convertible Senior Notes due 2017. In November 2010, we issued $450 million principal amount13. Other Liabilities
The following table shows the components of 3.000% Convertible Senior Notes due 2017 and received proceeds of $391.3 million, which was net of underwriting expenses and the cost of capped call transactionsother liabilities as discussed further below. Interest on these notes is payable semi-annually on May 15 and November 15 of each year. The effective interest rate for the liability component of this debt is 9.75%. Pursuant to the original terms, holders of the remaining Convertible Senior Notes due 2017 may convert their notes fromdates indicated:
| | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | Deferred ceding commission | $ | 91,400 |
| | $ | 89,907 |
| | FHLB advances | 82,532 |
| | — |
| | Accrued compensation | 61,452 |
| | 67,687 |
| | Amount payable on the return of cash collateral under securities lending agreements | 11,699 |
| | 19,357 |
| | Current federal income taxes | — |
| | 96,740 |
| | Other | 86,576 |
| | 80,154 |
| | Total other liabilities | $ | 333,659 |
| | $ | 353,845 |
|
FHLB Advances In August 15, 2017 up to the close of business on the second scheduled trading day immediately preceding the maturity date (the “Conversion Period”), subject to certain conditions. Upon a conversion, we will pay cash up to the aggregate principal amount2016, Radian Guaranty and Radian Reinsurance became members of the notes to be converted and pay or deliver, asFHLB. As members, they may borrow from the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in respect of the remainder, if any, of our conversion obligation that is in excess of the aggregate principal amount of the notes being converted. The conversion rate initially is 85.5688 shares of our common stock per $1,000 principal amount of notes (corresponding to an initial conversion price of approximately $11.69 per share of common stock prior to the consideration of the capped call transactions discussed below). The conversion rate is subject to adjustment in certain events, but is not adjusted for any accrued and unpaid interest. In addition, following certain corporate events, we will, under certain circumstances increase the conversion rate for a holder who elects to convert their notes in connection with that corporate event. At December 31, 2016, we had approximately 13 million shares reserved to cover the potential issuance of shares under the Convertible Senior Notes due 2017. Holders of the notes will be able to exercise their conversion rights prior to the Conversion Period,FHLB, subject to certain conditions, onlywhich include the need to post collateral and the requirement to maintain a minimum investment in FHLB stock, in part depending on the level of their outstanding FHLB advances.
As of December 31, 2018, we had $82.5 million of fixed-rate advances outstanding with a weighted average interest rate of 2.73%. Interest on the FHLB advances is payable quarterly, or at maturity if the term of the advance is less than 90 days. As of December 31, 2018, $60.5 million of the FHLB advances mature in 2019, $3.0 million mature in 2020, $8.0 million mature in 2021, $9.0 million mature in 2023 and $2.0 million mature in 2024. Principal is due at maturity. For obligations with maturities greater than or equal to 90 days, we may prepay the debt at any time, subject to a prepayment fee calculation. The FHLB advances are required to be collateralized by eligible assets with a market value that must be maintained at a minimum of approximately 103% to 105% of the principal balance of the FHLB advances (based on the eligible collateral we have provided at December 31, 2018, which consisted of an aggregate amount of $88.4 million in U.S. government and agency securities and RMBS from fixed-maturities available for sale within our investment securities portfolio). Amount Payable on the Return of Cash Collateral under Securities Lending Agreements We participate in a securities lending program through which we loan certain securities in our investment portfolio to Borrowers for short periods of time. These securities lending agreements, whereby we transfer securities to third parties through an intermediary in exchange for cash or other securities, are considered collateralized financing arrangements. Amounts payable on the return of cash collateral under securities lending agreements are classified as other liabilities in our consolidated balance sheets. See Note 6 for additional information. Revolving Credit Facility On October 16, 2017, Radian Group entered into a three-year, $225.0 million unsecured revolving credit facility with a syndicate of bank lenders. Terms of the credit facility include an accordion feature that allows Radian Group, at its option, to increase the total borrowing capacity during the term of the agreement, subject to our obtaining the necessary increased commitments from lenders (which may include then existing or other lenders), up to a total of $300 million. Effective October 26, 2018, Radian Group exercised its rights under the following circumstances: | | 1. | During any calendar quarter after December 31, 2010 (and only during such calendar quarter), if the last reported sale price of our common stock for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter, is greater than or equal to 130% of the applicable conversion price on each applicable trading day;
|
| | 2. | During the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the notes (for each trading day during that measurement period) was less than 98% of the product of the last reported sale price of the common stock and the applicable conversion rate on such trading day; or
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| | 3. | Upon the occurrence of specified corporate events as described in the indenture for the notes. |
See “—Convertible Senior Notes due 2017accordion feature to add another global bank to the existing syndicate of bank lenders and 2019” below for information on accounting considerations related to convertible debt instruments thatincrease the amount of total commitments under the credit facility by $42.5 million, bringing the aggregate unsecured revolving credit facility to $267.5 million.
Subject to certain limitations, borrowings under the credit facility may be settled in cash upon conversion,used for working capital and general corporate purposes, including capital contributions to Radian Group’s insurance and reinsurance subsidiaries as well as growth initiatives. The credit facility contains customary representations, warranties, covenants, terms and conditions. Our ability to borrow under the balance sheet classification ofcredit facility is conditioned on the equity componentsatisfaction of certain convertible debt instruments, such as the Convertible Senior Notes due 2017, that require the issuerfinancial and other covenants, including covenants related to settle the aggregate principal amount of the notes in cash. During the three-month period ended December 31, 2016, our closing stock price did not exceed the threshold required for the holders of our Convertible Senior Notes due 2017 to be able to exercise their conversion rights during the three-month period ending March 31, 2017.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
In connectionminimum net worth and statutory surplus, a maximum debt-to-capitalization level, limits on certain types of indebtedness and liens, minimum liquidity levels and Radian Guaranty’s eligibility as a private mortgage insurer with the November 2010 offering of the convertible notes, we also entered into capped call transactions with an affiliate of Morgan Stanley, whose obligations have been guaranteed by Morgan Stanley. The capped call transactions are intended to offset the potential dilution to our common stock and/or any potential cash payments that may be required to be made by us upon conversion of the notes in excess of the principal amount of the notes, up to a stock price of approximately $14.11 per share, which is the initial cap on the counterparty’s share delivery obligation under the call options. If the market value per share of our common stock, as measured under the terms of the capped call transactions, exceeds the applicable cap price of the capped call transactions, the number of shares of our common stock and/or the amount of cash we expect to receive upon the exercise of the capped call transactions will be capped and the anti-dilutive and/or offsetting effect of the capped call transactions will be limited. We paid $46.1 million from the net proceeds from the issuance and sale of the convertible notes to purchase the capped call transactions.
The premium paid for the capped call transactions was recorded in additional paid-in capital in accordance with the accounting standard for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.
See “—Extinguishment of Debt—2016 Activity”and“—Extinguishment of Debt—2015 Activity,”above, for information on the repurchases of a substantial portion of the Convertible Senior Notes due 2017 and the termination of a corresponding portion of the related capped call transactions.
Convertible Senior Notes due 2019. In March 2013, we issued $400 million principal amount of 2.25% Convertible Senior Notes due 2019 and received proceeds of $389.8 million, net of underwriting expenses. Interest was payable semi-annually on March 1 and September 1 of each year. The effective interest rate for the liability component of this debt was 6.25%.
In November 2016, we announced our intent to exercise our redemption option for the remaining Convertible Senior Notes due 2019. Our obligations in connection with this redemption were settled on January 27, 2017. See above “—Extinguishment of Debt—2016 Activity—Announced Redemption of Convertible Senior Notes due 2019” and Note 21.
Convertible Senior Notes due 2017 and 2019. The Convertible Senior Notes due 2017 and 2019 are both accounted for under the accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), which states that issuers of such instruments should separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when the interest cost is recognized in subsequent periods. Our convertible notes fall within the scope of this standard due to our ability to elect to repay the conversion premium in cash. We have determined that the embedded conversion options in the convertible notes are not required to be separately accounted for as derivatives under the accounting standard for derivatives and hedging.
The carrying amount of each liability component was calculated by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of each equity component, representing the embedded conversion option, was determined by deducting the fair value of the liability component from the initial proceeds ascribed to each convertible note issuance as a whole. The excess of the principal amount of each liability component over its carrying amount is amortized as a component of interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity components are not remeasured as long as they continue to meet the conditions for equity classification as prescribed in the accounting standard for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard for determining whether an instrument (or an embedded feature) is indexed to an entity’s own stock.
GSEs. At December 31, 2018, Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Uponwas in compliance with all the original issuance of the Convertible Senior Notes due 2017 and 2019, in accordance with accounting standards related to convertible debt instruments that may be settled in cash upon conversion, the Company recorded a pretax equity component of $101.0 million and $77.0 million, respectively, net of the capped call transaction (with respect to the Convertible Senior Notes due 2017) and related issuance costs (with respect to the Convertible Senior Notes due 2017 and 2019). The pretax equity component is not subject to remeasurement, and therefore remains unchanged unless a reduction of outstanding principal occurs. As a result of our purchases during 2016, the remaining pretax equity component associated with the Convertible Senior Notes due 2017 and 2019 decreased from $11.3 million and $75.1 million, respectively, at December 31, 2015 to $5.0 million and $13.1 million, respectively, at December 31, 2016. See Note 10 for information on DTLs associated with our convertible and other long-term debt.
In any period when holders of the Convertible Senior Notes due 2017 are eligible to exercise their conversion option, the related equity component is reflected as mezzanine (temporary) equity rather than permanent equity, because we are required to settle the aggregate principal amount of the notes in cash. This equity component is the difference between: (i) the amount of cash deliverable upon conversion (i.e., par value of debt) and (ii) the carrying value of the debt.
Issuance and transaction costs incurred at the time of the issuance of the convertible notes were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. The convertible notes are reflected on our consolidated balance sheets as follows:
| | | | | | | | | | | | | | | | | | | Convertible Senior Notes due 2017 | | Convertible Senior Notes due 2019 | | | December 31, | | December 31, | | (In thousands) | 2016 | | 2015 | | 2016 | | 2015 | | Liability component: | | | | | | | | | Principal | $ | 22,233 |
| | $ | 52,370 |
| | $ | 68,024 |
| | $ | 389,992 |
| Debt discount, net (1) | (1,221 | ) | | (5,941 | ) | | (5,461 | ) | | (44,313 | ) | Debt issuance costs (1) | (65 | ) | | (314 | ) | | (550 | ) | | (4,465 | ) | | Net carrying amount | $ | 20,947 |
| | $ | 46,115 |
| | $ | 62,013 |
| | $ | 341,214 |
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______________________
| | (1) | Included within long-term debt and is being amortized over the life of the convertible notes. |
The following table sets forth total interest expense recognized related to the convertible notes for the periods indicated:
| | | | | | | | | | | | | | | | | | | Convertible Senior Notes due 2017 | | Convertible Senior Notes due 2019 | | | December 31, | | December 31, | | | 2016 | | 2015 | | 2016 | | 2015 | | (In thousands) | | | | | | | | | Contractual interest expense | $ | 872 |
| | $ | 7,359 |
| | $ | 3,426 |
| | $ | 8,925 |
| | Amortization of debt discount | 1,674 |
| | 12,621 |
| | 5,016 |
| | 12,487 |
| | Amortization of debt issuance costs | 88 |
| | 696 |
| | 505 |
| | 1,292 |
| | Total interest expense | $ | 2,634 |
| | $ | 20,676 |
| | $ | 8,947 |
| | $ | 22,704 |
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Covenants in Convertible Senior Notes due 2017 and 2019. The Convertible Senior Notes due 2017 and 2019 have covenants generally customary for securities of this nature, including covenants related to payments of the notes, reports, compliance certificates, the modification of covenants and maintaining Radian Group’s corporate existence.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Furthermore, the indentures for the Convertible Senior Notes due 2017 and 2019 include, among other terms, provisionsthere were no amounts outstanding under which the bankruptcy of Radian Group or the appointment of a receiver for Radian Group or for certain of its subsidiaries or other material assets would constitute an event of default under the indentures. Upon such a default, the note holders of the Convertible Senior Notes due 2017 or 2019 could declare the applicable notes due and payable (which may, under certain circumstances, be automatically accelerated), which would constitute an event of default under the indentures for the Senior Notes due 2019, 2020 and 2021. Certain events could cause our applicable insurance regulator to appoint a receiver for our insurance subsidiaries. If this occurred, it would, unless waived by a majority of the applicable note holders, constitute an event of default under the indentures for the Convertible Senior Notes due 2017 and 2019, and therefore, also cause an event of default under the indentures for the Senior Notes due 2019, 2020 and 2021.
revolving credit facility.
13.14. Commitments and Contingencies
Legal Proceedings We are routinely involved in a number of legal and regulatory claims, assertions, actions, reviews, and audits, as well as inquiries and investigations by various regulatory entities involving compliance with laws or other regulations, the outcome of which are uncertain. These legal proceedings could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business. In accordance with applicable accounting standards and guidance, we establish accruals only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We accrue the amount that represents our best estimate of the probable loss; however, if we can only determine a range of estimated losses, we accrue an amount within the range that, in our judgment, reflects the most likely outcome, and if none of the estimates within the range is more likely, we accrue the minimum amount of the range. In the course of our regular review of pending legal and regulatory matters, we determine whether it is reasonably possible that a potential loss may have a material impact on our liquidity, results of operations or financial condition. If we determine such a loss is reasonably possible, we disclose information relating to such potential loss, including an estimate or range of loss or a statement that such an estimate cannot be made. On a quarterly basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or range of losses based on such reviews. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. In addition, we generally make no disclosures for loss contingencies that are determined to be remote. For matters for which we disclose an estimated loss, the disclosed estimate reflects the reasonably possible loss or range of loss in excess of the amount accrued, if any. Loss estimates are inherently subjective, based on currently available information, and are subject to management’s judgment and various assumptions. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal and other proceedings, actual results may differ materially from any amounts that have been accrued. On December 22, 2016, Ocwen Loan Servicing, LLC and Homeward Residential, Inc. (collectively, “Ocwen”) filed a complaint against Radian Guaranty (the “Complaint”). Ocwen has also initiated legal proceedings against several other mortgage insurers. The action filed against Radian Guaranty, titled Ocwen, et al. v. Radian Guaranty, is pending in the U.S. District Court for the Eastern District of Pennsylvania. The Complaint alleges breach of contract and bad faith claims and seeks monetary damages and declaratory relief in regard to certain claims handling practices on future insurance claims. On December 17, 2016, Ocwen separately filed an arbitration petition against Radian Guaranty (the “Petition”) before the American Arbitration Association that asserts substantially the same allegations as contained in the Complaint (the Complaint and the Petition are collectively referred to as the “Filings”). The Filings list 9,420 mortgage insurance certificates issued under multiple insurance policies, including Pool Insurance policies, as being the subject of these proceedings. Radian Guaranty believes that the claims in the Filings are without merit and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the preliminary stage of the proceedings.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
We are also involved in litigation that has arisen in the normal course of our business. We are contesting the allegations in each such pending action and management believes, based on current knowledge and after consultation with counsel, that the outcome of such litigation will not have a material adverse effect on our consolidated financial condition. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of the matters currently pending or threatened could have an unanticipated adverse effect on our liquidity, financial condition or results of operations for any particular period.
We are subject to regulatory inquiries, investigations and reviews. In the past, we and other mortgage insurers have been subject to inquiries from the Minnesota Department of Commerce requesting information relating to captive reinsurance. We have cooperated with these requests for information. In June 2015, Radian Guaranty executed a Consent Order with the Minnesota Department of Commerce that resolved the Minnesota Department of Commerce’s outstanding inquiries related to captive reinsurance arrangements involving mortgage insurance in Minnesota without any findings of wrongdoing. As part of the Consent Order, Radian Guaranty paid an immaterial amount to Minnesota and agreed not to enter into new captive reinsurance arrangements for a period of ten years ending in June 2025. We have not entered into any new captive reinsurance arrangements since 2007.
In June 2015, we and other mortgage insurers received a letter from the Wisconsin OCI requesting information pertaining to customized insurance rates and terms offered to mortgage insurance customers. We submitted a response to the Wisconsin OCI in June 2015, as requested. Although we believe we are in compliance with applicable Wisconsin state law requirements for mortgage guaranty insurance, we cannot predict the outcome of this matter or whether additional inquiries, actions or proceedings may be pursued against us by the Wisconsin OCI or other regulators.
As described in Note 10, on September 4, 2014 we received formal Notices of Deficiency from the IRS related to certain losses and deductions resulting from our investment in a portfolio of non-economic REMIC residual interest. We believeinterests. As previously disclosed, we contested adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. In July 2018, we finalized a settlement with the IRS related to the adjustments we had been contesting. This settlement with the IRS resolved the issues and concluded all disputes related to the IRS Matter. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that an adequate provision for income taxes has been madewas previously on deposit. On December 22, 2016, Ocwen Loan Servicing, LLC and Homeward Residential, Inc. (collectively, “Ocwen”) filed a complaint in the U.S. District Court for the potential liabilitiesEastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract and bad faith claims and seeking monetary damages and declaratory relief. Ocwen has also initiated similar legal proceedings against several other mortgage insurers. On December 17, 2016, Ocwen separately filed a parallel arbitration petition against Radian Guaranty before the American Arbitration Association (“AAA”) asserting substantially the same allegations (the “Arbitration”). Ocwen’s filings together listed 9,420 mortgage insurance certificates issued under multiple insurance policies, including Pool Insurance policies, as subject to the dispute. On June 5, 2017, Ocwen filed an amended complaint and an amended petition (collectively, the “Amended Filings”) with both the court and the AAA, respectively, together listing 8,870 certificates as subject to the dispute. On April 11, 2018, the parties entered into a confidential agreement with respect to all certificates subject to the dispute. The confidential agreement resolved certain categories of claims involved in the dispute and, on April 12, 2018, the parties filed a stipulation of voluntary dismissal of the federal court proceeding and the trial judge issued an Order dismissing all claims and counterclaims subject to the parties’ agreement. Radian Guaranty was not required to make any payment in connection with this confidential agreement. Pursuant to the confidential agreement, the parties: (1) dismissed the federal court proceeding; (2) narrowed the scope of the dispute to Ocwen’s breach of contract claims
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
seeking payment of insurance benefits on approximately 2,500 certificates that may result from this matter. However,Ocwen was previously pursuing through the Amended Filings; and (3) agreed to resolve the remaining dispute through the Arbitration. Radian Guaranty believes that Ocwen’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if the ultimate resolutionany, or range of loss in this matter produces because of the current preliminary stage of the Arbitration. On August 31, 2018, Nationstar Mortgage LLC d/b/a resultMr. Cooper (“Nationstar”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract, bad faith, and unjust enrichment claims and seeking monetary damages and declaratory relief. The Complaint lists 3,014 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving insurance coverage decisions. The Complaint further lists 2,231 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving premium refund requests. Radian Guaranty believes that differs materiallyNationstar’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the preliminary stage of the litigation. We also are periodically subject to reviews and audits, as well as inquiries, information-gathering requests and investigations. In connection with these matters, from time to time we receive requests and subpoenas seeking information and documents related to aspects of our current expectations, there could be a material impact on our effective tax rate, results of operations and cash flows.business. Our Master Policies establish the timeline within which any suit or action arising from any right of an insured under the policy generally must be commenced. In general, any suit or action arising from any right of an insured under the policy must be commenced within two years after such right first arose for primary insurance and within three years for certain other policies, including certain Pool Insurance policies. Although we believe that our Loss Mitigation Activities are justified under our policies, we continue to face challenges from certain lender and servicer customers regarding our Loss Mitigation Activities, which have resulted in some reversals of our decisions regarding Rescissions, Claim Denials or Claim Curtailments. We are currently in discussions with these customers regarding Loss Mitigation Activities and our claim payment practices, which if not resolved, could result in arbitration or judicial proceedings and we may need to reassume the risk on, and increase loss reserves for, those policies or pay additional claims.See Note 11 for further information. Further, there are loans in our total defaulted portfolio (in particular, our older defaulted portfolio) for which actions or proceedings (such as foreclosure that provide the insured with title to the property) may not have been commenced within the outermost deadline in our Prior Master Policy. We are evaluating these loans regarding this potential violation and our corresponding rights under the Prior Master Policy. While we can provide no assurance regarding the ultimate resolution of these issues, it is possible that arbitration or legal proceedings could result. Other Securities regulations became effective in 2005 that impose enhanced disclosure requirements on issuers of ABS (including MBS)mortgage-backed securities). To allow our customers to comply with these regulations at that time, we typically were required, depending on the amount of credit enhancement we were providing, to provide: (i) audited financial statements for the insurance subsidiary participating in the transaction or (ii) a full and unconditional holding company-level guarantee for our insurance subsidiaries’ obligations in such transactions. Radian Group has guaranteed two structured transactions for Radian Guaranty involving approximately $110.2$87.8 million of remaining credit exposure as of December 31, 2016.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
2018.
We provide contract underwriting as an outsourced service to our customers. Under our current contract underwriting program the remedy we offer is limited indemnification to our contract underwriting customers only with respect to those loans that we simultaneously underwrite for both secondary market compliance and for potential mortgage insurance eligibility. In 2016, we did not pay any2018, payments for losses related to contract underwriting remedies.remedies were de minimis. In 2016,2018, our provision for contract underwriting expenses was $0.2 millionde minimis and our reserve for contract underwriting obligations at December 31, 20162018 was $0.5$0.2 million. We monitor this risk and negotiate our underwriting fee structure and recourse agreements on a client-by-client basis. We also routinely audit the performance of our contract underwriters.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
We lease office space for use in our operations. The lease agreements, which expire periodically through August 2032, contain provisions for scheduled periodic rent increases. Net rental expense in connection with these leases totaled $9.7 million in 2018, $5.7 million in 2017 and $5.0 million in 2016, $5.0 million in 2015 and $3.9 million in 2014, excluding the net rental expense related to discontinued operations.2016. The commitment for non-cancelable operating leases in future years is as follows: | | | | | | (In thousands) | | | 2019 | $ | 11,310 |
| | 2020 | 10,847 |
| | 2021 | 10,165 |
| | 2022 | 10,100 |
| | 2023 | 10,251 |
| | Thereafter | 56,317 |
| | Total | $ | 108,990 |
|
| | | | | | (In thousands) | | | 2017 | $ | 7,020 |
| | 2018 | 3,924 |
| | 2019 | 7,148 |
| | 2020 | 7,151 |
| | 2021 | 6,927 |
| | Thereafter | 56,429 |
| | Total | $ | 88,599 |
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At December 31, 2016,2018, there were no future minimum receipts expected from sublease rental payments.
14.15. Capital Stock
2018 Activity On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program, which expires on July 31, 2019. On August 9, 2017, Radian Group’s board of directors authorized a share repurchase program to spend up to $50 million to repurchase Radian Group common stock in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. Radian established a trading plan under Rule 10b5-1 of the Exchange Act to implement the program. The Company completed this program during the first half of 2018 by purchasing 3.0 million shares of Radian Group common stock at an average price of $16.56 per share, including commissions. 2017 Activity On June 29, 2016, Radian Group’s board of directors authorized a share repurchase program to spend up to $125 million to repurchase Radian Group common stock. In order to implement the program, Radian adopted a trading plan under Rule 10b5-1 of the Exchange Act during the third quarter of 2016. During the second quarter of 2017, 380 shares were purchased at an average price of $15.59 per share, which represented the only purchases made under the plan. This share repurchase program expired on June 30, 2017. 2016 Activity In the first quarter of 2016, we announced and completed a share repurchase program. Pursuant to this program, we purchased an aggregate of 9.4 million shares of Radian Group common stock for $100.2 million, at a weighted averageweighted-average price per share of $10.62, including commissions. No further purchase authority remains under this share repurchase program. As partial consideration for our March 2016 privately negotiated purchases of a portion of our Convertible Senior Notes due 2017 and 2019, we issued to the sellers 17.0 million shares of Radian Group common stock. In addition, in connection with our termination of the corresponding portion of the related capped call transactions, we received consideration of 0.2 million shares of Radian Group common stock. See Note 12 for additional information regarding these transactions. All shares of Radian Group common stock that we received from the above transactions were retired, resulting in a decrease in shares issued and outstanding and a corresponding increase in unissued shares. On June 29, 2016, Radian Group’s board of directors authorized a new share repurchase program to spend up to $125 million to repurchase Radian Group common stock. In order to implement the program, we adopted a trading plan under Rule 10b5-1 of the Exchange Act during the third quarter of 2016. As of December 31, 2016, no shares had been purchased and therefore the full purchase authority of up to $125 million remained available under this program, which expires on June 30, 2017.
2015 Activity
As partial consideration for our June 2015 privately negotiated purchases of a portion of our Convertible Senior Notes due 2017, we issued to the sellers 28.4 million shares of Radian Group common stock. In addition, in partial consideration for our termination of the corresponding portion of the related capped call transactions, we received 2.3 million shares of Radian Group common stock. See Note 12 for additional information regarding these transactions.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
On June 18, 2015, we authorized an ASR program to repurchase an aggregate of $202 million of Radian Group common stock. Under the ASR program, the total number of shares ultimately delivered to Radian Group was based on the average of the daily volume-weighted average price of Radian Group common stock during the term of the transaction, less a negotiated discount and subject to certain other adjustments pursuant to the terms and conditions of the program. During the three-month period ended June 30, 2015, 9.2 million shares were repurchased under this program. The counterparty delivered to Radian Group 1.8 million additional shares of Radian Group common stock at final settlement of the ASR program in August 2015, based on the calculated price of $18.32 during the term of the transaction. The shares of Radian Group common stock received pursuant to the ASR and the termination of the capped call transactions were retired, resulting in a decrease in shares issued and outstanding and a corresponding increase in unissued shares. All share repurchases pursuant to the ASR program were funded in the second quarter of 2015 from the proceeds of the Senior Notes due 2020.
Other Purchases We may purchase shares on the open market to settle stock options exercised by employees and to fund 401(k) matches and purchases under our ESPP.Employee Stock Purchase Plan. Through December 31, 2018, from time to time we also purchased shares on the open market
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
to fund certain 401(k) matches. In addition, upon the vesting of certain restricted stock awards under our equity compensation plans, we may withhold from such vested awards shares of our common stock to satisfy the tax liability of the award recipients.
Dividends Paid
In each of the quarters during 2018, 2017 and 2016, we declared quarterly cash dividends on our common stock equal to $0.0025 per share. 15.16. Share-Based and Other Compensation Programs
On May 14, 2014,10, 2017, our stockholders approved our most recent equity compensation plan,the Amended and Restated Equity Compensation Plan, which amended and restated the 2014 Equity Plan. The 2014 Equity Plan replaced our prior equity plan,In addition to the 2008Amended and Restated Equity Compensation Plan, which replaced our 1995 Equity Plan. Wewe also have awards outstanding under all three of theseour 2008 Equity Plans.Plan and 1995 Equity Plan. The last awards granted pursuant to the 2008 Equity Plan and 1995 Equity PlansPlan were granted in 2014 and 2008, respectively. All awards granted under the Equity Plans have been performance-based or time-vested awards in the form of non-qualified stock options, restricted stock, RSUs, phantom stock, or SARs.stock appreciation rights. The maximum contractual term for all awardsstock options and similar instruments under the Equity Plans is 10 years.years, although awards of these instruments may be granted with shorter terms. The 2014Amended and Restated Equity Compensation Plan authorizes the issuance of up to 6,423,1638,954,109 shares, of our common stock, plus such number of shares of common stock that were subject to awards outstanding awards that are payable in shares under the 2014 Equity Plan and the 2008 Equity Plan prior to the effective date of the Amended and which awardsRestated Equity Plan that subsequently terminate, expire or are cancelled and become available for issuance under the Amended and Restated Equity Compensation Plan (“Prior Plan Shares”). There were 1,004,1097,906,190 shares remaining available for grant under the 2014Amended and Restated Equity Compensation Plan as of December 31, 20162018 (the “share reserve”), which includes Prior Plan Shares. Each grant of restricted stock, RSUs, or performance share awards under the 2014Amended and Restated Equity Compensation Plan (other than those settled in cash) reduces the share reserve available for grant under the 2014Amended and Restated Equity Compensation Plan by 1.31 shares for every share subject to such grant. Absent this share reserve adjustment for outstanding restricted stock, RSUs, phantom stock or performance share awards, our shares remaining available for grant under the Amended and Restated Equity Compensation Plan would have been 11,108,244 shares as of December 31, 2018. Awards under the 2014Amended and Restated Equity Compensation Plan that provide for settlement solely in cash (and not common shares) do not count against the share reserve. Absent this reserve adjustment for restricted stock, RSUs, phantom stock or performance share Most awards our shares remaining available for grant under the 2014 Equity Plan would have been 4,269,701 shares as of December 31, 2016. Unless otherwise described below, awards under the Equity Plans include the following terms:
Generally, all awards require the grantee to remain in service with us through the vesting period, except in the event of the grantee’s death, disability, retirement or upon a change of control (subject to certain conditions discussed below).
Generally, the awards vest immediately upon a grantee’s death or disability, or at the end of the performance or service period inperiod. In the event of retirement.
a grantee’s death or disability, awards generally vest immediately. Upon retirement, awards generally vest immediately or at the end of the performance period, if any. Awards granted under the Equity Plans to officers and our non-employee directors provide for “double trigger” vesting in the event of a change of control, meaning thatcontrol. As a result, awards granted to officers will vest in connection with a change of control only in the event the grantee’s employment is terminated by us without cause or the grantee terminates employment for “good reason,” in each case within 90 days before or one year after the change of control. Generally, effective July 9, 2015, the performance RSUs granted Awards to executive officers includeour non-employee directors will vest in connection with a one-year post-vesting holding period, such that the vested awards will not be convertible into shares (other than shares withheld to pay taxes due at vesting) until the one-year anniversary following the vesting datechange of the awards, exceptcontrol only in the event the grantee fails to be appointed to the board of deathdirectors of the surviving entity or disability.
is not nominated for reelection, or fails to be reelected after nomination, to the board of directors of the Company or the surviving entity, in each case at any time beginning upon the change of control and ending 90 days following the first meeting of the stockholders of the Company or the surviving entity after the change in control. In the event of a hypothetical change of control as of December 31, 2016,2018, we estimate that the vesting of awards, assuming for purposes of this hypothetical that “double trigger” vesting occurred, would have resulted in a pretax accounting charge to us of approximately $11.3$19.7 million, representing the acceleration of compensation expense.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
We use the Monte Carlo valuation model to determine the fair value of all cash-settled awards where stock price is a factor in determining the vesting, as well as for cash- or equity-settled performance awards where there exists a similar stock price-based market condition. The Monte Carlo valuation model incorporates multiple input variables, including expected life, volatility, risk-free rate of return and dividend yield for each award to estimate the probability that a vesting condition will be achieved. In determining these assumptions for the Monte Carlo valuations, we consider historic and observable market data.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Depending on certain characteristics of the awards granted under the various Equity Plans noted above, they are accounted for as either liabilities or equity instruments. The following table summarizes awards outstanding and compensation expense recognized for each type of share-based award as of and for the years ended: | | | | | December 31, | | December 31, | | ($ in thousands) | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 | | Share-Based Compensation Programs | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liabilities: | | | | | | | | | | | | | | RSUs—Cash-Settled | | $ | 18 |
| | $ | (718 | ) | | $ | 3,595 |
| | $ | 10,244 |
| | $ | 65,157 |
| | $ | 31,834 |
| | SARs—Cash-Settled | | — |
| | — |
| | — |
| | 159 |
| | 595 |
| | 915 |
| | | Liabilities | | $ | 18 |
| | $ | (718 | ) | | $ | 3,595 |
| | $ | 10,403 |
| | $ | 65,752 |
| | $ | 32,749 |
| | | Liabilities: RSUs—Cash-Settled | | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 18 |
| | $ | (718 | ) | | Equity: | | | | | | | | | | | | | | | | | | | | | | | | | RSUs—Equity Settled | | 3,208,454 |
| | 13,285 |
| | 2,472,861 |
| | 9,243 |
| | 2,056,596 |
| | 7,461 |
| | 3,763,633 |
| | 16,591 |
| | 3,434,976 |
| | 12,206 |
| | 3,208,454 |
| | 13,285 |
| | Non-Qualified Stock Options | | 2,839,738 |
| | 3,286 |
| | 2,692,457 |
| | 2,984 |
| | 3,029,348 |
| | 2,531 |
| | 1,312,791 |
| | 603 |
| | 1,692,743 |
| | 851 |
| | 2,839,738 |
| | 3,286 |
| | Phantom Stock | | 234,174 |
| | 2 |
| | 230,196 |
| | 2 |
| | 284,645 |
| | 3 |
| | 234,427 |
| | 2 |
| | 234,302 |
| | 2 |
| | 234,174 |
| | 2 |
| | ESPP | | | | 449 |
| | | | 396 |
| | | | 267 |
| | | Employee Stock Purchase Plan | | | | | 453 |
| | | | 432 |
| | | | 449 |
| | Equity | | | | 17,022 |
| | | | 12,625 |
| | | | 10,262 |
| | | | 17,649 |
| | | | 13,491 |
| | | | 17,022 |
| | Total all share-based plans | | | | $ | 16,304 |
| | | | $ | 23,028 |
| | | | $ | 43,011 |
| | | | $ | 17,649 |
| | | | $ | 13,492 |
| | | | $ | 16,304 |
|
______________________ | | | (1) | For purposes of calculating compensation cost recognized, we generally consider time-vested awards effectively vested (and we recognize the full compensation costs) when grantees become retirement eligible. However, under the terms of our stock option awards granted in 2016, 2015, and 2014, legal vesting for retirement occurs when the grantee actually separates from service, with the exception of certain senior executives for whom vesting remains dependent on the stock price hurdle being met regardless of when the executive separates from service. Performance-based RSU awards granted in 2016, 2015, and 2014 provide that vesting remains dependent on the Company’s performance for the full term of the awards, notwithstanding the grantee’s earlier retirement. |
The following table reflects additional information regarding all share-based awards for the years indicated: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Total compensation cost recognized | $ | 17,649 |
| | $ | 13,492 |
| | $ | 16,304 |
| | Less: Costs deferred as acquisition costs | 324 |
| | 269 |
| | 206 |
| | Stock-based compensation expense | $ | 17,325 |
| | $ | 13,223 |
| | $ | 16,098 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Total compensation cost recognized | $ | 16,304 |
| | $ | 23,028 |
| | $ | 43,011 |
| | Less: Costs deferred as acquisition costs | 206 |
| | 500 |
| | 1,047 |
| | Stock-based compensation expense | $ | 16,098 |
| | $ | 22,528 |
| | $ | 41,964 |
|
RSUs (Cash-Settled) Performance-BasedTime-Vested RSUs— In 2012,At December 31, 2015, a total of 2,211,640 performance-based262,694 time-vested RSUs (to be settled in cash), originally granted to our non-employee directors during 2009 and 2010, remained outstanding. On February 10, 2016, these time-vested RSUs (to be settled in cash) were grantedconverted into time-vested RSUs to eligible officers underbe settled in common stock. Upon the 2008 Equity Plan. These performance-based RSUsdirector’s termination of service with us, the non-employee director generally will be entitled grantees to a cash amount equal to the fair market valueequivalent number of RSUs that vested at the endshares of a three-year performance period in 2015. There were no cash-settled performance-based RSUs granted after 2012.common stock.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Vesting of awards granted to both non-executives and executives in 2012 was dependent upon the performance of Radian Group’s TSR relative to the TSR of a performance peer group. Based on performance during the three-year performance period, grantees were entitled to a maximum payout of 200% of their target number of RSUs.
Timed-Vested RSUs—In 2014 and 2013, certain non-executive officers were granted 1,470 and 7,670, respectively, of cash-settled time-vested RSUs under the 2008 Equity Plan. The estimated fair value of the time-vested RSUs was based on the closing price of our common stock on the measurement date. These RSU awards entitle award recipients to a cash amount equal to the closing price of our common stock on the NYSE on the vesting date. These RSU awards vest in their entirety three years from the date of grant, or earlier, upon retirement, death or disability. No cash-settled time-vested RSUs were granted subsequent to 2014.
RSUs (Equity Settled) Information with regard to RSUs to be settled in stock for the periods indicated is as follows: | | | | | | | | | | Number of Shares | | Weighted-Average Grant Date Fair Value | Unvested, December 31, 2017 (1) | 3,434,976 |
| | $ | 12.90 |
| | Granted | 1,058,045 |
| | $ | 15.58 |
| | Vested | (258,845 | ) | | $ | 12.61 |
| | Forfeited | (470,543 | ) | | $ | 18.07 |
| Unvested, December 31, 2018 (1) | 3,763,633 |
| | $ | 13.04 |
|
| | | | | | | | | | Number of Shares | | Weighted Average Grant Date Fair Value | | Unvested, December 31, 2015 | 2,472,861 |
| | $ | 12.62 |
| | Granted | 1,264,858 |
| | $ | 11.79 |
| | Vested | (431,520 | ) | | $ | 13.47 |
| | Forfeited | (97,745 | ) | | $ | 16.00 |
| | Unvested, December 31, 2016 | 3,208,454 |
| | $ | 12.08 |
|
| | | (1) | Included in unvested amounts are certain awards to employees and non-employee directors that are exercisable upon termination or retirement. |
The weighted-average grant date fair value of RSUs granted during 2017 and 2016 was $16.84 and $11.79, respectively. The total fair value of RSUs vested during 2018, 2017 and 2016 was $3.3 million, $1.4 million, and $5.8 million, respectively. Performance-Based RSUs—In 2016, 20152018, 2017 and 2014,2016, executive and non-executive officers were granted a total of 701,110; 499,740; and 702,180; respectively, of performance-based RSUs to be settled in common stock.stock with target awards totaling 595,320, 456,510, and 701,110; respectively. The maximum payout at the end of the three-year performance period is 200% of a grantee’s target number of RSUs,RSUs. The maximum payout for awards based on the TSR Measures described below is generally subject to a maximum cap of six times the value of the grantee’s target award on the grant date. The vesting of the performance-based RSUs granted in 2018 to each executive officer and non-executive will be based upon the cumulative growth in Radian’s book value per share, adjusted for certain defined items, over a three-year performance period. The vesting of approximately 50% of the target awardsperformance-based RSUs granted to each executive officer in 2017 and 2016 is dependent upon (i) Radian Group’s TSR compared to the median TSR of a designated peer group of companies as of the date of grant (the “Relative TSR Measure”) and (ii) Radian Group’s absolute TSR (“Absolute TSR Measure,” and together with the Relative TSR Measure, the “TSR Measures”), in each case measured over a three-year performance period and subject to certain conditions. The remaining 50% of each executive officer’s target award will vest based on the cumulative growth in Radian’s book value per share, adjusted for certain defined items, over a three-year performance period. The vesting of performance-based RSUs granted to non-executives in 2017 is the same as described above for executive officers. The vesting of performance-based RSUs granted to non-executives in 2016 is entirely based on the Relative TSR Measures described above. The vesting of 100% of the target awards granted to executive officersabove and non-executives in 2015 and 2014 is dependent upon Radian Group’s TSR Measures, as described above.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
does not include a book value measure.
The grant date fair value of the performance-based RSUs that are based on the cumulative growth in Radian’s book value per share is determined usingcalculated based on the Monte Carlo valuation model. The following are assumptions used in our calculationstock price as of the grant date, discounted for the lack of dividends earned over the vesting period and the one-year post-vesting holding period, as applicable. The compensation cost that is recognized over the remaining requisite service period is based on our expectations of the probable level of achievement of the performance condition. The grant date fair value of the performance-based RSUs to be settled in common stock:that are based on TSR Measures is determined using a Monte Carlo valuation model using the following assumptions: | | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | Expected life | 3 years |
| | 3 years |
| | 3 years |
| 3 years |
| | 3 years |
| Risk-free interest rate (1) | 0.9 | % | | 1.0 | % | | 1.0 | % | 1.6 | % | | 0.9 | % | Volatility of Radian’s stock (2) | 29.7 | % | | 40.6 | % | | 71.9 | % | 28.0 | % | | 29.7 | % | Average volatility of peer companies (3) | 38.2 | % | | 24.0 | % | | 30.0 | % | 30.6 | % | | 38.2 | % | | Dividend yield | 0.08 | % | | 0.05 | % | | 0.06 | % | 0.06 | % | | 0.08 | % | Discount rate (4) | 10.7 | % | | 13.9 | % | | — | % | 10.7 | % | | 10.7 | % |
______________________ | | | (1) | The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. |
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
| | | (2) | Volatility of Radian’s stock is used in the calculation of the grant date fair value of the portion of the awards based on TSR Measures, as described above. Volatility of Radian’s stock is not an applicable assumption for valuing the portion of the awards based on the cumulative growth in Radian’s book value per share. Volatility is determined at the date of grant using the historical share price volatility and the expected life of each award. |
| | | (3) | Average volatility of peer companies is used in the calculation of the grant date fair value of the portion of the awards based on the Relative TSR Measures,Measure, as described above. |
| | | (4) | A discount is applied to executive officer awards to reflect illiquidity during the one-year post-vesting holding period. |
Also in 2017, 123,496 performance-based RSUs to be settled in common stock were granted to the Company’s former chief executive officer pursuant to the terms of his retirement agreement. Vesting for these performance-based RSUs only occurs if a stock price hurdle is met during the performance period, which begins 10 days prior to the first anniversary of the grant date and ends on the fifth anniversary of the grant date, or upon the death of the grantee or a change in control of the Company. The stock price hurdle requires that the closing price of our common stock on the New York Stock Exchange equals or exceeds 120% of the grant date share price, or $22.46, for 10 consecutive trading days during the performance period. Time-Vested RSUs—In 2016, a total of 273,726 shares Information with regard to grants of time-vested RSUs to be settled in common stock were granted, including 180,380 shares awarded to certain executives and non-executive officers and 93,346 shares awarded to non-employee directors. In 2015, a total of 113,141 shares of time-vested RSUs to be settled in common stock were granted, including 56,970 shares awarded to non-executive officers and 56,171 shares awarded to non-employee directors. In 2014, a total of 170,176 shares of time-vested RSUs to be settled in common stock were granted, including 85,133 shares awarded to non-executive officers and 85,043 shares awarded to non-employee directors. The grant date fair value ofis as follows for the time-vested RSUs was calculated based on the closing price of our common stock on the NYSE on the date of grant and is recognized as compensation expense over the vesting period. All of these awards generally are subject to three-year cliff vesting.periods indicated: | | | | | | | | | | | | | Year Ended December 31, | | | | 2018 | | 2017 (1) | | 2016 (2) | | | Time-vested RSUs granted to certain executives and non-executive officers | 385,962 |
| (1) | 372,489 |
| | 180,380 |
| | | Time-vested RSUs granted to non-employee directors | 76,763 |
| (3) | 68,337 |
| | 356,040 |
| (4) | Total time-vested RSUs granted (5) | 462,725 |
| | 440,826 |
| | 536,420 |
| |
______________________ | | | (1) | The time-vested RSU awards granted in 2018 and 2017 are scheduled to vest in: (i) pro rata installments on each of the first three anniversaries of the grant date or (ii) generally at the end of three years. |
| | | (2) | The time-vested RSU awards granted in 2016 generally are subject to three-year cliff vesting. |
| | | (3) | The time-vested RSU awards granted in 2018 to non-employee directors generally are subject to one-year cliff vesting. |
| | | (4) | Includes 262,694 time-vested awards granted on February 10, 2016 to convert the outstanding fully-vested 2009 and 2010 time-vested RSUs (to be settled in cash) awarded to our non-employee directors into time-vested RSUs to be settled in shares of our common stock on the conversion date (generally defined as a director’s termination of service with us). |
| | | (5) | The grant date fair value of time-vested RSUs was calculated based on the closing price of our common stock on the New York Stock Exchange on the date of grant, discounted for the lack of dividends earned over the vesting period, and is recognized as compensation expense over the service period. |
Non-Qualified Stock Options Information with regard to stock options for the periods indicated is as follows: | | | | | | | | | | | | | | | ($ in thousands, except per-share amounts) | Number of Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (1) | | Outstanding, December 31, 2017 | 1,692,743 |
| | $ | 8.16 |
| | | | | | Granted | — |
| | $ | — |
| | | | | | Exercised | (375,573 | ) | | $ | 3.79 |
| | | | | | Forfeited | (4,379 | ) | | $ | 14.38 |
| | | | | | Expired | — |
| | $ | — |
| | | | | | Outstanding, December 31, 2018 | 1,312,791 |
| | $ | 9.39 |
| | 4.9 | | $ | 9,500 |
| | Exercisable, December 31, 2018 | 966,478 |
| | $ | 7.91 |
| | 4.0 | | $ | 8,361 |
| | Available for grant, December 31, 2018 | 7,906,190 |
| | | | | | |
| | | | | | | | | | | | | | | ($ in thousands, except per-share amounts) | Number of Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | Outstanding, December 31, 2015 | 2,692,457 |
| | $ | 6.94 |
| | | | | | Granted | 342,090 |
| | $ | 12.18 |
| | | | | | Exercised | (162,998 | ) | | $ | 4.40 |
| | | | | | Forfeited | (31,811 | ) | | $ | 14.17 |
| | | | | | Expired | — |
| | $ | — |
| | | | | | Outstanding, December 31, 2016 | 2,839,738 |
| | $ | 7.64 |
| | 5.3 | | $ | 29,450 |
| | Exercisable, December 31, 2016 | 1,970,659 |
| | $ | 4.57 |
| | 3.9 | | $ | 26,440 |
| | Available for grant, December 31, 2016 | 1,004,109 |
| | | | | | |
| | | (1) | Based on the market price of $16.36 at December 31, 2018. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
The following table summarizes additional information concerning stock option activity for the periods indicated: | | | | | Years Ended December 31, | Years Ended December 31, | | ($ in thousands, except per-share amounts) | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | Granted (number of shares) | | 342,090 |
| | 212,230 |
| | 289,500 |
| — |
| | — |
| | 342,090 |
| Weighted average grant date fair value per share (1) | | $ | 9.72 |
| | $ | 14.68 |
| | $ | 12.18 |
| | Weighted-average grant date fair value per share (1) | | $ | — |
| | $ | — |
| | $ | 9.72 |
| | Aggregate intrinsic value of options exercised | | $ | 1,519 |
| | $ | 7,146 |
| | $ | 192 |
| $ | 6,274 |
| | $ | 14,389 |
| | $ | 1,519 |
| | Tax benefit of options exercised | | $ | 532 |
| | $ | 2,501 |
| | $ | 67 |
| $ | 1,318 |
| | $ | 5,036 |
| | $ | 532 |
| | Cash received from options exercised | | $ | 717 |
| | $ | 1,285 |
| | $ | 259 |
| $ | 1,425 |
| | $ | 7,131 |
| | $ | 717 |
|
______________________ | | | (1) | We use the Monte Carlo valuation model in determining the grant date fair value of stock options issued to executives and non-executives using the assumptions noted in the following table: |
| | | | | | | | | | | | Year Ended December 31, | | | 2016 | | 2015 | | 2014 | | Derived service period (years) | 3.02 - 4.00 |
| | 3.02 - 4.00 |
| | 2.99 - 3.96 |
| Risk-free interest rate (a) | 1.72 | % | | 2.32 | % | | 2.57 | % | Volatility (b) | 94.20 | % | | 93.70 | % | | 94.26 | % | | Dividend yield | 0.08 | % | | 0.05 | % | | 0.06 | % |
| | | | | Year Ended December 31, | | 2016 | | Derived service period (years) | 3.02 - 4.00 |
| Risk-free interest rate (a) | 1.72 | % | Volatility (b) | 94.20 | % | | Dividend yield | 0.08 | % |
______________________ | | | (a) | The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. |
| | | (b) | Volatility is determined at the date of grant using historical share price volatility and expected life of each award. |
Upon the exercise of stock options, we generally issue shares from the authorized, unissued share reserves when the exercise price is less than the treasury stock repurchase price and from treasury stock when the exercise price is greater than the treasury stock repurchase price. The following table summarizes information concerning outstanding and exercisable options at December 31, 2016:2018: | | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | | Range of Exercise Prices | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price | | $2.45 - $3.58 | 565,317 |
| | 3.4 | | $ | 2.45 |
| | 565,317 |
| | $ | 2.45 |
| | $5.76 - $7.06 | — |
| | 0.0 | | $ | — |
| | — |
| | $ | — |
| | $10.42 - $15.44 | 578,612 |
| | 6.0 | | $ | 13.53 |
| | 306,611 |
| | $ | 14.74 |
| | $18.42 | 168,862 |
| | 6.3 | | $ | 18.42 |
| | 20,000 |
| | $ | 18.42 |
| | | 1,312,791 |
| | 4.9 | | $ | 9.39 |
| | 891,928 |
| | $ | 7.03 |
|
| | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | | Range of Exercise Prices | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price | | $2.45 - $3.58 | 1,592,785 |
| | 4.1 | | $ | 2.83 |
| | 1,592,785 |
| | $ | 2.83 |
| | $5.76 - $7.06 | 43,674 |
| | 1.2 | | $ | 6.91 |
| | 43,674 |
| | $ | 6.91 |
| | $10.42 - $15.44 | 1,006,456 |
| | 6.7 | | $ | 13.17 |
| | 320,270 |
| | $ | 12.27 |
| | $18.42 | 196,823 |
| | 8.5 | | $ | 18.42 |
| | 13,930 |
| | $ | 18.42 |
| | | 2,839,738 |
| | 5.3 | | $ | 7.64 |
| | 1,970,659 |
| | $ | 4.57 |
|
Generally, the stock option awards have a 10-year term,four-year vesting period, with 50% of the award vesting on or after the third anniversary of the grant date and the remaining 50% of the award vesting on or after the fourth anniversary of the grant date, provided the applicable stock price performance hurdle is met, as described below. The fair value of stock options vested during the year ended December 31, 20162018 was $3.8 million.$1.3 million, as compared to $3.3 million in 2017 and $1.3 million in 2016. There were no stock options granted in 2017 and 2018. For stock option awards granted in 2016, 2015 and 2014, in addition to the time-based vesting requirements, the options contain a performance hurdle whereby the options will only vest if the closing price of our common stock on the NYSENew York Stock Exchange exceeds approximately $15.20 $23.03 and $19.30 (in each case, 125%(125% of the option exercise price), respectively, for 10 consecutive trading days ending on or after the third anniversary of the date of grant.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
We elected to apply the short-cut method, under the accounting standard regarding share-based payment, to account for the windfall tax benefits that may result from the exercise of stock options. Effective January 1, 2017, upon the implementation of the update to the accounting standard regarding stock-based compensation, future windfalls and shortfalls resulting from cancellations, expirations or exercises of stock options will be reflected in the consolidated statements of operations as part of our income tax provision (benefit), as they occur. See Note 2.
Employee Stock Purchase Plan We have anOn May 9, 2018, stockholders of Radian approved the Amended and Restated Radian Group Inc. ESPP, which amended and restated the Radian Group Inc. 2008 ESPP, under which 2,000,000 sharesEmployee Stock Purchase Plan. Under this plan, we issued 103,668; 105,476; and
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
151,121 shares to employees during the years ended December 31, 2018, 2017 and 2016, 2015respectively, and 2014, respectively.when amended in 2018, an additional 1,250,000 shares of our authorized but unissued common stock were reserved for issuance. In January 2019, we issued 51,187 shares from the shares available for issuance under our Amended and Restated Radian Group Inc. ESPP. As a result, 1,997,613 shares currently remain available for issuance under the Amended and Restated Radian Group Inc. ESPP. The 2008Amended and Restated Radian Group Inc. ESPP is designed to allow eligible employees to purchase shares of our common stock at a discount of 15% off the lower of the fair market value of our common stock at the beginning or end of a six monthsix-month offering period (each period being the first and second six months in a calendar year). The following are assumptions were used in our calculation of ESPPEmployee Stock Purchase Plan compensation expense during 2016:2018: | | | | | | | | | January 1, 2018 | | July 1, 2018 | | Expected life | 6 months |
| | 6 months |
| | Risk-free interest rate | 1.76 | % | | 2.43 | % | | Volatility | 31.49 | % | | 32.80 | % | | Dividend yield | 0.05 | % | | 0.06 | % |
| | | | | | | | | January 1, 2016 | | July 1, 2016 | | Expected life | 6 months |
| | 6 months |
| | Risk-free interest rate | 0.83 | % | | 0.92 | % | | Volatility | 32.99 | % | | 37.52 | % | | Dividend yield | 0.08 | % | | 0.10 | % |
Unrecognized Compensation Expense As of December 31, 2016, 2015 and 2014,2018, unrecognized compensation expense related to the unvested portion of all of our share-based awards was $11.323.9 million, $11.7 million and $17.5 million, respectively.. Absent a change of control under the Equity Plans, this expense is expected to be recognized over a weighted averageweighted-average period of approximately 2.1 years.
16.17. Benefit Plans
The Radian Group Inc. Savings Incentive Plan (“Savings Plan”) covers substantially all of our full-time and our part-time employees. Participants can contribute up to 100% of their base earnings as pretax and/or after-tax (Roth IRA) contributions up to a maximum amount of $18,000$18,500 for 2016.2018. The Savings Plan also includes a catch-up contribution provision whereby participants who are or will be age 50 and above during the Savings Plan year may contribute an additional contribution. The maximum catch-up contribution for the Savings Plan Year 2016in 2018 was $6,000.$6,000. Effective January 1, 2016,2018, we match up to 100% of the first 4.5%6.0% of base earnings contributed in any given year. Previously, in 2016 and 2017 the match was up to 100% of the first 6%4.5% of annual base earnings exclusive of Clayton, which had its own employee match of 25% of the first 6% of base earnings contributed in any given year. Beginning January 1, 2016, Clayton was merged into the Savings Plan.earnings. Our expense for matching funds for the years ended December 31, 2018, 2017 and 2016 2015was $6.1 million, $4.8 million and 2014 was $4.9 million, $3.1 million and $3.1 million, respectively. Certain of the benefits of this plan are as follows: allows for the immediate eligibility of new hire participation and provides for the automatic enrollment of eligible employees; provides for the immediate vesting of matching contributions (including existing unvested matching contributions attributable to prior periods) and the elimination of all restrictions (other than Radian Group’s Policy Regarding Securities Trading)Insider Trading Policy) on a participant’s ability to diversify his/her position in matching contributions; and permits Radian Group to make discretionary, pro rata (based on eligible pay) cash allocations to each eligible participant’s account, with vesting upon completion of three years of service with us. Other Contributions We contributed immaterial amounts to other postretirement benefit plans in 2016.2018.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
17.18. Accumulated Other Comprehensive Income (Loss)
The following table shows the rollforward of AOCIaccumulated other comprehensive income (loss) as of the periods indicated: | | | | Year Ended December 31, 2016 | Year Ended December 31, 2018 | | (In thousands) | Before Tax | | Tax Effect | | Net of Tax | Before Tax | | Tax Effect | | Net of Tax | | Balance at beginning of period | $ | (28,425 | ) | | $ | (9,948 | ) | | $ | (18,477 | ) | $ | 32,669 |
| | $ | 9,584 |
| | $ | 23,085 |
| | Cumulative effect of adopting the accounting standard update for financial instruments | | 284 |
| | 60 |
| | 224 |
| | Cumulative effect of adopting the accounting standard update for the reclassification of certain tax effects | | — |
| | (2,724 | ) | | 2,724 |
| | Balance adjusted for cumulative effect of adopting accounting standard updates | | 32,953 |
| | 6,920 |
| | 26,033 |
| | Other comprehensive income (loss) (“OCI”): | | | | | | | | | | | | Unrealized gains (losses) on investments: |
| |
| | | | | | | | | Unrealized holding gains (losses) arising during the period | 13,510 |
| | 4,728 |
| | 8,782 |
| (123,235 | ) | | (25,879 | ) | | (97,356 | ) | Less: Reclassification adjustment for net gains (losses) included in net income (1) | 3,463 |
| | 1,212 |
| | 2,251 |
| (13,000 | ) | | (2,730 | ) | | (10,270 | ) | | Net unrealized gains (losses) on investments | 10,047 |
| | 3,516 |
| | 6,531 |
| (110,235 | ) | | (23,149 | ) | | (87,086 | ) | | Net foreign currency translation adjustments | (724 | ) | | (250 | ) | | (474 | ) | 5 |
| | 1 |
| | 4 |
| | Net actuarial gains (losses) | 39 |
| | 14 |
| | 25 |
| 163 |
| | 34 |
| | 129 |
| | OCI | 9,362 |
| | 3,280 |
| | 6,082 |
| (110,067 | ) | | (23,114 | ) | | (86,953 | ) | | Balance at end of period | $ | (19,063 | ) | | $ | (6,668 | ) | | $ | (12,395 | ) | $ | (77,114 | ) | | $ | (16,194 | ) | | $ | (60,920 | ) | | | | | | | | | | | | | | | Year Ended December 31, 2015 | Year Ended December 31, 2017 | | (In thousands) | Before Tax | | Tax Effect | | Net of Tax | Before Tax | | Tax Effect | | Net of Tax | | Balance at beginning of period | $ | 79,208 |
| | $ | 27,723 |
| | $ | 51,485 |
| $ | (19,063 | ) | | $ | (6,668 | ) | | $ | (12,395 | ) | | OCI: | | | | | | | | | | | | Unrealized gains (losses) on investments: | | | | | | | | | | | | Unrealized holding gains (losses) arising during the period | (34,728 | ) | | (12,155 | ) | | (22,573 | ) | 46,235 |
| | 14,332 |
| | 31,903 |
| Less: Reclassification adjustment for net gains (losses) included in net income (1) (2) | 67,974 |
| | 23,791 |
| | 44,183 |
| | Less: Reclassification adjustment for net gains (losses) included in net income (1) | | (4,065 | ) | | (1,423 | ) | | (2,642 | ) | | Net unrealized gains (losses) on investments | (102,702 | ) | | (35,946 | ) | | (66,756 | ) | 50,300 |
| | 15,755 |
| | 34,545 |
| | Foreign currency translation adjustments: | | | | | | | | Unrealized foreign currency translation adjustments | | 225 |
| | 75 |
| | 150 |
| Less: Reclassification adjustment for liquidation of foreign subsidiary and other adjustments included in net income (2) | | (1,109 | ) | | (388 | ) | | (721 | ) | | Net foreign currency translation adjustments | (333 | ) | | (116 | ) | | (217 | ) | 1,334 |
| | 463 |
| | 871 |
| Activity related to investments recorded as assets held for sale (3) | (5,006 | ) | | (1,752 | ) | | (3,254 | ) | | | Net actuarial gains (losses) | 408 |
| | 143 |
| | 265 |
| 98 |
| | 34 |
| | 64 |
| | OCI | (107,633 | ) | | (37,671 | ) | | (69,962 | ) | 51,732 |
| | 16,252 |
| | 35,480 |
| | Balance at end of period | $ | (28,425 | ) | | $ | (9,948 | ) | | $ | (18,477 | ) | $ | 32,669 |
| | $ | 9,584 |
| | $ | 23,085 |
| | | | | | | | | | | | |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | Year Ended December 31, 2014 | | (In thousands) | Before Tax | | Tax Effect | | Net of Tax | | Balance at beginning of period | $ | 57,345 |
| | $ | 19,962 |
| | $ | 37,383 |
| | OCI: | | | | | | | Unrealized gains (losses) on investments: | | | | | | | Unrealized holding gains (losses) arising during the period | 21,204 |
| | 7,554 |
| | 13,650 |
| Less: Reclassification adjustment for net gains (losses) included in net income (1) | (1,599 | ) | | (560 | ) | | (1,039 | ) | | Net unrealized gains (losses) on investments | 22,803 |
| | 8,114 |
| | 14,689 |
| | Net foreign currency translation adjustments | (326 | ) | | (100 | ) | | (226 | ) | Activity related to investments recorded as assets held for sale (4) | (329 | ) | | (27 | ) | | (302 | ) | | Net actuarial gains (losses) | (285 | ) | | (226 | ) | | (59 | ) | | OCI | 21,863 |
| | 7,761 |
| | 14,102 |
| | Balance at end of period | $ | 79,208 |
| | $ | 27,723 |
| | $ | 51,485 |
|
| | | | | | | | | | | | | | | Year Ended December 31, 2016 | | (In thousands) | Before Tax | | Tax Effect | | Net of Tax | | Balance at beginning of period | $ | (28,425 | ) | | $ | (9,948 | ) | | $ | (18,477 | ) | | OCI: | | | | | | | Unrealized gains (losses) on investments: | | | | | | | Unrealized holding gains (losses) arising during the period | 13,510 |
| | 4,728 |
| | 8,782 |
| Less: Reclassification adjustment for net gains (losses) included in net income (1) | 3,463 |
| | 1,212 |
| | 2,251 |
| | Net unrealized gains (losses) on investments | 10,047 |
| | 3,516 |
| | 6,531 |
| | Net foreign currency translation adjustments | (724 | ) | | (250 | ) | | (474 | ) | | Net actuarial gains (losses) | 39 |
| | 14 |
| | 25 |
| | OCI | 9,362 |
| | 3,280 |
| | 6,082 |
| | Balance at end of period | $ | (19,063 | ) | | $ | (6,668 | ) | | $ | (12,395 | ) |
______________________ | | | (1) | Included in net gains (losses) on investments and other financial instruments onin our consolidated statements of operations. |
| | | (2) | During the second quarter of 2015, we sold equity securitiesIncluded in restructuring and other exit costs in our portfolio and reinvested the proceeds in assets that qualify as PMIERs-compliant Available Assets, recognizing pretax gainsconsolidated statements of $69.2 million. |
| | (3) | For 2015, this amount represents the recognition of investment gains included in income from discontinued operations, net of tax, as a result of the completion of the sale of Radian Asset Assurance on April 1, 2015. Previously, pursuant to accounting standards, such investment gains had been deferred and recorded in AOCI. |
| | (4) | Represents the unrealized holding gains (losses) arising during the period on investments recorded as assets held for sale, net of reclassification adjustments for net gains (losses) included in net income from discontinued operations. |
18. Discontinued Operations
On April 1, 2015, Radian Guaranty completed the sale of 100% of the issued and outstanding shares of Radian Asset Assurance for a purchase price of approximately $810 million, pursuant to the Radian Asset Assurance Stock Purchase Agreement.
Radian Asset Assurance provided direct insurance and reinsurance on credit-based risks. The assets and liabilities associated with the discontinued operations had historically been a source of significant volatility to Radian’s results of operations, due to various factors including fluctuations in fair value and credit risk. The divestiture was intended to better position Radian Guaranty to comply with the PMIERs (which are discussed in Note 1) and to support Radian’s strategic focus on the mortgage and real estate industries. After closing costs and other adjustments, Radian Guaranty received net proceeds of $789 million.
Based upon the applicable terms of the Radian Asset Assurance Stock Purchase Agreement, we determined that Radian Asset Assurance met the criteria for held for sale and discontinued operations accounting at December 31, 2014. As a result, we recognized a pre-tax impairment charge of $467.5 million for the year ended December 31, 2014 and an additional pre-tax impairment charge of $14.3 million through April 1, 2015, when the sale was completed. We recorded total net income from discontinued operations of $5.4 million related to this sale in 2015, consisting primarily of the recognition of investment gains previously deferred and recorded in AOCI and recognized as a result of the completion of the sale of Radian Asset Assurance to Assured on April 1, 2015, as well as adjustments to estimated transaction costs and taxes. The operating results of Radian Asset Assurance are classified as discontinued operations for all periods presented in our consolidated statements of operations. No general corporate overhead or interest expense was allocated to discontinued operations.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
The table below summarizes the components of income (loss) from discontinued operations, net of tax, for the periods indicated. There was no activity for discontinued operations in the year ended December 31, 2016.
| | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2015 | | 2014 | | Net premiums earned—insurance | $ | 1,007 |
| | $ | 37,194 |
| | Net investment income | 9,153 |
| | 35,633 |
| | Net gains (losses) on investments and other financial instruments | 21,486 |
| | 55,312 |
| | Change in fair value of derivative instruments | 2,625 |
| | 130,617 |
| | Other income | — |
| | 88 |
| | Total revenues | 34,271 |
| | 258,844 |
| | | | | | | Provision for losses | 502 |
| | 2,853 |
| | Policy acquisition costs | (191 | ) | | 6,340 |
| | Other operating expense | 4,107 |
| | 23,726 |
| | Total expenses | 4,418 |
| | 32,919 |
| | | | | | | Equity in net income (loss) of affiliates | (13 | ) | | (13 | ) | | Income (loss) from operations of businesses held for sale | 29,840 |
| | 225,912 |
| | Income (loss) on sale | (14,280 | ) | | (467,527 | ) | | Income tax provision (benefit) | 10,175 |
| | 58,442 |
| | Income (loss) from discontinued operations, net of tax | $ | 5,385 |
| | $ | (300,057 | ) |
19. Statutory Information We prepare our statutory financial statements in accordance with the accounting practices required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries. Required SAPP are established by a variety of NAIC publications, as well as state laws, regulations and general administrative rules. In addition, insurance departments have the right to permit other specific practices that may deviate from prescribed practices. As of December 31, 2016,2018, we did not have any prescribed or permitted statutory accounting practices that resulted in reported statutory surplus or risk-based capital being different from what would have been reported had NAIC statutory accounting practices been followed. Radian Group serves as the holding company for our insurance subsidiaries, through which we conduct our mortgage insurance business. These insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance departments in the various states where our insurance subsidiaries are domiciled or licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to state agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. The state insurance regulations include various capital requirements and dividend restrictions based on our insurance subsidiaries’ statutory financial position and results of operations, as described below. Our failure to maintain adequate levels of capital could lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition. As of December 31, 2016,2018, the amount of restricted net assets held by our consolidated insurance subsidiaries (which represents our equity investment in those insurance subsidiaries) totaled $3.0$3.6 billion of our consolidated net assets.
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
The ability of Radian’s mortgage insurance subsidiaries to pay dividends on their common stock is restricted by certain provisions of the insurance laws of Pennsylvania, their state of domicile. Under Pennsylvania’s insurance laws, dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance Commissioner approves the payment of dividends or other distributions from another source. In 2015 On March 31, 2017, we effectuatedreallocated $175 million of capital, in the form of cash and marketable securities, from Radian Guaranty to Radian Reinsurance. The reallocation was accomplished by way of an Extraordinary Distribution, approved by the Pennsylvania Insurance Department, from Radian Guaranty to Radian Group, and a reorganizationsimultaneous capital contribution from Radian Group to Radian Reinsurance in the same amount. These transactions resulted in a $175 million decrease in Radian Guaranty’s statutory policyholders’ surplus (i.e., statutory capital and surplus) and a corresponding increase in Radian Reinsurance’s statutory policyholders’ surplus. Until September 30, 2017, the reallocation of our mortgage insurance subsidiaries, which included a significant redistributioncapital had no impact on Radian Guaranty’s Available Assets under the PMIERs, because Radian Reinsurance was considered an exclusive affiliated reinsurer of assets and RIF among our legal entities. As a result
Radian Insurance and Radian Mortgage Insurance were transferredGroup Inc. Notes to Consolidated Financial Statements (Continued)
Radian Guaranty and, a newas such, Radian Guaranty’s Available Assets and Minimum Required Assets were determined on an aggregate basis, taking into account the assets and insured risk of Radian Guaranty and any exclusive affiliated reinsurers. However, effective in the third quarter of 2017, Radian Reinsurance is no longer considered an exclusive affiliated reinsurer Radian Reinsurance. None of the distributions from these entities were retained by Radian Group, as all proceeds were distributed to either Radian Guaranty, ordue to its participation in the credit risk transfer programs with Fannie Mae and Freddie Mac. Although this change impacted Radian Reinsurance.Guaranty’s Available Assets and Minimum Required Assets under the PMIERs, it did not affect Radian Guaranty’s compliance with the PMIERs financial requirements. At December 31, 2016,2018, although Radian Guaranty and Radian Reinsurance had statutory policyholders’ surplus of $814.1 million and $356.2 million, respectively, both companies had negative unassigned surplus balances, due primarily to the need for mortgage guaranty insurers to establish and maintain contingency reserves. Radian Guaranty had negative unassigned surplus of $691.3$701.9 million at December 31, 2018, compared to negative unassigned surplus of $679.9765.0 million at December 31, 2015.2017. Radian Reinsurance, which began operations in December 2015, had negative unassigned surplus of $118.4$84.8 million at December 31, 2016,2018, compared to negative unassigned surplus of $127.3$112.1 million at December 31, 2015 as a result of the establishment of contingency reserves.2017. If either of these insurers had positive unassigned surplus as of the end of the prior fiscal year, such insurer only may pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income. Due to the negative unassigned surplus balances at the end of 2016, 2018, no dividends or other distributions can be paid from Radian Guaranty or Radian Reinsurance without approval from the Pennsylvania Insurance Commissioner. NeitherIn addition to the payment of the $175 million Extraordinary Distribution by Radian Guaranty norin 2017, as described above, on December 21, 2018, Radian Guaranty distributed $450 million in capital, in the form of cash and marketable securities, to Radian Group. This transfer was approved by the Pennsylvania Insurance Department as an Extraordinary Distribution and resulted in a $450 million decrease in Radian Guaranty’s statutory policyholders’ surplus. Radian Reinsurance paiddid not pay any dividends or other distributions in 20162018 or 2015.2017. Radian Guaranty Radian Guaranty is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty insurance. It is a monoline insurer, restricted to writing first-lien residential mortgage guaranty insurance. Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, in certain states, a minimum ratio of statutory capital relative to the level of net RIF, or Risk-to-capital. There are 16 RBC States that currently impose a Statutory RBC Requirement. The most common Statutory RBC Requirement is that a mortgage insurer’s Risk-to-capital may not exceed 25 to 1. In certain of the RBC States, a mortgage insurer must satisfy ana MPP Requirement. The statutory capital requirements for the non-RBC States are de minimis (ranging from $1 million to $5 million); however, the insurance laws of these states generally grant broad supervisory powers to state agencies or officials to enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer, such as Radian Guaranty, is not in compliance with the Statutory RBC Requirement of that state, the mortgage insurer may be prohibited from writing new mortgage insurance business in that state. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States. Radian Guaranty was in compliance with the Statutory RBC Requirements or MPP Requirements, as applicable, in each of the RBC States as of December 31, 2016.2018. The NAIC is in the process of developing a new Model Act for mortgage insurers, which is expected to include, among other items, new capital adequacy requirements for mortgage insurers. In May 2016, a working group of Statestate regulators released an exposure draft of a risk-based capitalthis Model Act. The process for developing this framework to establish capital requirements for mortgage insurers.is ongoing. While the outcome and timing of this process are uncertain, the new Model Act, if and when finalized by the NAIC, has the potential to increase capital requirements in those states that adopt the Model Act. However, we continue to believe the changes to the Model Act will not result in financial requirements that require greater capital than the level currently required under the PMIERs Financial Requirements.financial requirements. See Note 1 for information regarding the PMIERs, which set requirements for private mortgage insurers to remain eligibleapproved insurers of loans purchased by the GSEs.
Radian Group Inc. Notes to Consolidated Financial Statements (Continued)
Radian Guaranty’s statutory net income, statutory policyholders’ surplus and contingency reserve as of or for the years ended December 31, 2016, 20152018, 2017 and 20142016 were as follows: | | | | | | | | | | | | | | | December 31, | | (In millions) | 2018 | | 2017 | | 2016 | | Statutory net income | $ | 501.9 |
| | $ | 445.1 |
| | $ | 480.8 |
| | Statutory policyholders’ surplus | 814.1 |
| | 1,201.0 |
| | 1,349.7 |
| | Contingency reserve | 2,109.9 |
| | 1,667.0 |
| | 1,260.6 |
|
| | | | | | | | | | | | | | | December 31, | | (In millions) | 2016 | | 2015 | | 2014 | | Statutory net income | $ | 480.8 |
| | $ | 754.8 |
| | $ | 273.7 |
| | Statutory policyholders’ surplus | 1,349.7 |
| | 1,686.5 |
| | 1,325.2 |
| | Contingency reserve | 1,260.6 |
| | 860.9 |
| | 389.4 |
|
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Radian Guaranty’s Risk-to-capital calculation appears in the table below. For purposes of the Risk-to-capital requirements imposed by certain states, statutory capital is defined as the sum of statutory policyholders’ surplus plus statutory contingency reserves. | | | | December 31, | December 31, | | ($ in millions) | 2016 | | 2015 | 2018 | | 2017 | RIF, net (1) | $ | 35,357.8 |
| | $ | 36,396.1 |
| $ | 40,711.3 |
| | $ | 36,793.5 |
| | | | | | | | | | Common stock and paid-in capital | $ | 2,041.0 |
| | $ | 2,041.4 |
| $ | 1,416.0 |
| | $ | 1,866.0 |
| | Surplus Note | — |
| | 325.0 |
| 100.0 |
| | 100.0 |
| | Unassigned earnings (deficit) | (691.3 | ) | | (679.9 | ) | (701.9 | ) | | (765.0 | ) | | Statutory policyholders’ surplus | 1,349.7 |
| | 1,686.5 |
| 814.1 |
| | 1,201.0 |
| | Contingency reserve | 1,260.6 |
| | 860.9 |
| 2,109.9 |
| | 1,667.0 |
| | Statutory capital | $ | 2,610.3 |
| | $ | 2,547.4 |
| $ | 2,924.0 |
| | $ | 2,868.0 |
| | | | | | | | | | Risk-to-capital | 13.5:1 |
| | 14.3:1 | 13.9:1 |
| | 12.8:1 |
______________________ | | | (1) | Excludes risk ceded through all reinsurance contracts (to third parties andprograms (including with affiliates) and RIF on defaulted loans. |
Radian Guaranty’s statutory capital increased by $56.0 million in 2018, primarily due to Radian Guaranty’s statutory net income of $501.9 million during the year, partially offset by the $450 million in distribution of capital to Radian Group, as described above. The net decreaseincrease in Radian Guaranty’s Risk-to-capital in 20162018 was primarily due to a decreasethe growth in IIF combined with the smaller overall increase in statutory capital due to the $450 million distribution of capital to Radian Group. Radian Guaranty’s net RIF at Radian Guaranty, resulting from insurance cededincreased during the year due to strong growth in NIW and IIF, partially offset by the increased reinsurance benefit pursuant to the Single Premium QSR Transaction during 2016, combined with statutory net income, which hadProgram and the effect of increasing statutory policyholders’ surplus. The effect of both of these items was mainly offset by the repayment of the $325 million Surplus Note on June 30, 2016.Excess-of-Loss Program. We have actively managed Radian Guaranty’s capital position in various ways, including: (i) through internal and external reinsurance arrangements; (ii) by seeking opportunities to reduce our risk exposure through commutations and other negotiated transactions; and (iii) by contributing additional capital from Radian Group. Radian Guaranty did not receive capital contributions from Radian Group in the year endedIn December 31, 2016. For the years ended December 31, 2015 and 2014, Radian Guaranty received capital contributions from Radian Group totaling $100.0 million and $100.0 million, respectively. In addition, in December 2015,2017, Radian Group transferred $325$100 million of cash and marketable securities to Radian Guaranty in exchange for a Surplus Note issued by Radian Guaranty. This Surplus Note hadhas a 0% interest rate and wasis scheduled to mature on December 31, 2025. However, Radian Guaranty repaid the2027. The Surplus Note in full on Junemay be redeemed at any time upon 30 2016.days prior notice, subject to the approval of the Pennsylvania Insurance Department.
Radian Reinsurance Effective December 2015, Radian Reinsurance is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to reinsure policies of mortgage guaranty insurance. Radian Reinsurance is only licensed or authorized to write direct mortgage guaranty insurance in Pennsylvania. Radian Reinsurance is required to maintain a minimum statutory surplus of $20 million to remain an authorized reinsurer in all states. Radian Reinsurance did not receive capital contributions from
Radian Group in the year ended December 31, 2016. During 2015, Radian Reinsurance received cash capital contributions from Radian Group totaling $50 million.Inc. Notes to Consolidated Financial Statements (Continued)
Radian Reinsurance’s statutory net income, statutory policyholders’ surplus and contingency reserve as of and for the years ended December 31, 20162018, 2017 and 20152016 were as follows: | | | | | | | | | | | | | | | December 31, | | (In millions) | 2018 | | 2017 | | 2016 | | Statutory net income | $ | 86.1 |
| | $ | 64.3 |
| | $ | 60.3 |
| | Statutory policyholders’ surplus | 356.2 |
| | 328.9 |
| | 147.6 |
| | Contingency reserve | 293.5 |
| | 234.0 |
| | 180.3 |
|
| | | | | | | | | | | December 31, | | (In millions) | 2016 | | 2015 | | Statutory net income (loss) | $ | 60.3 |
| | $ | (1.0 | ) | | Statutory policyholders’ surplus | 147.6 |
| | 138.7 |
| | Contingency reserve | 180.3 |
| | 128.8 |
|
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
Combined Risk-to-Capital Ratio and Other Mortgage Insurance Subsidiaries The Risk-to-capital ratio for our combined mortgage insurance operations was 13.612.8 to 1 as of December 31, 2016,2018, compared to 14.612.1 to 1 as of December 31, 2015.2017. In addition to Radian Guaranty and Radian Reinsurance, this combined ratio also includes RGRI, RMAI,Radian Guaranty Reinsurance, Radian Mortgage Assurance, Radian Investor Surety Inc., Radian Insurance, Radian Mortgage Insurance and Radian Mortgage Guaranty Inc. Radian Insurance is the only other entity that had any remaining RIF as of December 31, 2016,2018, totaling $35.8$15.0 million. The aggregate statutory net income, statutory policyholders’ surplus and contingency reserve for these sixfive subsidiaries as of and for the years ended December 31, 2016, 20152018, 2017 and 20142016 were as follows: | | | | | | | | | | | | | | | December 31, | | (In millions) | 2018 | | 2017 | | 2016 | | Statutory net income (loss) | $ | (2.8 | ) | | $ | 0.1 |
| | $ | (6.1 | ) | | Statutory policyholders’ surplus | 58.0 |
| | 58.6 |
| | 57.1 |
| | Contingency reserve | 1.7 |
| | 1.7 |
| | 1.5 |
|
| | | | | | | | | | | | | | | December 31, | | (In millions) | 2016 | | 2015 | | 2014 | | Statutory net income (loss) | $ | (6.1 | ) | | $ | 92.9 |
| | $ | 112.9 |
| | Statutory policyholders’ surplus | 57.1 |
| | 55.0 |
| | 473.7 |
| | Contingency reserve | 1.5 |
| | 1.1 |
| | 140.7 |
|
During 2015, Radian Mortgage Guaranty Inc. was newly establishedEnTitle Insurance’s statutory policyholders’ surplus and statutory net loss were $27.0 million and $1.8 million, respectively, as of and for the year ended December 31, 2018.
Through EnTitle Insurance, we maintain escrow deposits as a mortgage guaranty insurer domiciledservice to our customers. Amounts held in Pennsylvania,escrow and received capital contributionsexcluded from Radian Group totaling $20 million.assets and liabilities in our consolidated balance sheets totaled $4.7 million as of December 31, 2018. These amounts were held at third-party financial institutions and not considered assets of the Company. Should one or more of the financial institutions at which escrow deposits are maintained fail, there is no guarantee that we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage or otherwise. In the event of any such failure, we could be held liable for the disposition of these funds owned by third parties. Principal Differences between GAAP and SAPP The differences between the statutory financial statements and financial statements presented on a GAAP basis represent differences between GAAP and SAPP principally for the following reasons: | | | (a) | Under SAPP, mortgage guaranty insurance companies are required each year to establish a contingency reserve equal to 50% of premiums earned in such year. Such amount musteach year, generally to be maintained in the contingencyfor 10 years, whereas no such reserve for 10 years, after which time it is released to unassigned surplus. Prior to 10 years, the contingency reserve may be reduced with regulatory approval to the extent that losses in any calendar year exceed 35% of earned premiums for such year.required under GAAP. |
| | | (b) | Under SAPP, insurance policy acquisition costs are charged against operations in the year incurred.incurred, and considered in the recognition of unearned premiums. Under GAAP, such costs other than those incurred in connection with the origination of derivative contracts, are generally deferred and amortized. |
| | | (c) | Under SAPP, incomedeferred tax expense is calculated on the basis of amounts currently payable. Generally, DTAs are recognized under both SAPP and GAAP when it is more likely than not that the DTA will be realized. However, SAPP standards impose additional admissibility requirements whereby DTAsassets are only recognized to the extent they are expected to be recovered within a one- to three-year period subject to a capital and surplus limitation. Changes in DTAsdeferred tax assets and DTLsdeferred tax liabilities are recognized as a direct benefit or charge to unassigned surplus, whereas under GAAP changes in DTAsdeferred tax assets and DTLs, except for changes in unrealized gains and losses on available-for-sale securities,deferred tax liabilities are generally recorded as a component of income tax expense. |
| | | (d) | Under SAPP, investment grade fixed-maturity investments are generally valued at amortized cost and below-investment grade securities are carried at the lower of amortized cost or market value.cost. Under GAAP, those investments that the statutory insurance entities do not have the ability or intent to hold to maturity are considered to be either available for sale or trading securities and aregenerally recorded at fair value, with the unrealized gain or loss recognized, net of tax, as an increase or decrease to stockholders’ equity or current operations, as applicable.value. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
| | | (e) | Under SAPP, certain assets, designated as non-admitted assets, are charged directly against statutory surplus. Such assets are reflected on our GAAP financial statements. |
| | (f) | Prior to January 1, 2013, under SAPP, the accounting standard regarding share-based payments was not applicable, with regard to the recognition and measurement of stock option issuances. However, effective January 1, 2013, the NAIC adopted SSAP No. 104, Share-Based Payments (“SSAP 104”), on a prospective basis. Therefore, expenses related to stock options granted subsequent to the date of adoption of SSAP 104 are recognized under SAPP but expenses related to stock options granted prior to the date of adoption continue to not be recognized under SAPP. Expenses related to stock options, regardless of the date of grant, are reflected on our GAAP financial statements in accordance with this standard.
|
| | (g) | Under SAPP, premiums written on a multi-year basis are initially deferred as unearned premiums. A portion of the premium written, which corresponds to the insurance policy acquisition costs, is earned immediately and the remaining premiums written are earned over the policy term. Under GAAP, these premiums written on a multi-year basis are initially deferred as unearned premiums and are earned over the policy term. |
| | (h) | Under SAPP, capital contributions satisfied by receipt of cash or readily marketable securities subsequent to the balance sheet date but prior to the filing of the statutory financial statement are treated as a recognized subsequent event and, as such, are considered an admitted asset based on the evidence of collection and approval of the domiciliary commissioner. Under GAAP, such capital contributions are treated as a non-recognized subsequent event. |
Radian Group Inc.
Notes to Consolidated Financial Statements - (Continued)
20. Quarterly Financial Data (Unaudited) | | | | 2016 Quarters (1) | 2018 Quarters | | (In thousands, except per-share amounts) | First | | Second | | Third | | Fourth | | Year | First | | Second | | Third | | Fourth | | Year | | Net premiums earned—insurance | $ | 220,950 |
| | $ | 229,085 |
| | $ | 238,149 |
| | $ | 233,585 |
| | $ | 921,769 |
| $ | 242,550 |
| | $ | 251,344 |
| | $ | 258,431 |
| | $ | 261,682 |
| | $ | 1,014,007 |
| | Services revenue | 32,849 |
| | 40,263 |
| | 45,877 |
| | 49,905 |
| | 168,894 |
| 33,164 |
| | 36,828 |
| | 36,566 |
| | 38,414 |
| | 144,972 |
| | Net investment income | 27,201 |
| | 28,839 |
| | 28,430 |
| | 28,996 |
| | 113,466 |
| 33,956 |
| | 37,473 |
| | 38,995 |
| | 42,051 |
| | 152,475 |
| | Net gains (losses) on investments and other financial instruments | 31,286 |
| | 30,527 |
| | 7,711 |
| | (38,773 | ) | | 30,751 |
| (18,887 | ) | | (7,404 | ) | | (4,480 | ) | | (11,705 | ) | | (42,476 | ) | | Provision for losses | 42,991 |
| | 49,725 |
| | 55,785 |
| | 54,287 |
| | 202,788 |
| 37,283 |
| | 19,337 |
| | 20,881 |
| | 27,140 |
| | 104,641 |
| | Policy acquisition costs | 6,389 |
| | 5,393 |
| | 6,119 |
| | 5,579 |
| | 23,480 |
| 7,117 |
| | 5,996 |
| | 5,667 |
| | 6,485 |
| | 25,265 |
| | Cost of services | 23,550 |
| | 27,365 |
| | 29,447 |
| | 33,812 |
| | 114,174 |
| 23,126 |
| | 24,205 |
| | 25,854 |
| | 24,939 |
| | 98,124 |
| | Other operating expenses | 57,188 |
| | 63,173 |
| | 62,119 |
| | 62,416 |
| | 244,896 |
| 63,243 |
| | 70,184 |
| | 70,125 |
| | 77,266 |
| | 280,818 |
| | Loss on induced conversion and debt extinguishment | 55,570 |
| | 2,108 |
| | 17,397 |
| | — |
| | 75,075 |
| | | Amortization and impairment of intangible assets | 3,328 |
| | 3,311 |
| | 3,292 |
| | 3,290 |
| | 13,221 |
| | | Restructuring and other exit costs | | 551 |
| | 925 |
| | 4,464 |
| | 113 |
| | 6,053 |
| | Amortization and impairment of other acquired intangible assets | | 2,748 |
| | 2,748 |
| | 3,472 |
| | 3,461 |
| | 12,429 |
| | Net income | 66,249 |
| | 98,112 |
| | 82,803 |
| | 61,089 |
| | 308,253 |
| 114,486 |
| | 208,949 |
| | 142,797 |
| | 139,779 |
| | 606,011 |
| Diluted net income per share (2) | $ | 0.29 |
| | $ | 0.44 |
| | $ | 0.37 |
| | $ | 0.27 |
| | $ | 1.37 |
| | | Weighted average shares outstanding-diluted | 239,707 |
| | 226,203 |
| | 225,968 |
| | 224,776 |
| | 229,258 |
| | Diluted net income per share (1) | | $ | 0.52 |
| | $ | 0.96 |
| | $ | 0.66 |
| | $ | 0.64 |
| | $ | 2.77 |
| | Weighted-average shares outstanding-diluted | | 219,883 |
| | 217,830 |
| | 217,902 |
| | 217,883 |
| | 218,553 |
| | | | | | | | | | | | | | | | | | | | | | | 2015 Quarters (1) | 2017 Quarters | | | First | | Second | | Third | | Fourth | | Year | First | | Second | | Third | | Fourth | | Year | | Net premiums earned—insurance | $ | 224,595 |
| | $ | 237,437 |
| | $ | 227,433 |
| | $ | 226,443 |
| | $ | 915,908 |
| $ | 221,800 |
| | $ | 229,096 |
| | $ | 236,702 |
| | $ | 245,175 |
| | $ | 932,773 |
| Services revenue (3) | 31,135 |
| | 44,558 |
| | 43,185 |
| | 38,338 |
| | 157,216 |
| | | Services revenue | | 38,027 |
| | 37,802 |
| | 39,571 |
| | 39,703 |
| | 155,103 |
| | Net investment income | 17,328 |
| | 19,285 |
| | 22,091 |
| | 22,833 |
| | 81,537 |
| 31,032 |
| | 30,071 |
| | 32,540 |
| | 33,605 |
| | 127,248 |
| | Net gains (losses) on investments and other financial instruments | 16,779 |
| | 28,448 |
| | 3,868 |
| | (13,402 | ) | | 35,693 |
| (2,851 | ) | | 5,331 |
| | 2,480 |
| | (1,339 | ) | | 3,621 |
| | Provision for losses | 45,028 |
| | 32,560 |
| | 64,192 |
| | 56,805 |
| | 198,585 |
| 46,913 |
| | 17,222 |
| | 35,841 |
| | 35,178 |
| | 135,154 |
| | Policy acquisition costs | 7,750 |
| | 6,963 |
| | 2,880 |
| | 4,831 |
| | 22,424 |
| 6,729 |
| | 6,123 |
| | 5,554 |
| | 5,871 |
| | 24,277 |
| | Cost of services | 19,184 |
| | 25,326 |
| | 26,018 |
| | 23,187 |
| | 93,715 |
| 28,375 |
| | 25,635 |
| | 27,240 |
| | 23,349 |
| | 104,599 |
| | Other operating expenses | 53,843 |
| | 65,925 |
| | 64,013 |
| | 58,624 |
| | 242,405 |
| 68,377 |
| | 68,750 |
| | 64,195 |
| | 65,999 |
| | 267,321 |
| | Restructuring and other exit costs | | — |
| | — |
| | 12,038 |
| | 5,230 |
| | 17,268 |
| | Loss on induced conversion and debt extinguishment | — |
| | 91,876 |
| | 11 |
| | 2,320 |
| | 94,207 |
| 4,456 |
| | 1,247 |
| | 45,766 |
| | — |
| | 51,469 |
| | Amortization and impairment of intangible assets | 3,023 |
| | 3,281 |
| | 3,273 |
| | 3,409 |
| | 12,986 |
| | | Net income from continuing operations | 91,727 |
| | 45,193 |
| | 70,091 |
| | 74,528 |
| | 281,539 |
| | Income (loss) from discontinued operations, net of tax (4) | 530 |
| | 4,855 |
| | — |
| | — |
| | 5,385 |
| | | Net income | 92,257 |
| | 50,048 |
| | 70,091 |
| | 74,528 |
| | 286,924 |
| | Diluted net income per share (2) | $ | 0.39 |
| | $ | 0.22 |
| | $ | 0.29 |
| | $ | 0.32 |
| | $ | 1.22 |
| | | Weighted average shares outstanding-diluted | 243,048 |
| | 246,650 |
| | 250,795 |
| | 247,981 |
| | 246,332 |
| | | Impairment of goodwill | | — |
| | 184,374 |
| | — |
| | — |
| | 184,374 |
| | Amortization and impairment of other acquired intangible assets | | 3,296 |
| | 18,856 |
| | 2,890 |
| | 2,629 |
| | 27,671 |
| | Net income (loss) | | 76,472 |
| | (27,342 | ) | | 65,142 |
| | 6,816 |
| (2) | 121,088 |
| Diluted net income (loss) per share (1) | | $ | 0.34 |
| | $ | (0.13 | ) | | $ | 0.30 |
| | $ | 0.03 |
| (2) | $ | 0.55 |
| | Weighted-average shares outstanding-diluted | | 221,497 |
| | 215,152 |
| | 219,391 |
| | 220,250 |
| | 220,406 |
|
______________________ | | | (1) | For all periods presented, reflects changes to align our segment reporting structure with recent changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, for all periods presented, Services revenue and cost of services have increased, with offsetting reductions in other operating expenses. |
| | (2) | Diluted net income per share is computed independently for each period presented. Consequently, the sum of the quarters may not equal the total net income per share for the year. For all calculations, the determination of whether potential common shares are dilutive or anti-dilutive is based on net income from continuing operations. |
| | (3)(2) | Services revenue for the firstThe fourth quarter of 2015 includes $0.1 million that had previously been included in other income. |
| | (4) | Radian completed the sale of Radian Asset Assurance to Assured on April 1, 2015, pursuant2017 reflects an incremental tax provision related to the Radian Asset Assurance Stock Purchase Agreement. Untilremeasurement of our net deferred tax assets as a result of the April 1, 2015 sale date,enactment of the operating results of Radian Asset Assurance were classified as discontinued operations for all periods presented in our consolidated statements of operations. See Note 18 for additional information.TCJA. |
Notes to Consolidated Financial Statements - (Continued)
21. Subsequent Events
In November 2016, we announced our intent to exercise our redemption option for the remaining Convertible Senior Notes due 2019, of which $68.0 million aggregate principal was outstanding at December 31, 2016. Radian elected to redeem all of the notes surrendered for conversion or redemption with cash. We settled our obligations on January 27, 2017 with a$110.1 million cash payment. At the time of settlement, this transaction resulted in a pretax charge of $4.5 million and reduced Radian Group’s diluted shares by 6.4 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
| | | Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 20162018 pursuant to Rule 15d-15(e)15d-15(b) under the Exchange Act. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance regarding management’s control objectives. Management does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance and cannot guarantee that it will succeed in its stated objectives. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2016,2018, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting, as of December 31, 2016,2018, using the criteria described in Internal Control-Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the updated internal control framework in Internal Control-Integrated Framework (2013), management concluded that our internal control over financial reporting was effective as of December 31, 2016.2018. The effectiveness of our internal control over financial reporting as of December 31, 20162018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing in Item 8 of this Annual Report on Form 10-K. There was no change in the internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| | | Item 9B. | Other Information. |
None.
PART III
| | | Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which will be filed within 120 days after December 31, 2016.2018. Accordingly, we have omitted the information from this Item pursuant to General Instruction G (3) of Form 10-K.
| | | Item 11. | Executive Compensation. |
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which will be filed within 120 days after December 31, 2016.2018. Accordingly, we have omitted the information from this Item pursuant to General Instruction G (3) of Form 10-K.
| | | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which will be filed within 120 days after December 31, 2016.2018. Accordingly, we have omitted the information from this Item pursuant to General Instruction G (3) of Form 10-K. Equity Compensation Plans The following table sets forth certain information relating to the Company’s equity compensation plans as of December 31, 2016.2018. Each number of securities reflected in the table is a reference to shares of our common stock. | | Plan Category (1) | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | (b) Weighted-average exercise price of outstanding options, warrants and rights | | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | (b) Weighted-average exercise price of outstanding options, warrants and rights | | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | | Equity compensation plans approved by stockholders (2) | 6,282,366 |
| (3) | $ | 5.84 |
| (4) | 2,034,273 |
| (5) | 5,310,851 |
| (3) | $ | 2.98 |
| (4) | 9,955,831 |
| (5) | | Equity compensation plans not approved by stockholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | Total | 6,282,366 |
| (3) | $ | 5.84 |
| (4) | 2,034,273 |
| (5) | $ | 5,310,851 |
| (3) | $ | 2.98 |
| (4) | $ | 9,955,831 |
| (5) | | | | | | | | | | | | | | |
__________________ | | | (1) | The table does not include information for equity compensation plans assumed by us in mergers, under which we do not grant additional awards. |
| | | (2) | These plans consist of our 1995 Equity Plan, 2008 Equity Plan, 2014the Amended and Restated Equity Compensation Plan and our 2008 ESPP Plan.Amended and Restated Radian Group Inc. ESPP. |
| | | (3) | Represents 2,839,738 non-qualified stock options and 234,174234,427 shares of phantom stock issued under our 1995 Equity Plan, 696,187 non-qualified stock options and our 2008 Equity Plan and 3,208,454889,760 RSUs issued under our 2008 Equity Plan, and 616,604 non-qualified stock options and 2,873,873 RSUs issued under our Amended and Restated Equity Compensation Plan. Of the RSUs included herein, 1,761,8531,646,223 are performance-based stock-settled RSUs that could potentially pay out between 0% and 200% of this represented target.target, and 123,496 are performance-based stock-settled RSUs that could pay out to our former chief executive officer at 0% or 100%. |
| | | (4) | The shares of phantom stock and RSUs were granted at full value, and therefore, have a weighted averageweighted-average exercise price of $0. Excluding shares of phantom stock and RSUs from this calculation, the weighted averageweighted-average exercise price of outstanding non-qualified stock options was $7.64$9.39 at December 31, 2016.2018. |
| | | (5) | Includes 1,004,1097,906,190 shares available for issuance under our 2014Amended and Restated Equity Compensation Plan, and 1,030,1642,048,800 shares available for issuance under our 2008Amended and Restated Radian Group Inc. ESPP, Plan, in each case as of December 31, 2016.2018. In January 2017,2019, we issued 74,68451,187 shares from the shares available for issuance under our 2008 ESPP Plan.Amended and Restated Radian Group Inc. ESPP. As a result, 955,4801,997,613 shares currently remain available for issuance under the 2008 ESPP Plan.Amended and Restated Radian Group Inc. ESPP. |
| | | Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which will be filed within 120 days after December 31, 2016.2018. Accordingly, we have omitted the information from this Item pursuant to General Instruction G (3) of Form 10-K.
| | | Item 14. | Principal Accountant Fees and Services. |
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which will be filed within 120 days after December 31, 2016.2018. Accordingly, we have omitted the information from this Item pursuant to General Instruction G (3) of Form 10-K.
PART IV
| | | Item 15. | Exhibits and Financial Statement Schedules. |
(a) | | | 1. | Financial Statements—See the “Index to Consolidated Financial Statements” included in Item 8 of this report for a list of the financial statements filed as part of this report. |
2.Financial2.Exhibits—See “Index to Exhibits” on pageof this report for a list of exhibits filed as part of this report.3.Financial Statement Schedules—See the “Index to Financial Statement Schedules” on pageof this report for a list of the financial statement schedules filed as part of this report. 3.Exhibits—See “Index to Exhibits” on pageSchedule I—Summary of investments—other than investments in related parties (December 31, 2018) Schedule II—Financial information of this reportRadian Group, Inc., Parent Company Only (Registrant) Condensed Balance Sheets as of December 31, 2018 and 2017 Condensed Statements of Operations for a listthe Years Ended December 31, 2018, 2017 and 2016 Condensed Statements of exhibits filed as part of this report.Cash Flows for the Years Ended December 31, 2018, 2017 and 2016 Supplemental Notes to Condensed Financial Statements Schedule IV—Reinsurance (December 31, 2018, 2017 and 2016) | | | Item 16. | Form 10-K Summary. |
None.
INDEX TO EXHIBITS | | | Exhibit Number | Exhibit | | 2.1 | | | | | 2.2 | | | | | 3.1 | | | | | 3.2 | | | | | 3.3 | | | | | 3.4 | | | | | 3.5 | | | | | 3.6 | | | | | 3.7 | | | | | 3.8 | | | | | 4.1 | | | | | 4.2 | | | | | 4.3 | | | | | 4.4 | | | | | 4.5 | | | |
| | | Exhibit Number | Exhibit | | 4.6 | | | | | 4.7 | | | | | 4.8 | | | | | 4.9 | | | | | 4.10 | | | | | 4.11 | | | | | 4.12 | | | | | +10.1 | | | | | +10.2 | | | | | +10.3 | | | | | +10.4 | | | | | +10.5 | | | | | 10.6 | | | | | +10.7 | | | | | +10.8 | | | | | +10.9 | | | | | +10.10 | | | | | +10.11 | | | |
| | | Exhibit Number | Exhibit | | +10.12 | | | | | +10.13 | | | | | +10.14 | | | | | +10.15 | | | | | +10.16 | | | | | +10.17 | | | | | +10.18 | | | | | +10.19 | | | | | +10.20 | | | | | +10.21 | | | | | +10.22 | | | | | +10.23 | | | | | +10.24 | | | | | +10.25 | | | | | +10.26 | | | | | +10.27 | | | |
| | | Exhibit Number | Exhibit | | +10.28 | | | | | +10.29 | | | | | +10.30 | | | | | +10.31 | | | | | +10.32 | | | | | +10.33 | | | | | +10.34 | | | | | +10.35 | | | | | +10.36 | | | | | 10.37 | | | | | 10.38 | | | | | 10.39 | | | | | 10.40 | | | | | +10.41 | | | | | +10.42 | | | |
| | | Exhibit Number | Exhibit | | +10.43 | | | | | +10.44 | | | | | 10.45 | | | | | +10.46 | | | | | +10.47 | | | | | +10.48 | | | | | +10.49 | | | | | 10.50 | | | | | +10.51 | | | | | +10.52 | | | | | +10.53 | | | | | +10.54 | | | | | 10.55 | Confidential Settlement Agreement and Release, dated as of September 16, 2014 by and among Radian Guaranty Inc., Countrywide Home Loans, Inc., and Bank of America, N.A., as a successor to BofA Home Loans Servicing f/k/a Countrywide Home Loans Servicing LP on its own behalf and as successor in interest by de jure merger to Countrywide Bank FSB, formerly Treasury Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated September 16, 2014 and filed on September 19, 2014) | | | | +10.56 | | | |
| | | Exhibit Number | Exhibit | | +10.57 | | | | | 10.58 | | | | | +10.59 | | | | | +10.60 | | | | +10.61
| | | | | +10.62 | | | | | +10.63 | | | | | +10.64 | | | | | +10.65 | | | | | +10.66 | | | | | +10.67 | | | | | +10.68 | | | | | +10.69 | | | | | +10.70 | | | | | +10.71 | | | | | +10.72 | | | |
| | | Exhibit Number | Exhibit | | +10.73 | | | | | +10.74 | | | | | +10.75 | | | | | +10.76 | | | | | +10.77 | | | | | +10.78 | | | | | +10.79 | | | | | +10.80 | | | | | +10.81 | | | | | +10.82 | | | | | +10.83 | | | | | +10.84 | | | | | +10.85 | | | | | +10.86 | | | | | +10.87 | | | |
| | | Exhibit Number | Exhibit | | +10.88 | | | | | +10.89 | | | | | 10.90 | Credit Agreement, dated October 16, 2017, by and among the Registrant, Royal Bank of Canada, as Administrative Agent, RBC Capital Markets and U.S. Bank National Association, as Syndication Agents, Joint Lead Arrangers and Joint Book Runners, Associated Bank, National Association, as Documentation Agent, and certain other banks and financial institutions (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated October 16, 2017 and filed on October 20, 2017) | | | | *10.91 | | | | | *10.92 | First Amendment, dated as of December 21, 2018, to the Credit Agreement, dated as of October 16, 2017 (as amended by that certain Augmenting Lender Supplement dated as of October 26, 2018), by and among the Registrant, each of the lenders from time to time party thereto, Royal Bank of Canada, as administrative agent, and the other agents and arrangers party thereto | | | | *21 | | | | | *23.1 | | | | | *31 | | | | | **32 | | | | | *101 | The following financial information from Radian Group Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018, is formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017, (ii) Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 2016, (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017, and 2016, (iv) Consolidated Statements of Changes in Common Stockholders’ Equity for the years ended December 31, 2018, 2017, and 2016, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016, and (vi) the Notes to Consolidated Financial Statements. |
+ Management contract, compensatory plan or arrangement
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2017. 28, 2019. | | | | Radian Group Inc. | | | | | By: | /s/SANFORD A. IBRAHIM Richard G. Thornberry
| | | Sanford A. Ibrahim,
Richard G. Thornberry
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 27, 2017,28, 2019, by the following persons on behalf of the registrant and in the capacities indicated. | | | | | Name | | Title | /s/ SANFORD A. IBRAHIM RICHARD G. THORNBERRY | | Chief Executive Officer (Principal Executive Officer) and Director | Sanford A. IbrahimRichard G. Thornberry | | | | | | | /s/ J. FRANKLIN HALL J. FRANKLIN HALL | | Senior Executive Vice President, Chief Financial Officer (Principal Financial Officer) | | J. Franklin Hall | | | | | | | /s/ CATHERINE M. JACKSON ROBERT J. QUIGLEY | | Senior Vice President, Controller
(Principal Accounting Officer)
| Catherine M. JacksonRobert J. Quigley | | | | | | | /s/ HERBERT WENDER HERBERT WENDER | | Non-Executive Chairman of the Board | | Herbert Wender | | | | | | | /s/ DAVIDDAVID C. CARNEY CARNEY | | Director | | David C. Carney | | | | | | | /s/ HOWARDHOWARD B. CULANG CULANG | | Director | | Howard B. Culang | | | | | | | /s/ LISALISA W. HESS HESS | | Director | | Lisa W. Hess | | | | | | | /s/ STEPHENSTEPHEN T. HOPKINS HOPKINS | | Director | | Stephen T. Hopkins | | | | | | | /s/ BRIAN D. MONTGOMERY | | Director | Brian D. Montgomery | | | | | | /s/ GAETANO MUZIO
GAETANO MUZIO | | Director | | Gaetano Muzio | | | | | | | /s/ GREGORYGREGORY V. SERIO SERIO | | Director | | Gregory V. Serio | | | | | | | /s/ NOELNOEL J. SPIEGEL SPIEGEL | | Director | | Noel J. Spiegel | | |
| | | INDEX TO FINANCIAL STATEMENT SCHEDULES
Index to Financial Statement Schedules | | | Page | | Financial Statement Schedules | | | | | | | | | | | | | | | | | |
All other schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in our Consolidated Financial Statements and notes thereto.
Radian Group Inc. and Its Consolidated Subsidiaries Schedule I Summary of Investments—Other Than Investments in Related Parties December 31, 2016
2018
| | | Type of Investment | Amortized Cost | | Fair Value | | Amount Reflected on the Consolidated Balance Sheet | Amortized Cost | | Fair Value | | Amount Reflected on the Consolidated Balance Sheet | | | (In thousands) | | | | | Fixed-Maturities: | | | | | | | | Fixed-maturities available for sale: | | | | | | | | | Bonds: | | | | | | | | | | | | | U.S. government and agency securities | $ | 78,931 |
| | $ | 75,474 |
| | $ | 75,474 |
| $ | 85,532 |
| | $ | 84,070 |
| | $ | 84,070 |
| | State and municipal obligations (1) | 66,124 |
| | 67,171 |
| | 67,171 |
| | | State and municipal obligations | | 138,022 |
| | 138,313 |
| | 138,313 |
| | | Corporate bonds and notes | 1,463,720 |
| | 1,455,628 |
| | 1,455,628 |
| 2,288,720 |
| | 2,229,885 |
| | 2,229,885 |
| | | RMBS | 358,262 |
| | 350,628 |
| | 350,628 |
| 334,843 |
| | 332,142 |
| | 332,142 |
| | | CMBS | 429,057 |
| | 428,289 |
| | 428,289 |
| 546,729 |
| | 539,915 |
| | 539,915 |
| | | Other ABS | 433,603 |
| | 434,728 |
| | 434,728 |
| 712,748 |
| | 704,662 |
| | 704,662 |
| | | Foreign government and agency securities | 24,771 |
| | 24,594 |
| | 24,594 |
| | | Other investments | 2,000 |
| | 2,000 |
| | 2,000 |
| | | Total fixed-maturities | 2,856,468 |
| | 2,838,512 |
| | 2,838,512 |
| | Trading securities (2) | 874,764 |
| | 879,862 |
| | 879,862 |
| | | Equity securities available for sale: | | | | | | | | Total securities available for sale | | 4,106,594 |
| | 4,028,987 |
| | 4,028,987 |
| | | Trading securities | | 468,696 |
| | 469,071 |
| | 469,071 |
| | | Equity securities: | | | | | | | | | Common stocks | 830 |
| | 830 |
| | 830 |
| 150,344 |
| | 140,620 |
| | 140,620 |
| | | Nonredeemable preferred stocks | 500 |
| | 500 |
| | 500 |
| | | Total equity securities available for sale | 1,330 |
| | 1,330 |
| | 1,330 |
| | | Short-term investments | 741,605 |
| | 741,531 |
| | 741,531 |
| | | Total equity securities | | 150,344 |
| | 140,620 |
| | 140,620 |
| | Short-term investments (1) | | 538,977 |
| | 538,796 |
| | 538,796 |
| | | Other invested assets | 1,195 |
| | 3,789 |
| | 1,195 |
| 308 |
| | 3,415 |
| | 3,415 |
| | | Total investments other than investments in related parties | $ | 4,475,362 |
| | $ | 4,465,024 |
| | $ | 4,462,430 |
| $ | 5,264,919 |
| | $ | 5,180,889 |
| (2) | $ | 5,180,889 |
| (2) |
______________________ | | | (1) | Available for sale.Includes cash collateral held under securities lending agreements of $11.7 million that is reinvested in money market instruments. |
| | | (2) | Includes foreign government$7.4 million of fixed maturity securities available for sale, $10.1 million of trading securities and agency securities.$10.4 million of equity securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
Radian Group Inc. Schedule II—Financial Information of Registrant Condensed Balance SheetsSheet Parent Company Only | | | | | | | | | | | December 31, | | (In thousands, except per-share amounts) | 2018 | | 2017 | | Assets | | | | | Investments | | | | | Fixed-maturities available for sale—at fair value | $ | 321,401 |
| | $ | 10,785 |
| | Trading securities—at fair value | 56,011 |
| | — |
| | Equity securities—at fair value | 29,375 |
| | — |
| | Short-term investments—at fair value | 238,185 |
| | 83,356 |
| | Total investments | 644,972 |
| | 94,141 |
| | Cash | 32,352 |
| | 13,173 |
| | Investment in subsidiaries, at equity in net assets (Note B) | 3,927,268 |
| | 3,764,865 |
| | Accounts and notes receivable (Note C) | 101,072 |
| | 103,561 |
| | Federal income taxes recoverable, net—current | 49,381 |
| | 35,741 |
| | Other assets (Note D) | 58,993 |
| | 166,051 |
| | Total assets | $ | 4,814,038 |
| | $ | 4,177,532 |
| | | | | | | Liabilities and Stockholders’ Equity | | | | | Senior Notes (Note E) | $ | 1,030,348 |
| | $ | 1,027,074 |
| | Federal income taxes—deferred | 243,341 |
| | 97,067 |
| | Other liabilities | 51,634 |
| | 53,353 |
| | Total liabilities | 1,325,323 |
| | 1,177,494 |
| | | | | | | Common stockholders’ equity | | | | | Common stock: par value $.001 per share; 485,000 shares authorized at December 31, 2018 and 2017; 231,132 and 233,417 shares issued at December 31, 2018 and 2017, respectively; 213,473 and 215,814 shares outstanding at December 31, 2018 and 2017, respectively | 231 |
| | 233 |
| | Treasury stock, at cost: 17,660 and 17,603 shares at December 31, 2018 and 2017, respectively | (894,870 | ) | | (893,888 | ) | | Additional paid-in capital | 2,724,733 |
| | 2,754,275 |
| | Retained earnings | 1,719,541 |
| | 1,116,333 |
| | Accumulated other comprehensive income (loss) | (60,920 | ) | | 23,085 |
| | Total common stockholders’ equity | 3,488,715 |
| | 3,000,038 |
| | Total liabilities and stockholders’ equity | $ | 4,814,038 |
| | $ | 4,177,532 |
|
| | | | | | | | | | | December 31, | | ($ in thousands, except per-share amounts) | 2016 | | 2015 | | Assets | | | | | Investments | | | | | Fixed-maturities available for sale—at fair value | $ | 79,336 |
| | $ | 41,176 |
| | Equity securities available for sale—at fair value | — |
| | 25,510 |
| | Trading securities—at fair value | — |
| | 5,482 |
| | Short-term investments—at fair value | 311,418 |
| | 158,658 |
| | Total investments | 390,754 |
| | 230,826 |
| | Cash | 8,256 |
| | 3,301 |
| | Restricted cash (Note B) | 124 |
| | 124 |
| | Investment in subsidiaries, at equity in net assets (Note C) | 3,383,089 |
| | 3,001,846 |
| | Accounts and notes receivable (Note D) | 305,316 |
| | 631,636 |
| | Other assets (Note E) | 166,098 |
| | 124,983 |
| | Total assets | $ | 4,253,637 |
| | $ | 3,992,716 |
| | | | | | | Liabilities and Stockholders’ Equity | | | | | Long-term debt (Note F) | $ | 1,069,537 |
| | $ | 1,219,454 |
| | Federal income taxes—current and deferred | 266,289 |
| | 229,939 |
| | Other liabilities | 45,525 |
| | 46,392 |
| | Total liabilities | 1,381,351 |
| | 1,495,785 |
| | | | | | | Common stockholders’ equity | | | | | Common stock: par value $.001 per share; 485,000,000 shares authorized at December 31, 2016 and 2015; 232,091,921 and 224,432,465 shares issued at December 31, 2016 and 2015, respectively; 214,521,079 and 206,871,768 shares outstanding at December 31, 2016 and 2015, respectively | 232 |
| | 224 |
| | Treasury stock, at cost: 17,570,842 and 17,560,697 shares at December 31, 2016 and 2015, respectively | (893,332 | ) | | (893,176 | ) | | Additional paid-in capital | 2,779,891 |
| | 2,716,618 |
| | Retained earnings | 997,890 |
| | 691,742 |
| | Accumulated other comprehensive income (loss) | (12,395 | ) | | (18,477 | ) | | Total common stockholders’ equity | 2,872,286 |
| | 2,496,931 |
| | Total liabilities and stockholders’ equity | $ | 4,253,637 |
| | $ | 3,992,716 |
|
See Supplemental Notes.
Radian Group Inc. Schedule II—Financial Information of Registrant Condensed Statements of Operations Parent Company Only | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Revenues: | | | | | | | Net investment income | $ | 21,294 |
| | $ | 22,528 |
| | $ | 20,834 |
| | Net gains (losses) on investments and other financial instruments | (470 | ) | | (328 | ) | | (150 | ) | | Other income | — |
| | 80 |
| | 49 |
| | Total revenues | 20,824 |
| | 22,280 |
| | 20,733 |
| | Expenses: | | | | | | | Loss on induced conversion and debt extinguishment | — |
| | 51,469 |
| | 75,075 |
| | Interest expense | 17,805 |
| | 18,033 |
| | 29,002 |
| | Total expenses (Note F) | 17,805 |
| | 69,502 |
| | 104,077 |
| | Pretax gain (loss) from continuing operations | 3,019 |
| | (47,222 | ) | | (83,344 | ) | | Income tax benefit | (3,319 | ) | | (141,437 | ) | | (8,676 | ) | | Equity in net income of affiliates | 599,673 |
| | 26,873 |
| | 382,921 |
| | Net income | 606,011 |
| | 121,088 |
| | 308,253 |
| | Other comprehensive income (loss), net of tax | (86,953 | ) | | 35,480 |
| | 6,082 |
| | Comprehensive income | $ | 519,058 |
| | $ | 156,568 |
| | $ | 314,335 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Revenues: | | | | | | | Net investment income | $ | 20,834 |
| | $ | 17,917 |
| | $ | 9,515 |
| | Net gains (losses) on investments and other financial instruments | (150 | ) | | 2,975 |
| | (2,732 | ) | | Other income | 49 |
| | — |
| | 7 |
| | Total revenues | 20,733 |
| | 20,892 |
| | 6,790 |
| | Expenses: | | | | | | | Loss on induced conversion and debt extinguishment | 75,075 |
| | 94,207 |
| | — |
| | Interest expense | 29,002 |
| | 55,768 |
| | 57,366 |
| | Total expenses (Note G) | 104,077 |
| | 149,975 |
| | 57,366 |
| | Pretax loss from continuing operations | (83,344 | ) | | (129,083 | ) | | (50,576 | ) | | Income tax provision (benefit) | (8,676 | ) | | (43,854 | ) | | 143,912 |
| | Equity in net income of affiliates | 382,921 |
| | 371,949 |
| | 1,172,032 |
| | Net income from continuing operations | 308,253 |
| | 286,720 |
| | 977,544 |
| | Income (loss) from discontinued operations, net of taxes | — |
|
| 204 |
|
| (18,027 | ) | | Net income | 308,253 |
| | 286,924 |
| | 959,517 |
| | Other comprehensive income (loss), net of tax | 6,082 |
| | (69,962 | ) | | 14,102 |
| | Comprehensive income | $ | 314,335 |
| | $ | 216,962 |
| | $ | 973,619 |
|
See Supplemental Notes.
Radian Group Inc. Schedule II—Financial Information of Registrant Condensed Statements of Cash Flows Parent Company Only | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2018 | | 2017 | | 2016 | | Net cash provided by (used in) operating activities | 254,698 |
| | (23,654 | ) | | 38,902 |
| | Cash flows from investing activities: | | | | | | | Proceeds from sales of: | | | | | | | Fixed-maturity investments available for sale | 6,779 |
| | 58,007 |
| | 47,058 |
| | Trading securities | — |
| | — |
| | 30,350 |
| | Equity securities | — |
| | — |
| | 24,992 |
| | Proceeds from redemptions of: | | | | | | | Fixed-maturity investments available for sale | 12,391 |
| | 60,414 |
| | 49,578 |
| | Trading securities | — |
| | — |
| | 10,000 |
| | Purchases of: | | | | | | | Fixed-maturity investments available for sale | (37,552 | ) | | (134,456 | ) | | (137,431 | ) | | Sales, redemptions and (purchases) of : | | | | | | | Short-term investments, net | (131,164 | ) | | 210,529 |
| | (40,288 | ) | | Other assets, net | (3,317 | ) | | (1,107 | ) | | 239 |
| | Capital distributions from subsidiaries | — |
| | 924 |
| | 15,000 |
| | Capital contributions to subsidiaries | (30,338 | ) | | (21,643 | ) | | (1,500 | ) | | Acquisition of subsidiaries | — |
| | — |
| | (30,443 | ) | | (Issuance) repayment of note receivable from affiliate (Note C) | — |
| | (44 | ) | | 201,631 |
| | Net cash provided by (used in) investing activities | (183,201 | ) | | 172,624 |
| | 169,186 |
| | Cash flows from financing activities: | | | | | | | Dividends paid | (2,140 | ) | | (2,154 | ) | | (2,105 | ) | | Issuance of senior notes, net | — |
| | 442,163 |
| | 343,417 |
| | Purchases and redemptions of senior notes | — |
| | (593,527 | ) | | (445,072 | ) | | Proceeds from termination of capped calls | — |
| | 4,208 |
| | — |
| | Issuance of common stock | 1,385 |
| | 7,132 |
| | 717 |
| | Purchases of common shares | (50,053 | ) | | (6 | ) | | (100,188 | ) | | Credit facility commitment fees paid | (1,510 | ) | | (1,993 | ) | | — |
| | Excess tax benefits from stock-based awards (Note A) | — |
| | — |
| | 98 |
| | Net cash provided by (used in) financing activities | (52,318 | ) | | (144,177 | ) | | (203,133 | ) | | Increase (decrease) in cash and restricted cash | 19,179 |
| | 4,793 |
| | 4,955 |
| | Cash and restricted cash, beginning of period | 13,173 |
| | 8,380 |
| | 3,425 |
| | Cash and restricted cash, end of period | $ | 32,352 |
| | $ | 13,173 |
| | $ | 8,380 |
|
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | 2016 | | 2015 | | 2014 | | Net cash provided by (used in) operating activities, continuing operations | $ | 38,902 |
| | $ | (128,879 | ) | | $ | (27,152 | ) | | Net cash provided by (used in) operating activities, discontinued operations | — |
| | — |
| | (18,027 | ) | | Net cash provided by (used in) operating activities | 38,902 |
| | (128,879 | ) | | (45,179 | ) | | Cash flows from investing activities: | | | | | | | Proceeds from sales of: | | | | | | | Fixed-maturity investments available for sale | 47,058 |
| | — |
| | — |
| | Equity securities available for sale | 24,992 |
| | — |
| | — |
| | Trading securities | 30,350 |
| | — |
| | — |
| | Proceeds from redemptions of: | | | | | | | Fixed-maturity investments available for sale | 49,578 |
| | — |
| | — |
| | Trading securities | 10,000 |
| | — |
| | — |
| | Purchases of : | | | | | | | Fixed-maturity investments available for sale | (137,431 | ) | | (39,667 | ) | | — |
| | Equity securities available for sale | — |
| | (25,545 | ) | | — |
| | Sales, redemptions and (purchases) of : | | | | | | | Short-term investments, net | (40,288 | ) | | 473,350 |
| | 1,372 |
| | Other assets, net | 239 |
| | (688 | ) | | (1,351 | ) | | Capital distributions from subsidiaries and affiliates | 15,000 |
| | 113,784 |
| | — |
| | Capital contributions to subsidiaries and affiliates | (1,500 | ) | | (182,307 | ) | | (139,103 | ) | | Acquisition of subsidiaries | (30,443 | ) | | — |
| | — |
| | (Issuance) repayment of note receivable from affiliate (Note D) | 201,631 |
| | (208,527 | ) | | (300,000 | ) | | Net cash provided by (used in) investing activities | 169,186 |
| | 130,400 |
| | (439,082 | ) | | Cash flows from financing activities: | | | | | | | Dividends paid | (2,105 | ) | | (1,996 | ) | | (1,865 | ) | | Issuance of long-term debt, net | 343,417 |
| | 343,334 |
| | 293,809 |
| | Purchases and redemptions of long-term debt | (445,072 | ) | | (156,172 | ) | | (57,223 | ) | | Proceeds from termination of capped calls | — |
| | 13,150 |
| | — |
| | Issuance of common stock | 717 |
| | 1,285 |
| | 247,188 |
| | Purchase of common shares | (100,188 | ) | | (202,000 | ) | | — |
| | Excess tax benefits from stock-based awards | 98 |
| | 2,228 |
| | — |
| | Net cash provided by (used in) financing activities | (203,133 | ) | | (171 | ) | | 481,909 |
| | Increase (decrease) in cash and restricted cash | 4,955 |
| | 1,350 |
| | (2,352 | ) | | Cash and restricted cash, beginning of period | 3,425 |
| | 2,075 |
| | 4,427 |
| | Cash and restricted cash, end of period | $ | 8,380 |
| | $ | 3,425 |
| | $ | 2,075 |
|
See Supplemental Notes.
Radian Group Inc. Schedule II—Financial Information of Registrant Parent Company Only Supplemental Notes
Note A The Radian Group Inc. (the “Parent Company”, “we” or “our”) financial statements represent the stand-alone financial statements of the Parent Company. These financial statements have been prepared on the same basis and using the same accounting policies as described in the consolidated financial statements included herein, except that the Parent Company uses the equity-method of accounting for its majority-owned subsidiaries. These financial statements should be read in conjunction with our consolidated financial statements and the accompanying notes thereto. Certain prior period amounts have been reclassified to conform to current period presentation, including the adoption of an update to the accounting standard for the treatment of restricted cash in the statement of cash flows. See Note 2 of Notes to Consolidated Financial Statements for additional information.
On April 1, 2015, Radian Guaranty completed the sale of Radian Asset Assurance pursuant to the Radian Asset Assurance Stock Purchase Agreement. See Note 18 of Notes to Consolidated Financial Statements for additional information related to discontinued operations.
Under our current tax-sharing agreement between the Parent Company and its subsidiaries, we are required to refund to each subsidiary any amount that the subsidiary could utilize through existing carryback provisions of the Internal Revenue Code had such subsidiary filed its federal tax return on a separate company basis. Pursuant to this, we had paid Radian Asset Assurance for losses and foreign tax credits it had generated, and Radian Group had recorded the DTA for the related consolidated carryforward on its balance sheet. However, the Internal Revenue Code consolidation provisions do not allocate consolidated carryovers based on tax-sharing agreements, but rather on an allocation to all subsidiaries that generated the carryforward. Upon a stock sale of a subsidiary, any consolidated attributes allocated to a subsidiary under these regulations transfer to the subsidiary and are no longer part of the consolidated carryforward. As such, for the year ended December 31, 2014, the Parent Company classified the DTAs pertaining to Radian Asset Assurance’s foreign tax credit and allocated NOL as assets held for sale and recorded a related loss from discontinued operations. These DTAs were transferred to Assured upon completion of the sale of Radian Asset Assurance in 2015.
Note B We had restricted cash of $0.1 million at both December 31, 2016 and 2015, held as collateral for our insurance trust agreement for our health insurance policy.
Note C
During 2016,2018, the Parent Company made total capital contributions of $2.5$98.1 million to its subsidiaries. This amount included a $30.3 million cash contribution to Radian Title Services Inc., part of $1.5 millionwhich was used to RDN Investments, Inc.acquire EnTitle Direct in March 2018, and a $1.0$1.7 million capital contribution to Enhance Financial Services Group Inc. in lieu of marketable securitiesreceiving tax payments due under our tax sharing agreement. We also effectively contributed $66.1 million to Clayton Group Holdings Inc. In addition,to reflect the impairment of the interest receivable on our intercompany note that was recorded during 2016, the Parent Company purchased Radian Insurance, Radian Mortgage Insurance and RMAI from Radian Guaranty for $19.0 million, $2.82018 of $17.8 million and $8.6the outstanding intercompany receivable balance of $48.3 million respectively. The purchase pricerepresenting the services segment’s share of each subsidiary represented its total statutory capitalunreimbursed direct and surplus as of September 30, 2016.allocated costs. During 2016, the Parent Company received dividends from its subsidiaries totaling $40.4 million in cash and marketable securities. This amount included cash of $15.0 million from Enhance Financial Services Group Inc. and marketable securities from RDN Investments, Inc. of $25.4 million. In addition,2018, the Parent Company received a dividend$450.0 million distribution from Radian MI Services Inc.Guaranty, which included $55.4 million of its fullcash and $394.6 million of marketable securities. Under the cumulative earnings approach, we considered this distribution to be a return on investment in Radian Investor Surety Inc., which was valued at $5.0 million at the date of transfer.and classified as operating cash flow. The Parent Company also received tax payments of $51.2$229.6 million from its subsidiaries under our tax sharing agreement. During 2015,2017, the Parent Company made total capital contributions of $398.3$521.0 million to its subsidiaries. This amount included a cash$175.0 million contribution of $100.0 million to Radian Guaranty, contributions of cash ($50.0 million) and marketable securities ($216.0 million) totaling $266.0 million to Radian Reinsurance, consisting of $21.4 million of cash and cash contributions$153.6 million of $20.0 million, $12.1 millionmarketable securities, and a $0.2 million cash contribution to Radian Mortgage Guaranty Inc., Clayton Group Holdings Inc., and Radian Mortgage Reinsurance Company, respectively.
During 2015, theAssurance. The Parent Company received dividends from its subsidiaries totaling $446.2also made a $3.1 million in cash and marketable securities. This amount included marketable securities of $216.0 million fromcapital contribution to Enhance Financial Services Group Inc. in lieu of receiving tax payments due under our tax sharing agreement. We also effectively contributed $342.7 million to Clayton Group Holdings Inc. to reflect the impairment of our $300 million intercompany note receivable and cash$42.7 million of $15.0interest receivable on the intercompany note as of December 31, 2017.
During 2017, the Parent Company received a $175.0 million distribution from Radian MI Services Inc.,Guaranty, which were usedincluded $21.4 million of cash and $153.6 million of marketable securities, all of which was subsequently contributed to partially fund the creation of Radian Reinsurance as part of an approved reorganization of our mortgage insurance subsidiaries.Reinsurance. In addition, the Parent Company liquidated three of its subsidiaries and received a total of $215.2 million ($98.7 million in cashliquidating dividends totaling $26.5 million. This amount reflected liquidating dividends from Radian Mortgage Insurance, Radian Mortgage Reinsurance Company and $116.5 million in marketable securities) from RDN Investments, Inc., to partially fund of $24.9 million, $1.0 million and $0.6 million, respectively, and included cash dividends of $2.7 million, $0.6 million and $0.5 million, respectively, and the acquisitiondistribution of a Surplus Note from Radian Guaranty (see Note D for additional information).deferred and current tax recoverables of $22.2 million, $0.4 million and $0.1 million, respectively. The Parent Company also received tax payments of $16.0$50.7 million from its subsidiaries in 2015 under our tax-sharing agreement. During 2014, the Parent Company made total capital contributions of $139.1 million to its subsidiaries. This amount included cash contributions of $100 million to Radian Guaranty, $20 million to Radian MI Services Inc., $19 million to Radian Clayton Holdings Inc. and $0.1 million to Radian Mortgage Reinsurance Company. The Parent Company did not receive any dividends from its subsidiaries in 2014. The Parent Company did receive tax payments of $8.8 million from its subsidiaries in 2014 under our tax-sharingsharing agreement.
Note DC Accounts and notes receivable included a $300 million note receivable from Clayton Group Holdings Inc. as of December 31, 20162018 and 2015.2017. This represents the original principal amount related to the Senior Notes due 2019, which funded the acquisition of Clayton in June 2014. Interest on the note is payable semi-annually on June 1 and December 1, beginning December 1, 2014.1. The interest payment represents coupon interest plus issuance costs (amortized on a straight line basis over the term of the note). The principal is due on June 1, 2019. See Note E2019 although, in the event of non-payment, the note terms reflect that the note remains outstanding and continues to accrue interest at the coupon rate. The Services segment has not generated sufficient cash flow to reimburse the Parent Company for additional information.its share of its direct and allocated operating expenses and interest expense, and we do not expect that the Services segment will be able to bring its reimbursement obligations current in the foreseeable future. Therefore, we have recorded an allowance against the outstanding balance of the $300 million note receivable at December 31, 2018 and 2017. Accounts and notes receivable also included, as of December 31, 2015,2018 and 2017, a $325$100 million Surplus Note from Radian Guaranty. In December 2015,2017, the Parent Company transferred $325$100 million ($208.5 million inof primarily marketable securities and a
small amount of cash and $116.5 million in marketable securities) to Radian Guaranty in exchange for a Surplus Note issued by Radian Guaranty. On June 30, 2016, Radian Guaranty transferred $325 million ($201.6 million in cash and $123.4 million in marketable securities) in repayment of the outstanding Surplus Note. See Note 19 of Notes to Consolidated Financial Statements for additional information related to the Surplus Note. Note ED Other assets increaseddecreased as of December 31, 2016,2018, compared to December 31, 2015,2017, by $107.1 million, primarily as a result of an increasethe settlement of the Company’s dispute related to the IRS Matter and the Company’s utilization of its $88.6 million of “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS. In 2019, the Company expects the IRS to refund the remaining $58 million that was previously on deposit. Also contributing to this decrease was a $28.7 million net decrease in the intercompany receivable balance primarily related to the reimbursement of the Parent Company’s allocated expenses by all of its subsidiaries, including related to the $300 million note receivable from Clayton Group Holdings Inc.Services segment (See Notes DC and GF for additional information). In particular,, offset by increases in other assets. As disclosed above in Note C, the Services segment has not generated sufficient cash flow to reimburse the Parent Company for its share of a portion of its direct and all of its allocated operating expenses and interest expense which contributed $31.2 millionrelated to the $300 million note receivable. Therefore, at December 31, 2018 and 2017, we recorded an allowance of $60.5 million and $42.7 million, respectively, against the outstanding balance of the interest receivable. During 2018, the intercompany receivable balance reflected an increase during 2016. Other assets also includes an $89 million deposit within the IRS. See Note 10 of Notes to Consolidated Financial Statements for additional informationbalance due related to this “qualified deposit”the Services segment’s share of direct and allocated operating expenses of $13.0 million and $8.5 million, which was advanced to the statusServices segment and used for the acquisition of Independent Settlement Services and Five Bridges in the examination byfourth quarter of 2018. At December 31, 2018, we recorded an allowance of $48.3 million against the IRSentire outstanding intercompany receivable balance from Clayton Group Holdings Inc., which represented the Services segments’ share of our 2000 through 2007 consolidated federal income tax returns.unreimbursed direct and allocated operating expenses. Note FE During 2016,2017, the Parent Company successfully completed a series of transactions to strengthen its capital position, including reducing its overall cost of capital and improving the maturity profile of its debt. See Notes 12 and 1415 of Notes to Consolidated Financial Statements for additional information on our loss on induced conversion and debt extinguishment, long-term debtsenior notes and capital stock. At December 31, 2016,2018, the maturities of the principal amount of our long-term debtsenior notes in future years are as follows: | | | | | | (In thousands) | | | 2019 | $ | 158,623 |
| | 2020 | 234,126 |
| | 2021 | 197,661 |
| | 2024 | 450,000 |
| | Total | $ | 1,040,410 |
| | | |
| | | | | | (In thousands) | | | 2017 | $ | 22,233 |
| | 2019 | 368,024 |
| | 2020 | 350,000 |
| | 2021 | 350,000 |
| | Total | $ | 1,090,257 |
| | | |
In November 2016, the Parent Company announced its intent to exercise its redemption option for the remaining Convertible Senior Notes due 2019, of which $68.0 million aggregate principal was outstanding at December 31, 2016. The redemption was settled on January 27, 2017. See Note 21 of Notes to Consolidated Financial Statements for additional information.
Note GF The Parent Company provides certain services to its subsidiaries. The Parent Company allocates to its subsidiaries expenses it incurs in the capacity of supporting those subsidiaries, including operating expenses, which are allocated based on athe forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on certain subsidiaries, and interest expense, which is allocated based on relative capital. These expenses are presented net of allocations in the Statements of Operations. Substantially all operating expenses and most of our interest expense, except for discount amortization on our long-term debt, as well as coupon interest attributable to the Convertible Senior Notes due 2019,senior notes, have been allocated to the subsidiaries for 2016, 20152018, 2017 and 2014.2016. Amounts allocated to the subsidiaries for expenses are based on actual cost, without any mark-up. The Parent Company considers these charges fair and reasonable. The subsidiaries generally reimburse the Parent Company for these costs in a timely manner, which has the impact of temporarily improving the cash flows of the Parent Company, if accrued expenses are reimbursed prior to actual payment. See Note ED for additional information.
The following table shows the components of our Parent Company expenses that have been allocated to our subsidiaries for the periods indicated: | | | | | | | | | | | | | | | Year Ended December 31, | | (in thousands) | 2018 | | 2017 | | 2016 | | Allocated operating expenses | $ | 94,815 |
| | $ | 72,764 |
| | $ | 56,446 |
| | Allocated interest expenses | 42,195 |
| | 44,686 |
| | 52,092 |
| | Total allocated expenses | $ | 137,010 |
| | $ | 117,450 |
| | $ | 108,538 |
|
| | | | | | | | | | | | | | | | | Year Ended December 31, | | (in thousands) | | 2016 | | 2015 | | 2014 | | Allocated operating expenses | | $ | 56,446 |
| | $ | 53,738 |
| | $ | 59,434 |
| | Allocated interest expenses | | 52,092 |
| | 35,300 |
| | 33,098 |
| | Total allocated expenses | | $ | 108,538 |
| | $ | 89,038 |
| | $ | 92,532 |
|
Note H
Net investment income increased in 2016 compared to 2015, primarily due to an increase in the Parent Company’s investment portfolio during the year.
Interest expense reflectswas relatively unchanged in 2018 as compared to 2017. Interest expense during 2017 and 2016 reflected the discount amortization on our long-term debt,senior notes, as well as coupon interest attributable to the Convertible Senior Notes due 2019 and the Senior Notes due 2019, which are not allocated directly to our subsidiaries.2019. The reduction in interest expense in 2017 as compared to 2016 was primarily attributable to lower expense following the induced conversion and extinguishment of $30.1$21.6 million of our remaining Convertible Senior Notes due 2017 in the second quarter of 2017 and $322.0the redemption of the remaining $68.0 million of our Convertible Senior Notes due 2019 during the year.January 2017. Note IG We, and certain of our subsidiaries, have entered into the following intercompany guarantees: Radian Group and RMAIRadian Mortgage Assurance are parties to a guaranty agreement, which provides that Radian Group will make sufficient funds available to RMAIRadian Mortgage Assurance to ensure that RMAIRadian Mortgage Assurance has a minimum of $5 million of statutory policyholders’ surplus every calendar quarter. RMAIRadian Mortgage Assurance had $8.6$8.7 million of statutory policyholders’ surplus and no RIF exposure as of December 31, 2016.2018. To allow our mortgage insurance customers to comply with applicable securities regulations for issuers of ABS (including MBS)mortgage-backed securities), we have been required, depending on the amount of credit enhancement we were providing, to provide: (i) audited financial statements for the insurance subsidiary participating in these transactions or (ii) a full and unconditional holding-company level guarantee for our insurance subsidiaries’ obligations in such transactions. Radian Group has guaranteed two structured transactions for Radian Guaranty with approximately $110.2$87.8 million of aggregate remaining credit exposure as of December 31, 2016.2018. Radian Group and RGRIRadian Guaranty Reinsurance are parties to an Assumption and Indemnification Agreement with regard to RGRI’s portionobligations under our tax-sharing arrangements. Pursuant to this agreement, Radian Group is required to assume certain obligations that arise as a result of the Deficiency Amounts relating to the IRS litigation. This indemnification agreement was made in lieu of an immediate capital contribution to RGRI that otherwise would have been required for RGRI to maintain its minimum statutory policyholders’ surplus requirements in light of the remeasurement as of December 31, 2011 of uncertain tax positions related to the portfolio of REMIC residual interests. See Note E for additional information.our tax-sharing arrangement.
Radian Group Inc. Schedule IV—Reinsurance Insurance Premiums Earned YearYears Ended December 31, 2016, 20152018, 2017 and 2014
2016
| | | | | | | | | | | | | | | | | | | | | ($ in thousands) | Gross Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Assumed
Premiums as a
Percentage
of Net
Premiums | | 2018 | $ | 1,074,298 |
| | $ | 67,195 |
| | $ | 6,904 |
| | $ | 1,014,007 |
| | 0.68 | % | | 2017 | $ | 990,016 |
| | $ | 57,271 |
| | $ | 28 |
| | $ | 932,773 |
| | 0.00 | % | | 2016 | $ | 999,093 |
| | $ | 77,359 |
| | $ | 35 |
| | $ | 921,769 |
| | 0.00 | % | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | ($ in thousands) | Gross Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Assumed
Premiums as a
Percentage
of Net
Premiums | | 2016 | $ | 999,093 |
| | $ | 77,359 |
| | $ | 35 |
| | $ | 921,769 |
| | 0.00 | % | | 2015 | $ | 973,645 |
| | $ | 57,780 |
| | $ | 43 |
| | $ | 915,908 |
| | 0.00 | % | | 2014 | $ | 905,502 |
| | $ | 61,017 |
| | $ | 43 |
| | $ | 844,528 |
| | 0.01 | % | | | | | | | | | | | |
INDEX TO EXHIBITS
| | | Exhibit
Number
| Exhibit | 2.1 | Unit Purchase Agreement, dated as of May 6, 2014, by and among (i) the Registrant, (ii) Clayton Holdings LLC and (iii) Cobra Green LLC, a Delaware limited liability company, and Paul T. Bossidy (incorporated by reference to Exhibit 2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended March 31, 2014) | | | 2.2 | Stock Purchase Agreement dated as of December 22, 2014, between Radian Guaranty Inc. and Assured Guaranty Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated December 23, 2014, and filed on December 23, 2014) | | | 3.1 | Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 11, 2004 and filed on May 12, 2004) | | | 3.2 | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 22, 2008 and filed on May 29, 2008) | | | 3.3 | Second Amendment to the Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 12, 2010 and filed on May 18, 2010) | | | 3.4 | Certificate of Amendment of Certificate of Incorporation of the Registrant effective as of May 15, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 14, 2013 and filed on May 20, 2013) | | | 3.5 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant effective as of May 11, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 11, 2016 and filed on May 17, 2016) | | | 3.6 | Certificate of Change of Registered Agent and Registered Office of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 10, 2010 and filed on November 16, 2010) | | | 3.7 | Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated October 9, 2009 and filed on October 13, 2009) | | | 3.8 | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 9, 2016 and filed on November 14, 2016) | | | 4.1 | Specimen certificate for Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 1999) | | | 4.2 | Amended and Restated Tax Benefit Preservation Plan, dated as of February 12, 2010, between the Registrant and The Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 12, 2010 and filed on February 17, 2010) | | | 4.3 | First Amendment to the Amended and Restated Tax Benefit Preservation Plan, dated as of May 3, 2010, between the Registrant and The Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 3, 2010 and filed on May 4, 2010) | | | 4.4 | Senior Indenture, dated as of June 7, 2005, between the Registrant and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated June 2, 2005 and filed on June 7, 2005) | | | 4.5 | Senior Indenture, dated as of November 15, 2010, between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 10, 2010 and filed on November 16, 2010) | | |
| | | Exhibit
Number
| Exhibit | 4.6 | First Supplemental Indenture, dated as of November 15, 2010, between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 10, 2010 and filed on November 16, 2010) | | | 4.7 | Form of 3.00% Convertible Senior Notes Due 2017 (included within Exhibit 4.6) | | | 4.8 | Officers’ Certificate, dated as of January 4, 2013, including the terms of the Registrant’s 9.000% Senior Notes due 2017, as Attachment A, and including the form of the Notes as Exhibit A-1 to Attachment A (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated January 4, 2013 and filed on January 7, 2013) | | | 4.9 | Form of 9.000% Senior Notes Due 2017 (included within Exhibit 4.8) | | | 4.10 | Registration Rights Agreement, dated as of January 4, 2013, between the Registrant and Morgan Stanley & Co. LLC (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated January 4, 2013 and filed on January 7, 2013) | | | 4.11 | Senior Indenture dated as of March 4, 2013 between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 27, 2013 and filed on March 4, 2013) | | | 4.12 | First Supplemental Indenture dated as of March 4, 2013 between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 27, 2013 and filed on March 4, 2013) | | | 4.13 | Form of 2.25% Convertible Senior Notes due 2019 (included within Exhibit 4.12) | | | 4.14 | Second Supplemental Indenture, dated as of May 13, 2014, between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 7, 2014, and filed on May 13, 2014) | | | 4.15 | Form of 5.500% Senior Note due 2019 (included within Exhibit 4.14) | | | 4.16 | Officers’ Certificate, dated as of February 28, 2013, including the terms of the Registrant’s 9.000% Senior Notes due 2017, as Attachment A, and including the form of the Registered Notes as Exhibit A-1 to Attachment A (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 28, 2013 and filed on March 6, 2013) | | | 4.17 | Form of 9.000% Senior Notes due 2017 (included within exhibit 4.16) | | | 4.18 | Third Supplemental Indenture dated as of June 19, 2015 between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated June 16, 2015 and filed on June 19, 2015) | | | 4.19 | Form of 5.250% Senior Notes due 2020 (included within Exhibit 4.18) | | | 4.20 | Fourth Supplemental Indenture dated as of March 18, 2016 between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated March 15, 2016 and filed on March 18, 2016) | | | 4.21 | Form of 7.000% Senior Note due 2021 (included within Exhibit 4.20) | | | +10.1 | Employment Agreement between the Registrant and Sanford A. Ibrahim, dated as of November 12, 2014(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 12, 2014 and filed on November 18, 2014) | | | +10.2 | Stock Appreciation Right Agreement under 2008 Equity Compensation Plan, dated as of May 13, 2009, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2009) | | | +10.3 | Restricted Stock Award Agreement under 2008 Equity Compensation Plan, dated as of May 13, 2009, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2009) |
| | | Exhibit
Number
| Exhibit | | | +10.4 | Restricted Stock Award Agreement under 2008 Equity Compensation Plan, dated as of May 16, 2009, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2009) | | | +10.5 | Amendments to Restricted Stock and Stock Option Grants between the Registrant and Sanford A. Ibrahim, dated as of February 10, 2010 (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2009) | | | +10.6 | 2010 Performance-Based Restricted Stock Unit Agreement under the 2008 Equity Compensation Plan, dated May 12, 2010 between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2010) | | | +10.7 | 2010 Stock Option Agreement under the 2008 Equity Compensation Plan, dated May 12, 2010 between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2010) | | | +10.8 | Form of Severance Agreement (including for Richard I. Altman, Derek Brummer, Edward J. Hoffman, C. Robert Quint and H. Scott Theobald) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated December 30, 2010 and filed on January 6, 2011) | | | +10.9 | Radian Group Inc. Amended and Restated Benefit Restoration Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 6, 2007 and filed on November 13, 2007) | | | +10.10 | Amendment No. 1 to the Radian Group Inc. Amended and Restated Benefit Restoration Plan, effective January 1, 2008 (incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2008) | | | +10.11 | Radian Group Inc. Savings Incentive Plan (Amended and Restated Effective January 1, 2010 incorporating all amendments through December 31, 2012) (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2013) | | | +10.12 | Amendment No. 1 to the Radian Group Inc. Savings Incentive Plan (Amended and Restated Effective January 1, 2010), effective May 22, 2013 (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2013) | | | +10.13 | Radian Group Inc. 1995 Equity Compensation Plan (Amended and Restated May 9, 2006) (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders (file no. 1-11356), as filed with the Securities and Exchange Commission on April 18, 2006). | | | +10.14 | Amendment to Radian Group Inc. 1995 Equity Compensation Plan (Amended and Restated May 9, 2006) dated February 5, 2007 (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2006) | | | +10.15 | Amendment No. 2 to Radian Group Inc. 1995 Equity Compensation Plan, dated November 6, 2007 (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2007) | | | +10.16 | Form of Stock Option Grant Letter under 1995 Equity Compensation Plan (incorporated by reference to Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2004) | | | +10.17 | Form of Restricted Stock Award Agreement for awards granted before February 5, 2007 under 1995 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2005) | | | +10.18 | Form of Restricted Stock Award Agreement for awards granted on or after February 5, 2007 under 1995 Equity Compensation Plan (incorporated by reference to Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2006) | | | +10.19 | Form of Phantom Stock Agreement for Non-Employee Directors under 1995 Equity Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 8, 2005 and filed on February 14, 2005) |
| | | Exhibit
Number
| Exhibit | | | +10.20 | Radian Group Inc. Amended and Restated 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (file no. 333-174428) filed on May 23, 2011) | | | +10.21 | Form of Stock Option Grant Letter under 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2008) | | | +10.22 | Form of Restricted Stock Award Agreement under 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2008) | | | +10.23 | Form of Phantom Stock Agreement for Non-Employee Directors under 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2008) | | | +10.24 | Amendment to Form of 2008 Phantom Stock Agreement for Non-Employee Directors under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2009) | | | +10.25 | Form of 2009 Restricted Stock Award Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2009) | | | +10.26 | Form of 2009 Stock Appreciation Right Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2009) | | | +10.27 | Form of Restricted Stock Unit Award Agreement for Employees under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2010) | | | +10.28 | Form of 2009 Restricted Stock Unit Award Agreement for Non-Employee Directors under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2009) | | | +10.29 | Amended and Restated Radian Group Inc. 2008 Executive Long-Term Incentive Cash Plan (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended March 31, 2011) | | | +10.30 | Form of 2010 Performance-Based Restricted Stock Unit Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2010) | | | +10.31 | Form of 2010 Stock Option Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2010) | | | +10.32 | Form of 2010 Executive Long-Term Incentive Cash Plan Award (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2010) | | | +10.33 | Radian Group Inc. Amended and Restated Performance Share Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Amended Current Report on Form 8-K (file no. 1-11356) dated February 8, 2005 and filed on February 14, 2005) | | | +10.34 | Amended and Restated Radian Group Inc. Voluntary Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2014) | | | +10.35 | Amended and Restated Radian Voluntary Deferred Compensation Plan for Officers (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2014) | | |
| | | Exhibit
Number
| Exhibit | +10.36 | Radian Group Inc. 2008 Employee Stock Purchase Plan, as amended and restated on December 11, 2012 (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2012) | | | +10.37 | Radian Group Inc. STI/MTI Incentive Plan for Executive Employees (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 12, 2009 and filed on November 18, 2009) | | | +10.38 | Radian Group Inc. STI Incentive Plan For Financial Guaranty Employees (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2013) | | | +10.39 | Enhance Financial Services Group Inc. 1997 Long-Term Incentive Plan for Key Employees (As Amended Through June 3, 1999) (incorporated by reference to Exhibit 10.2.2 to the Quarterly Report on Form 10-Q (file no. 1-10967) for the period ended June 30, 1999, of Enhance Financial Services Group Inc.) | | | +10.40 | Enhance Reinsurance Company Supplemental Pension Plan (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K (file no. 1-10967) for the year ended December 31, 1999, of Enhance Financial Services Group Inc.) | | | +10.41 | Amendment to Enhance Reinsurance Company Supplemental Pension Plan, effective January 1, 2008 (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2008) | | | +10.42 | Certain Compensation Arrangements with Directors (Effective May, 2008) (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2008) | | | 10.43 | Net Worth and Liquidity Maintenance Agreement, dated as of October 10, 2000, between Radian Guaranty Inc. and Radian Insurance Inc. (incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2002) | | | 10.44 | Form of Expense Allocation and Services Agreement between the Registrant and each of Radian Guaranty Inc., Radian Insurance Inc., Radian Asset Assurance Inc. and Amerin Guaranty Corporation (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2005) | | | 10.45 | Form Amendment to Expense Allocation and Services Agreement between the Registrant and each of Radian Guaranty Inc. Radian Insurance Inc., Radian Asset Assurance Inc. and Amerin Guaranty Corporation (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on form 10-Q (file no. 1-11356) for the period ended March 31, 2009) | | | 10.46 | Radian Group Inc. Allocation of Consolidated Tax Liability Agreement between the Registrant and each of its subsidiaries, dated January 1, 2002, including Addendums 1 through 6 dated between January 1, 2002 and July 10, 2008 (incorporated by reference to Exhibit 10.49 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2008) | | | 10.47 | Capped Call Confirmation (Reference No. 99AMQGZY8) dated as of November 8, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 8, 2010 and filed on November 10, 2010) | | | 10.48 | Capped Call Confirmation (Reference No. 99AMQM627) dated as of November 10, 2010 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated November 8, 2010 and filed on November 10, 2010) | | | 10.49 | Securities Purchase Agreement, dated as of May 3, 2010, by and between Radian Guaranty Inc. and Sherman Financial Group LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated April 30, 2010 and filed on May 4, 2010) | | | +10.50 | Amendment to Incentive Awards under 2008 Executive Long-Term Incentive Cash Plan, dated April 5, 2011 (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated April 5, 2011 and filed on April 7, 2011) | | |
| | | Exhibit
Number
| Exhibit | +10.51 | Form of 2011 Performance Based Restricted Stock Unit Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2011) | | | +10.52 | Form of 2011 Stock Option Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2011) | | | +10.53 | 2011 Performance Based Restricted Stock Unit Agreement under the 2008 Equity Compensation Plan, dated June 9, 2011, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2011) | | | +10.54 | 2011 Performance Based Restricted Stock Unit Agreement under the 2008 Equity Compensation Plan, dated June 9, 2011, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2011) | | | +10.55 | 2011 Stock Option Agreement under the 2008 Equity Compensation Plan, dated June 9, 2011, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2011) | | | +10.56 | 2011 Stock Option Agreement under the 2008 Equity Compensation Plan, dated June 9, 2011, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2011) | | | +10.57 | Severance Agreement, dated December 23, 2011, between Teresa Bryce Bazemore and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) filed December 29, 2011) | | | +10.58 | Transfer Letter Agreement between the Registrant and Derek Brummer, dated April 3, 2013 (incorporated by reference to Exhibit 10.63 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2013) | | | 10.59 | Commutation, Reassumption and Release Agreement, effective as of January 1, 2012 (signed January 24, 2012), between Assured Guaranty Municipal Corp. (formerly Financial Security Assurance Inc.), Assured Guaranty (Europe) Ltd. (formerly Financial Security Assurance (U.K.) Limited), and Radian Asset Assurance Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated January 30, 2012 and filed on January 30, 2012) | | | +10.60 | Form of 2012 Performance Based Restricted Stock Unit Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2012) | | | +10.61 | Form of 2012 Stock Option Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2012) | | | +10.62 | 2012 Performance Based Restricted Stock Unit Grant Letter under the 2008 Equity Compensation Plan, dated as of June 6, 2012, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2012) | | | +10.63 | 2012 Performance Based Restricted Stock Unit Grant Letter under the 2008 Equity Compensation Plan, dated as of June 6, 2012, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2012) | | | +10.64 | 2012 Stock Option Agreement under the 2008 Equity Compensation Plan, dated as of June 6, 2012, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2012) | | | +10.65 | 2012 Stock Option Agreement under the 2008 Equity Compensation Plan, dated as of June 6, 2012, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2012) | | |
| | | Exhibit
Number
| Exhibit | +10.66 | Waiver Letter, dated May 30, 2012, under Employment Agreement between the Registrant and S.A. Ibrahim, dated April 5, 2011 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2012) | | | +10.67 | Letter Agreement, dated May 16, 2013, between the Registrant and S.A. Ibrahim (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated May 14, 2013 and filed on May 20, 2013) | | | +10.68 | 2013 Performance-Based Restricted Stock Unit Grant Letter under the 2008 Equity Compensation Plan, dated as of May 14, 2013, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2013) | | | +10.69 | 2013 Stock Option Agreement under the 2008 Equity Compensation Plan, dated as of May 14, 2013, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2013) | | | +10.70 | 2013 Performance-Based Restricted Stock Unit Grant Letter under the 2008 Equity Compensation Plan, dated as of May 14, 2013, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2013) | | | +10.71 | 2013 Stock Option Agreement under the 2008 Equity Compensation Plan, dated as of May 14, 2013, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2013) | | | +10.72 | Form of 2013 Performance-Based Restricted Stock Unit Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2013) | | | +10.73 | Form of 2013 Stock Option Agreement under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2013) | | | 10.74 | Master Transaction Agreement, dated as of August 29, 2013, by and between Radian Guaranty Inc. and Federal Home Loan Mortgage Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated August 29, 2013 and filed on August 30, 2013) | | | +10.75 | 2014 Performance-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan, dated as of June 17, 2014, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2014) | | | +10.76 | 2014 Stock Option Agreement under the 2014 Equity Compensation Plan, dated as of June 17, 2014, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2014) | | | +10.77 | 2014 Performance-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan, dated as of June 17, 2014, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2014) | | | +10.78 | 2014 Stock Option Agreement under the 2014 Equity Compensation Plan, dated as of June 17, 2014, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2014) | | | +10.79 | Form of 2014 Performance-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2014) | | | +10.80 | Form of 2014 Stock Option Agreement under the 2014 Equity Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2014) | | | +10.81 | Employment Agreement between the Registrant and Paul T. Bossidy, dated as of May 1, 2014 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2014) |
| | | Exhibit
Number
| Exhibit | | | 10.82 | Confidential Settlement Agreement and Release, dated as of September 16, 2014, by and among Radian Guaranty Inc., Countrywide Home Loans, Inc., and Bank of America, N.A., as a successor to BofA Home Loans Servicing f/k/a Countrywide Home Loans Servicing LP on its own behalf and as successor in interest by de jure merger to Countrywide Bank FSB, formerly Treasury Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated September 16, 2014, and filed on September 19, 2014) | | | +10.83 | Letter Agreement, effective as of December 10, 2014, between the Registrant and J. Franklin Hall (including Attachment A - Severance Agreement and Attachment B - Restrictive Covenant Agreement) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated December 10, 2014, and filed on December 15, 2014) | | | +10.84 | Consulting Services Agreement, dated December 16, 2014, between the Registrant and C. Robert Quint (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated December 16, 2014, and filed on December 18, 2014) | | | +10.85 | Radian Group Inc. 2014 Equity Compensation Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A (file no. 1-11356) filed on April 7, 2014 for the 2014 Annual Meeting of Stockholders) | | | 10.86 | Accelerated Share Repurchase Agreement, dated as of June 18, 2015, between the Registrant and Deutsche Bank AG, London Branch with Deutsche Bank Securities Inc. acting as agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2015) | | | +10.87 | 2014 Stock Option Agreement under the 2014 Equity Compensation Plan, dated as of July 9, 2015, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2015) | | | +10.88
| 2015 Performance-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan, dated as of July 9, 2015, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2015) | | | +10.89
| Form of 2015 Stock Option Agreement under the 2014 Equity Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2015) | | | +10.90
| Form of 2015 Performance-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2015) | | | +10.91
| Form of Amendment to Restricted Stock Unit Award Agreement for Non-Employee Directors under the 2008 Equity Compensation Plan (incorporated by reference to Exhibit 10.91 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2015) | | | +10.92 | Form of 2015 Time-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan (incorporated by reference to Exhibit 10.92 to the Registrant’s Annual Report on Form 10-K (file no. 1-11356) for the year ended December 31, 2015)
| | | +10.93 | Severance Agreement and Release, effective March 30, 2016, between the Registrant and Joseph D’Urso (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended March 31, 2016) | | | +10.94 | 2016 Performance-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan, dated as of May 11, 2016, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2016) | | | +10.95 | 2016 Stock Option Agreement under the 2014 Equity Compensation Plan, dated as of May 11, 2016, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2016) | | | +10.96 | Form of 2016 Performance-Based Restricted Stock Unit Grant Letter under the 2014 Equity Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2016) |
| | | Exhibit
Number
| Exhibit | | | +10.97 | Form of 2016 Stock Option Agreement under the 2014 Equity Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended June 30, 2016) | | | +10.98 | Form of Executive Severance Agreement (including for Jeffrey Tennyson) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2016) | | | +10.99 | Form of Restrictive Covenant Agreement (including for Jeffrey Tennyson) (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (file no. 1-11356) for the period ended September 30, 2016) | | | +10.100 | Employment Agreement, dated as of February 8, 2017, between the Registrant and Richard G. Thornberry (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 7, 2017 and filed on February 13, 2017) | | | +10.101 | Restrictive Covenants Agreement, dated as of February 8, 2017, between the Registrant and Richard G. Thornberry (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 7, 2017 and filed on February 13, 2017) | | | +10.102 | Form of Restricted Stock Unit Agreement between the Registrant and Richard G. Thornberry (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 7, 2017 and filed on February 13, 2017) | | | +10.103 | Retirement Agreement, dated as of February 8, 2017, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 7, 2017 and filed on February 13, 2017) | | | +10.104 | Consulting Agreement, dated as of February 8, 2017, between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 7, 2017 and filed on February 13, 2017) | | | +10.105 | Form of Performance Based Restricted Stock Unit Agreement between the Registrant and Sanford A. Ibrahim (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 7, 2017 and filed on February 13, 2017) | | | +10.106 | Radian Group Inc. STI/MTI Incentive Plan for Executive Employees, as amended and restated (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (file no. 1-11356) dated February 7, 2017 and filed on February 13, 2017) | | | *12 | Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends | | | *21 | Subsidiaries of the Registrant | | | *23.1 | Consent of PricewaterhouseCoopers LLP | | | *31 | Rule 13a-14(a) Certifications | | | **32 | Section 1350 Certifications | | | *101 | The following financial information from Radian Group Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016, is formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014, (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015, and 2014, (iv) Consolidated Statements of Changes in Common Stockholders’ Equity for the years ended December 31, 2016, 2015, and 2014, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014, and (vi) the Notes to Consolidated Financial Statements.
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| | + | Management contract, compensatory plan or arrangement. |
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