UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
(Mark One)
|
| |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 2019
OR
|
| |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-11356
Radian Group Inc.
(Exact name of registrant as specified in its charter)
|
| | | | | | |
| Delaware | | 23-2691170 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | |
| 1500 Market Street | , | Philadelphia | , | PA | | 19102 |
| (Address of principal executive offices) | | (Zip Code) |
(215) 231-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | RDN | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | | | | |
| Large Accelerated Filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 203,280,541201,149,388 shares of common stock, $0.001 par value per share, outstanding on August 2,November 8, 2019.
|
| | |
| | TABLE OF CONTENTS | |
| | | Page Number |
| |
| |
| |
| Item 1. | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | | |
| |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 6. | | |
| | | |
| |
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list defines various abbreviations and acronyms used throughout this report, including the Condensed Consolidated Financial Statements, the Notes to Unaudited Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
| |
| Term | Definition |
| 2014 Master Policy | Radian Guaranty’s master insurance policy, setting forth the terms and conditions of our mortgage insurance coverage, which became effective October 1, 2014 |
| 2016 Single Premium QSR Agreement | Quota share reinsurance agreement entered into with a panel of third-party reinsurance providers in the first quarter of 2016 and subsequently amended in the fourth quarter of 2017 |
| 2018 Single Premium QSR Agreement | Quota share reinsurance agreement entered into with a panel of third-party reinsurance providers in October 2017 to cede a portion of Single Premium NIW beginning January 1, 2018 |
| ABS | Asset-backed securities |
| ASU | Accounting Standards Update, issued by the FASB to communicate changes to GAAP |
| Available Assets | As defined in the PMIERs, assets primarily including the liquid assets of a mortgage insurer, and reduced by premiums received but not yet earned |
Back-end | With respect to credit risk transfer programs established by the GSEs, policies written on loans that are already part of an existing GSE portfolio, as contrasted with loans that are to be purchased by the GSEs in the future |
CCF | Conservatorship Capital Framework |
| CFPB | Consumer Financial Protection Bureau |
| Claim Curtailment | Our legal right, under certain conditions, to reduce the amount of a claim, including due to servicer negligence |
| Claim Denial | Our legal right, under certain conditions, to deny a claim |
| Claim Severity | The total claim amount paid divided by the original coverage amount |
| Clayton | Clayton Holdings LLC, a subsidiary of Radian Group |
| Clayton Intercompany Note | A $300 million note payable from Radian Mortgage Services Inc. (formerly Clayton Group Holdings Inc.) to Radian Group (with terms consistent with the terms of our Senior Notes due 2019 that were used to fund our purchase of Clayton) |
| CMBS | Commercial mortgage-backed securities |
| Cures | Loans that were in default as of the beginning of a period and are no longer in default because payments were received such that the loan is no longer 60 or more days past due |
| Default to Claim Rate | The percentage of defaulted loans that are assumed to result in a claim |
| Discrete Item(s) | For tax calculation purposes, certain items that are required to be accounted for in the provision for income taxes as they occur and are not considered components of the estimated annualized effective tax rate for purposes of reporting interim results. Generally, these are items that are: (i) clearly defined (such as changes in tax rate or tax law); (ii) infrequent or unusual in nature; or (iii) gains or losses that are not components of continuing operating income, such as income from discontinued operations or losses reflected as components of other comprehensive income. These items impact the difference between the statutory rate and Radian’s effective tax rate. |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended |
| Eagle Re 2018-1 | Eagle Re 2018-1 Ltd., an unaffiliated special purpose reinsurer (a VIE) domiciled in Bermuda |
| Eagle Re 2019-1 | Eagle Re 2019-1 Ltd., an unaffiliated special purpose reinsurer (a VIE) domiciled in Bermuda |
| Eagle Re Issuer(s) | Eagle Re 2018-1 Ltd. and Eagle Re 2019-1 Ltd. |
| Excess-of-Loss Program | The credit risk protection obtained by Radian Guaranty in the form of excess-of-loss reinsurance, which indemnifies the ceding company against loss in excess of a specific agreed limit, up to a specified sum. The program includes reinsurance agreements with Eagle Re 2018-1 and Eagle Re 2019-1, in connection with the issuance by the Eagle Re Issuers of mortgage insurance-linked notes in November 2018 and April 2019, respectively. The program also includes a separate agreement with a third-party reinsurer, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re 2018-1. |
| Exchange Act | Securities Exchange Act of 1934, as amended |
|
| |
| Term | Definition |
Excess-of-Loss Program | The credit risk protection obtained by Radian Guaranty in November 2018, including: (i) the excess-of-loss reinsurance agreement with Eagle Re 2018-1, in connection with the issuance by Eagle Re 2018-1 of mortgage insurance-linked notes, and (ii) a separate excess-of-loss reinsurance agreement with a third-party reinsurer. Excess-of-loss reinsurance is a type of reinsurance that indemnifies the ceding company against loss in excess of a specific agreed limit, up to a specified sum. Effective in April 2019, it also includes the new credit risk protection obtained through an excess-of-loss reinsurance agreement with Eagle Re 2019-1, in connection with the issuance by Eagle Re 2019-1 of mortgage insurance-linked notes. |
Exchange Act | Securities Exchange Act of 1934, as amended |
| Extraordinary Distribution | A dividend or distribution of capital that is required to be approved by an insurance company’s primary regulator that is greater than would be permitted as an ordinary distribution (which does not require regulatory approval) |
| Fannie Mae | Federal National Mortgage Association |
| FASB | Financial Accounting Standards Board |
| FEMA | Federal Emergency Management Agency, an agency of the U.S. Department of Homeland Security |
FEMA Designated Area | Generally, an area that has been subject to a disaster, designated by FEMA as an individual assistance disaster area for the purpose of determining eligibility for various forms of federal assistance |
| FHA | Federal Housing Administration |
| FHFA | Federal Housing Finance Agency |
| FHLB | Federal Home Loan Bank of Pittsburgh |
| FICO | Fair Isaac Corporation (“FICO”) credit scores, for Radian’s portfolio statistics, represent the borrower’s credit score at origination and, in circumstances where there are multiple borrowers, the lowest of the borrowers’ FICO scores is utilized |
| Five Bridges | Five Bridges Advisors, LLC. Radian acquired the assets of Five Bridges in December 2018 |
| Foreclosure Stage Default | The Stagestage of Default indicating that thedefault of a loan in which a foreclosure sale has been scheduled or held |
| Freddie Mac | Federal Home Loan Mortgage Corporation |
Front-end | With respect to credit risk transfer programs established by the GSEs, policies written on loans that are to be purchased by the GSEs in the future, as contrasted with loans that are already part of an existing GSE portfolio |
| GAAP | Generally accepted accounting principles in the U.S., as amended from time to time |
| GSE(s) | Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) |
| HARP | Home Affordable Refinance Program |
| IBNR | Losses incurred but not reported |
| IIF | Insurance in force, equal to the aggregate unpaid principal balances of the underlying loans |
| IRC | Internal Revenue Code of 1986, as amended |
| IRS | Internal Revenue Service |
| IRS Matter | Our dispute with the IRS that we settled and fully resolved in the second quarter of 2018 that was related to the assessed tax liabilities, penalties and interest from the IRS’s examination of our 2000 through 2007 consolidated federal income tax returns. |
| LAE | Loss adjustment expenses, which include the cost of investigating and adjusting losses and paying claims |
| Loss Mitigation Activity/Activities | Activities such as Rescissions, Claim Denials, Claim Curtailments and cancellations |
| LTV | Loan-to-value ratio, calculated as the percentage of the original loan amount to the original value of the property |
| Master Policies | The Prior Master Policy and the 2014 Master Policy, together |
| Minimum Required Assets | A risk-based minimum required asset amount, as defined in the PMIERs, calculated based on net RIF (RIF, net of credits permitted for reinsurance) and a variety of measures related to expected credit performance and other factors |
|
| |
Term | Definition |
| Monthly and Other Recurring Premiums (or Recurring Premium Policies) | Insurance premiums or policies, respectively, where premiums are paid on a monthly or other installment basis, in contrast to Single Premium Policies |
Monthly Premium Policies | Insurance policies where premiums are paid on a monthly installment basis |
| Moody’s | Moody’s Investors Service |
| Mortgage Insurance | Radian's mortgage insurance and risk services business segment, which 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 |
| MPP Requirement | Certain states’ statutory or regulatory risk-based capital requirement that the mortgage insurer must maintain a minimum policyholder position, which is calculated based on both risk and surplus levels |
| NIW | New insurance written |
|
| |
| Term | Definition |
| NOL | Net operating loss; for tax purposes, accumulated during years a company reported more tax deductions than taxable income. NOLs may be carried back or carried forward a certain number of years, depending on various factors which can reduce a company’s tax liability. |
| Persistency Rate | The percentage of IIF that remains in force over a period of time |
| PMIERs | Private Mortgage Insurer Eligibility Requirements issued by the GSEs under oversight of the FHFA to set forth requirements an approved insurer must meet and maintain to provide mortgage guaranty insurance on loans acquired by the GSEs |
| PMIERs 1.0 | The original PMIERs effective on December 31, 2015 |
| PMIERs 2.0 | The revised PMIERs issued by the GSEs on September 27, 2018, which became effective on March 31, 2019 |
| Pool Insurance | Pool Insurance differs from primary insurance in that our maximum liability is not limited to a specific coverage percentage on an individual mortgage loan. Instead, an aggregate exposure limit, or “stop loss,” is applied to the initial aggregate loan balance on a group or “pool” of mortgages. |
| Prior Master Policy | Radian Guaranty’s master insurance policy, setting forth the terms and conditions of our mortgage insurance coverage, which was in effect prior to the effective date of the 2014 Master Policy |
| QM | A mortgage that possesses certain low-risk characteristics that enable it to qualify for lender protection under the ability to repay rule instituted by the Dodd-Frank Act |
| QSR Program | The quota share reinsurance agreements entered into with a third-party reinsurance provider in the second and fourth quarters of 2012, collectively |
| Radian | Radian Group Inc. together with its consolidated subsidiaries |
| Radian Group | Radian Group Inc. |
| Radian Guaranty | Radian Guaranty Inc., a Pennsylvania domiciled insurance subsidiary of Radian Group |
| Radian Reinsurance | Radian Reinsurance Inc., a Pennsylvania domiciled insurance subsidiary of Radian Group |
| Radian Title Insurance | Radian Title Insurance Inc., formerly known as EnTitle Insurance, an Ohio domiciled insurance subsidiary of Radian Group |
| RBC States | Risk-based capital states, which are those states that currently impose a statutory or regulatory risk-based capital requirement |
| Reinstatements | Reversals of previous Rescissions, Claim Denials and Claim Curtailments |
REO | Real estate owned |
| Rescission | Our legal right, under certain conditions, to unilaterally rescind coverage on our mortgage insurance policies if we determine that a loan did not qualify for insurance |
| RIF | Risk in force; for primary insurance, RIF is equal to the underlying loan unpaid principal balance multiplied by the insurance coverage percentage, whereas for Pool Insurance, it represents the remaining exposure under the agreements |
|
| |
Term | Definition |
| Risk-to-capital | Under certain state regulations, a maximum ratio of net RIF calculated relative to the level of statutory capital |
| RMBS | Residential mortgage-backed securities |
| S&P | Standard & Poor’s Financial Services LLC |
| SAPP | Statutory accounting principles and practices, including those required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries |
| SEC | United States Securities and Exchange Commission |
| Senior Notes due 2019 | Our 5.500% unsecured senior notes due June 2019 ($300 million original principal amount) |
| Senior Notes due 2020 | Our 5.250% unsecured senior notes due June 2020 ($350 million original principal amount) |
| Senior Notes due 2021 | Our 7.000% unsecured senior notes due March 2021 ($350 million original principal amount) |
| Senior Notes due 2024 | Our 4.500% unsecured senior notes due October 2024 ($450 million original principal amount) |
|
| |
| Term | Definition |
| Senior Notes due 2027 | Our 4.875% unsecured senior notes due March 2027 ($450 million original principal amount) |
| Services | Radian's mortgage, real estate and title services business segment, which is primarily a fee-for-service business that offers a broad array of mortgage, real estate and title services to market participants across the mortgage and real estate value chain |
Single Premium NIW / RIF / IIF | NIW, RIF or IIF, respectively, on Single Premium Policies |
| Single Premium Policy / Policies | Insurance policies where premiums are paid in a single payment, which includes 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 shortly after the loans have been originated) |
| Single Premium QSR Program | The 2016 Single Premium QSR Agreement and the 2018 Single Premium QSR Agreement, together |
Stage of Default | The stage a loan is in relative to the foreclosure process, based on whether a foreclosure sale has been scheduled or held |
| Statutory RBC Requirement | Risk-based capital requirement imposed by the RBC States, requiring a minimum surplus level and, in certain states, a minimum ratio of statutory capital relative to the level of risk |
| Surplus Note | An intercompany 0.000% surplus note issued by Radian Guaranty to Radian Group |
Time in Default | The time period from the point a loan reaches default status (based on the month the default occurred) to the current reporting date |
| U.S. | The United States of America |
| U.S. Treasury | United States Department of the Treasury |
| VA | U.S. Department of Veterans Affairs |
| VIE | Variable interest entity |
Cautionary Note Regarding Forward-Looking Statements—Safe Harbor Provisions
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:
changes in economic and political conditions that impact the size of the insurable market, the credit performance of our insured portfolio, and our business prospects;
changes in the way customers, investors, ratings agencies, regulators or legislators perceive our performance, financial strength and future prospects;
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, including 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 CCFConservatorship Capital Framework (“CCF”) that would establish capital requirements for the GSEs, if the CCF is finalized;
our ability to successfully execute and implement our capital plans, including our risk distribution strategy through the capital markets and reinsurance markets, and to maintain sufficient holding company liquidity to meet our short- and long-term liquidity needs;
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 and licenses;
our ability to maintain an adequate level of capital in our insurance subsidiaries to satisfy existing and future regulatory requirements;
changes in the charters or business practices of, or rules or regulations imposed by or applicable to, the GSEs, which may include changes in the requirements to remain an approved insurer to the GSEs, the GSEs’ interpretation and application of the PMIERs, as well as changes impacting loans purchased by the GSEs, such as whether GSE eligible loans meet the QM loan requirements under applicable law, the GSEs’ requirements regarding mortgage 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;
a decrease in the Persistency Rates of our mortgage insurance on monthly premium products;
competition in our mortgage insurance business, including price competition and competition from the FHA and VA as well as from other forms of credit enhancement, including GSE sponsored alternatives to traditional mortgage insurance;
the effect of the Dodd-Frank Act on the financial services industry in general, and on our businesses in particular, including future changes to the QM loan requirements, which currently are subject to an Advanced Notice of Proposed Rulemaking issued by the CFPB;
legislative and regulatory activity (or inactivity), including the adoption of (or failure to adopt) new laws and regulations, or changes in existing laws and regulations, or the way they are interpreted or applied;
legal and regulatory claims, assertions, actions, reviews, audits, inquiries and investigations that could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures, new or increased reserves or have other effects on our business;
the amount and timing of potential settlements, payments or adjustments associated with federal or other tax examinations;
the possibility that we may fail to estimate accurately the likelihood, magnitude and timing of losses in establishing loss reserves for our mortgage insurance business or to accurately calculate and/or project our Available Assets and Minimum Required Assets under the PMIERs, 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 financial results caused by changes in the fair value of our assets and liabilities, including our investment portfolio;
potential future impairment charges related to our goodwill and other acquired intangible assets;
changes in GAAP or SAPP rules and guidance, or their interpretation;
our ability to attract and retain key employees; and
legal and other limitations on amounts we may receive from our subsidiaries, including dividends or ordinary course distributions under our internal tax- and expense-sharing arrangements.
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 our Annual Report on Form 10-K for the year ended December 31, 2018, and to subsequent reports and registration statements 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.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Radian Group Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) | | | ($ in thousands, except per-share amounts) | June 30,
2019 | | December 31,
2018 | September 30,
2019 | | December 31,
2018 |
| | | | | | | |
| Assets | | | | | | |
| Investments (Note 5) | | | | | | |
| Fixed-maturities available for sale—at fair value (amortized cost $4,003,367 and $4,098,962) | $ | 4,113,650 |
| | $ | 4,021,575 |
| |
| Trading securities—at fair value (amortized cost of $319,021 and $468,696) | 337,017 |
| | 469,071 |
| |
| Equity securities—at fair value (cost of $148,635 and $139,377) | 149,954 |
| | 130,565 |
| |
| Short-term investments—at fair value (includes $20,862 and $11,699 of reinvested cash collateral held under securities lending agreements) | 909,880 |
| | 528,403 |
| |
| Fixed-maturities available for sale—at fair value (amortized cost $4,369,273 and $4,098,962) | | $ | 4,527,223 |
| | $ | 4,021,575 |
|
| Trading securities—at fair value (amortized cost of $307,891 and $468,696) | | 329,935 |
| | 469,071 |
|
| Equity securities—at fair value (cost of $119,408 and $139,377) | | 121,759 |
| | 130,565 |
|
| Short-term investments—at fair value (includes $34,767 and $11,699 of reinvested cash collateral held under securities lending agreements) | | 552,095 |
| | 528,403 |
|
| Other invested assets—at fair value | 2,818 |
| | 3,415 |
| 2,712 |
| | 3,415 |
|
| Total investments | 5,513,319 |
| | 5,153,029 |
| 5,533,724 |
| | 5,153,029 |
|
| Cash | 74,111 |
| | 95,393 |
| 49,393 |
| | 95,393 |
|
| Restricted cash | 5,007 |
| | 11,609 |
| 2,853 |
| | 11,609 |
|
| Accounts and notes receivable | 122,104 |
| | 78,652 |
| 144,113 |
| | 78,652 |
|
| Deferred income taxes, net (Note 9) | 6,872 |
| | 131,643 |
| — |
| | 131,643 |
|
| Goodwill and other acquired intangible assets, net (Note 6) | 54,672 |
| | 58,998 |
| 52,533 |
| | 58,998 |
|
| Prepaid reinsurance premium | 385,805 |
| | 417,628 |
| 374,339 |
| | 417,628 |
|
| Other assets (Note 8) | 430,236 |
| | 367,700 |
| 513,647 |
| | 367,700 |
|
| Total assets | $ | 6,592,126 |
| | $ | 6,314,652 |
| $ | 6,670,602 |
| | $ | 6,314,652 |
|
| | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | |
| Unearned premiums | $ | 666,354 |
| | $ | 739,357 |
| $ | 647,856 |
| | $ | 739,357 |
|
| Reserve for losses and loss adjustment expense (Note 10) | 405,278 |
| | 401,361 |
| 398,141 |
| | 401,361 |
|
| Senior notes (Note 11) | 982,890 |
| | 1,030,348 |
| 886,643 |
| | 1,030,348 |
|
| FHLB advances (Note 11) | 106,382 |
| | 82,532 |
| 104,492 |
| | 82,532 |
|
| Reinsurance funds withheld | 339,641 |
| | 321,212 |
| 352,532 |
| | 321,212 |
|
| Other liabilities | 308,337 |
| | 251,127 |
| 358,431 |
| | 251,127 |
|
| Total liabilities | 2,808,882 |
| | 2,825,937 |
| 2,748,095 |
| | 2,825,937 |
|
| Commitments and contingencies (Note 12) |
| |
|
| |
|
| Stockholders’ equity | | | | | | |
| Common stock: par value $0.001 per share; 485,000 shares authorized at June 30, 2019 and December 31, 2018; 223,312 and 231,132 shares issued at June 30, 2019 and December 31, 2018, respectively; 205,399 and 213,473 shares outstanding at June 30, 2019 and December 31, 2018, respectively | 223 |
| | 231 |
| |
| Treasury stock, at cost: 17,913 and 17,660 shares at June 30, 2019 and December 31, 2018, respectively | (901,419 | ) | | (894,870 | ) | |
| Common stock: par value $0.001 per share; 485,000 shares authorized at September 30, 2019 and December 31, 2018; 220,174 and 231,132 shares issued at September 30, 2019 and December 31, 2018, respectively; 202,219 and 213,473 shares outstanding at September 30, 2019 and December 31, 2018, respectively | | 220 |
| | 231 |
|
| Treasury stock, at cost: 17,955 and 17,660 shares at September 30, 2019 and December 31, 2018, respectively | | (901,556 | ) | | (894,870 | ) |
| Additional paid-in capital | 2,539,803 |
| | 2,724,733 |
| 2,469,097 |
| | 2,724,733 |
|
| Retained earnings | 2,056,175 |
| | 1,719,541 |
| 2,229,107 |
| | 1,719,541 |
|
| Accumulated other comprehensive income (loss) (Note 14) | 88,462 |
| | (60,920 | ) | 125,639 |
| | (60,920 | ) |
| Total stockholders’ equity | 3,783,244 |
| | 3,488,715 |
| 3,922,507 |
| | 3,488,715 |
|
| Total liabilities and stockholders’ equity | $ | 6,592,126 |
| | $ | 6,314,652 |
| $ | 6,670,602 |
| | $ | 6,314,652 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands, except per-share amounts) | 2019 | | 2018 | | 2019 |
| 2018 | 2019 | | 2018 | | 2019 |
| 2018 |
| Revenues: | | | | | | | | | | | | | | |
| Net premiums earned—insurance | $ | 299,166 |
| | $ | 251,344 |
| | $ | 562,678 |
|
| $ | 493,894 |
| $ | 281,185 |
| | $ | 258,431 |
| | $ | 843,863 |
|
| $ | 752,325 |
|
| Services revenue | 39,303 |
| | 36,828 |
| | 72,056 |
|
| 69,992 |
| 42,509 |
| | 36,566 |
| | 114,565 |
|
| 106,558 |
|
| Net investment income | 43,761 |
| | 37,473 |
| | 87,608 |
| | 71,429 |
| 42,756 |
| | 38,995 |
| | 130,364 |
| | 110,424 |
|
| Net gains (losses) on investments and other financial instruments | 12,540 |
| | (7,404 | ) | | 34,453 |
| | (26,291 | ) | 13,009 |
| | (4,480 | ) | | 47,462 |
| | (30,771 | ) |
| Other income | 194 |
| | 1,016 |
| | 1,798 |
| | 1,823 |
| 879 |
| | 1,174 |
| | 2,677 |
| | 2,997 |
|
| Total revenues | 394,964 |
| | 319,257 |
| | 758,593 |
| | 610,847 |
| 380,338 |
| | 330,686 |
| | 1,138,931 |
| | 941,533 |
|
| Expenses: | | | | | | | | | | | | | | |
| Provision for losses | 47,427 |
| | 19,337 |
| | 68,181 |
| | 56,620 |
| 29,231 |
| | 20,881 |
| | 97,412 |
| | 77,501 |
|
| Policy acquisition costs | 6,203 |
| | 5,996 |
| | 12,096 |
| | 13,113 |
| 6,435 |
| | 5,667 |
| | 18,531 |
| | 18,780 |
|
| Cost of services | 27,845 |
| | 24,205 |
| | 52,002 |
| | 47,331 |
| 29,044 |
| | 25,854 |
| | 81,046 |
| | 73,185 |
|
| Other operating expenses | 70,046 |
| | 70,184 |
| | 148,851 |
| | 133,427 |
| 76,384 |
| | 70,125 |
| | 225,235 |
| | 203,552 |
|
| Restructuring and other exit costs | — |
| | 925 |
| | — |
| | 1,476 |
| — |
| | 4,464 |
| | — |
| | 5,940 |
|
| Interest expense | 14,961 |
| | 15,291 |
| | 30,658 |
| | 30,371 |
| 13,492 |
| | 15,535 |
| | 44,150 |
| | 45,906 |
|
| Loss on extinguishment of debt | 16,798 |
| | — |
| | 16,798 |
| | — |
| 5,940 |
| | — |
| | 22,738 |
| | — |
|
| Amortization and impairment of other acquired intangible assets | 2,139 |
| | 2,748 |
| | 4,326 |
|
| 5,496 |
| 2,139 |
| | 3,472 |
| | 6,465 |
|
| 8,968 |
|
| Total expenses | 185,419 |
| | 138,686 |
| | 332,912 |
| | 287,834 |
| 162,665 |
| | 145,998 |
| | 495,577 |
| | 433,832 |
|
| Pretax income | 209,545 |
| | 180,571 |
| | 425,681 |
|
| 323,013 |
| 217,673 |
| | 184,688 |
| | 643,354 |
|
| 507,701 |
|
| Income tax provision (benefit) | 42,815 |
| | (28,378 | ) | | 87,994 |
| | (422 | ) | |
| Income tax provision | | 44,235 |
| | 41,891 |
| | 132,229 |
| | 41,469 |
|
| Net income | $ | 166,730 |
| | $ | 208,949 |
| | $ | 337,687 |
|
| $ | 323,435 |
| $ | 173,438 |
| | $ | 142,797 |
| | $ | 511,125 |
|
| $ | 466,232 |
|
| | | | | | | | | | | | | | | |
| Net income per share: | | | | | | | | | | | | | | |
| Basic | $ | 0.80 |
| | $ | 0.98 |
| | $ | 1.60 |
| | $ | 1.50 |
| $ | 0.85 |
| | $ | 0.67 |
| | $ | 2.45 |
| | $ | 2.17 |
|
| Diluted | $ | 0.78 |
| | $ | 0.96 |
| | $ | 1.56 |
| | $ | 1.48 |
| $ | 0.83 |
| | $ | 0.66 |
| | $ | 2.39 |
| | $ | 2.13 |
|
| | | | | | | |
|
| | | | | | |
|
|
| Weighted-average number of common shares outstanding—basic | 208,097 |
| | 213,976 |
| | 211,264 |
| | 215,049 |
| 203,107 |
| | 213,309 |
| | 208,561 |
| | 214,499 |
|
| Weighted-average number of common and common equivalent shares outstanding—diluted | 213,603 |
| | 217,830 |
| | 216,500 |
| | 218,741 |
| 208,691 |
| | 217,902 |
| | 213,963 |
| | 218,783 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | | | | | | | | |
| Net income | $ | 166,730 |
| | $ | 208,949 |
| | $ | 337,687 |
| | $ | 323,435 |
| $ | 173,438 |
| | $ | 142,797 |
| | $ | 511,125 |
| | $ | 466,232 |
|
| Other comprehensive income (loss), net of tax (Note 14): | | | | | | | | | | | | | | |
| Unrealized gains (losses) on investments: | | | | | | | | | | | | | | |
| Unrealized holding gains (losses) arising during the period | 72,000 |
| | (27,804 | ) | | 150,023 |
| | (88,447 | ) | 40,654 |
| | (5,341 | ) | | 190,677 |
| | (93,788 | ) |
| Less: Reclassification adjustment for net gains (losses) included in net income | 1,029 |
| | (1,336 | ) | | 638 |
| | (4,468 | ) | 3,477 |
| | (4,044 | ) | | 4,115 |
| | (8,512 | ) |
| Net unrealized gains (losses) on investments | 70,971 |
| | (26,468 | ) | | 149,385 |
| | (83,979 | ) | 37,177 |
| | (1,297 | ) | | 186,562 |
| | (85,276 | ) |
| Net foreign currency translation adjustments | (3 | ) | | — |
| | (3 | ) | | 3 |
| — |
| | — |
| | (3 | ) | | 3 |
|
| Other comprehensive income (loss), net of tax | 70,968 |
| | (26,468 | ) | | 149,382 |
| | (83,976 | ) | 37,177 |
| | (1,297 | ) | | 186,559 |
| | (85,273 | ) |
| Comprehensive income | $ | 237,698 |
| | $ | 182,481 |
| | $ | 487,069 |
| | $ | 239,459 |
| $ | 210,615 |
| | $ | 141,500 |
| | $ | 697,684 |
| | $ | 380,959 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY (UNAUDITED)
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Common Stock | | | | | | | | | | | | | | |
| Balance, beginning of period | $ | 230 |
| | $ | 233 |
| | $ | 231 |
| | $ | 233 |
| $ | 223 |
| | $ | 231 |
| | $ | 231 |
| | $ | 233 |
|
| Issuance of common stock under incentive and benefit plans | 1 |
| | 1 |
| | 1 |
| | 1 |
| — |
| | — |
| | 1 |
| | 1 |
|
| Shares repurchased under share repurchase program (Note 13) | (8 | ) | | (3 | ) | | (9 | ) | | (3 | ) | (3 | ) | | — |
| | (12 | ) | | (3 | ) |
| Balance, end of period | 223 |
| | 231 |
| | 223 |
| | 231 |
| 220 |
| | 231 |
| | 220 |
| | 231 |
|
| | | | | | | | | | | | | | | |
| Treasury Stock | | | | | | | | | | | | | | |
| Balance, beginning of period | (895,321 | ) | | (894,191 | ) | | (894,870 | ) | | (893,888 | ) | (901,419 | ) | | (894,610 | ) | | (894,870 | ) | | (893,888 | ) |
| Repurchases of common stock under incentive plans | (6,098 | ) | | (419 | ) | | (6,549 | ) | | (722 | ) | (137 | ) | | (25 | ) | | (6,686 | ) | | (747 | ) |
| Balance, end of period | (901,419 | ) | | (894,610 | ) | | (901,419 | ) | | (894,610 | ) | (901,556 | ) | | (894,635 | ) | | (901,556 | ) | | (894,635 | ) |
| | | | | | | | | | | | | | | |
| Additional Paid-in Capital | | | | | | | | | | | | | | |
| Balance, beginning of period | 2,697,724 |
| | 2,748,233 |
| | 2,724,733 |
| | 2,754,275 |
| 2,539,803 |
| | 2,715,426 |
| | 2,724,733 |
| | 2,754,275 |
|
| Issuance of common stock under incentive and benefit plans | 1,689 |
| | 146 |
| | 2,758 |
| | 1,579 |
| 1,660 |
| | 1,014 |
| | 4,418 |
| | 2,593 |
|
| Share-based compensation | 6,255 |
| | 7,094 |
| | 9,950 |
| | 9,622 |
| 5,169 |
| | 4,186 |
| | 15,119 |
| | 13,808 |
|
| Shares repurchased under share repurchase program (Note 13) | (165,865 | ) | | (40,047 | ) | | (197,638 | ) | | (50,050 | ) | (77,535 | ) | | — |
| | (275,173 | ) | | (50,050 | ) |
| Balance, end of period | 2,539,803 |
| | 2,715,426 |
| | 2,539,803 |
| | 2,715,426 |
| 2,469,097 |
| | 2,720,626 |
| | 2,469,097 |
| | 2,720,626 |
|
| | | | | | | | | | | | | | | |
| Retained Earnings | | | | | | | | | | | | | | |
| Balance, beginning of period | 1,889,964 |
| | 1,229,616 |
| | 1,719,541 |
| | 1,116,333 |
| 2,056,175 |
| | 1,438,032 |
| | 1,719,541 |
| | 1,116,333 |
|
| Cumulative effect of adopting accounting standard updates | — |
| | — |
| | — |
| | (663 | ) | — |
| | — |
| | — |
| | (663 | ) |
| Net income | 166,730 |
| | 208,949 |
| | 337,687 |
| | 323,435 |
| 173,438 |
| | 142,797 |
| | 511,125 |
| | 466,232 |
|
| Dividends declared | (519 | ) | | (533 | ) | | (1,053 | ) | | (1,073 | ) | (506 | ) | | (533 | ) | | (1,559 | ) | | (1,606 | ) |
| Balance, end of period | 2,056,175 |
| | 1,438,032 |
| | 2,056,175 |
| | 1,438,032 |
| 2,229,107 |
| | 1,580,296 |
| | 2,229,107 |
| | 1,580,296 |
|
| | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | | |
| Balance, beginning of period | 17,494 |
| | (31,475 | ) | | (60,920 | ) | | 23,085 |
| 88,462 |
| | (57,943 | ) | | (60,920 | ) | | 23,085 |
|
| Cumulative effect of adopting accounting standard updates | — |
| | — |
| | — |
| | 2,948 |
| — |
| | — |
| | — |
| | 2,948 |
|
| Net unrealized gains (losses) on investments, net of tax | 70,971 |
| | (26,468 | ) | | 149,385 |
| | (83,979 | ) | 37,177 |
| | (1,297 | ) | | 186,562 |
| | (85,276 | ) |
| Net foreign currency translation adjustment, net of tax | (3 | ) | | — |
| | (3 | ) | | 3 |
| — |
| | — |
| | (3 | ) | | 3 |
|
| Balance, end of period | 88,462 |
| | (57,943 | ) | | 88,462 |
| | (57,943 | ) | 125,639 |
| | (59,240 | ) | | 125,639 |
| | (59,240 | ) |
| | | | | | | | | | | | | | | |
| Total Stockholders’ Equity | $ | 3,783,244 |
| | $ | 3,201,136 |
| | $ | 3,783,244 |
| | $ | 3,201,136 |
| $ | 3,922,507 |
| | $ | 3,347,278 |
| | $ | 3,922,507 |
| | $ | 3,347,278 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
| | Radian Group Inc. | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | | | | | | | | |
| (In thousands) | Six Months Ended
June 30, | Nine Months Ended
September 30, |
| 2019 | | 2018 | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net cash provided by (used in) operating activities | $ | 338,129 |
| | $ | 300,822 |
| $ | 506,805 |
| | $ | 491,929 |
|
| Cash flows from investing activities: | | | | | | |
| Proceeds from sales of: | | | | | | |
| Fixed-maturities available for sale | 568,351 |
| | 348,082 |
| 770,393 |
| | 577,034 |
|
| Trading securities | 111,713 |
| | 16,639 |
| 120,875 |
| | 35,182 |
|
| Equity securities | 39,818 |
| | 82,701 |
| 52,295 |
| | 92,702 |
|
| Proceeds from redemptions of: | | | | | | |
| Fixed-maturities available for sale | 184,464 |
| | 219,825 |
| 287,557 |
| | 337,857 |
|
| Trading securities | 35,852 |
| | 33,849 |
| 36,827 |
| | 53,437 |
|
| Purchases of: | | | | | | |
| Fixed-maturities available for sale | (665,882 | ) | | (807,204 | ) | (1,352,883 | ) | | (1,307,335 | ) |
| Equity securities | (31,853 | ) | | (52,357 | ) | (45,748 | ) | | (59,625 | ) |
| Sales, redemptions and (purchases) of: | | | | | | |
| Short-term investments, net | (372,540 | ) | | (205,566 | ) | (12,199 | ) | | (216,778 | ) |
| Other assets and other invested assets, net | 490 |
| | 293 |
| 687 |
| | 2,111 |
|
| Purchases of property and equipment, net | (15,207 | ) | | (12,328 | ) | (20,707 | ) | | (20,323 | ) |
| Acquisitions, net of cash acquired | — |
| | (634 | ) | — |
| | (662 | ) |
| Net cash provided by (used in) investing activities | (144,794 | ) | | (376,700 | ) | (162,903 | ) | | (506,400 | ) |
| Cash flows from financing activities: | | | | | | |
| Dividends paid | (1,053 | ) | | (1,073 | ) | (1,559 | ) | | (1,606 | ) |
| Issuance of senior notes, net | 442,937 |
| | — |
| 442,498 |
| | — |
|
| Repayments and repurchases of senior notes | (508,017 | ) | | — |
| (610,739 | ) | | — |
|
| Issuance of common stock | 1,268 |
| | 810 |
| 2,126 |
| | 1,128 |
|
| Repurchases of common shares | (188,817 | ) | | (50,053 | ) | (275,185 | ) | | (50,053 | ) |
| Credit facility commitment fees paid | (471 | ) | | (405 | ) | (710 | ) | | (643 | ) |
| Change in secured borrowings, net (with terms less than 3 months) | 11,563 |
| | 119,631 |
| 9,568 |
| | 41,414 |
|
| Proceeds from secured borrowings (with terms greater than 3 months) | 36,000 |
| | 15,544 |
| 73,011 |
| | 45,458 |
|
| Repayments of secured borrowings (with terms greater than 3 months) | (14,550 | ) | | — |
| (37,550 | ) | | (3,000 | ) |
| Repayments of other borrowings | (75 | ) | | (94 | ) | (114 | ) | | (133 | ) |
| Net cash provided by (used in) financing activities | (221,215 | ) | | 84,360 |
| (398,654 | ) | | 32,565 |
|
| Effect of exchange rate changes on cash and restricted cash | (4 | ) | | (1 | ) | (4 | ) | | — |
|
| Increase (decrease) in cash and restricted cash | (27,884 | ) | | 8,481 |
| (54,756 | ) | | 18,094 |
|
| Cash and restricted cash, beginning of period | 107,002 |
| | 96,244 |
| 107,002 |
| | 96,244 |
|
| Cash and restricted cash, end of period | $ | 79,118 |
| | $ | 104,725 |
| $ | 52,246 |
| | $ | 114,338 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Condensed Consolidated Financial Statements—Business Overview and Significant Accounting Policies
Business Overview
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 two2 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 homebuyers 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 IIF and RIF were $230.8$237.2 billion and $59.1$60.4 billion, respectively, as of JuneSeptember 30, 2019.
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.
Significant Accounting Policies
Basis of Presentation
Our condensed 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. We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP pursuant to the instructions set forth in Article 10 of Regulation S-X of the SEC.
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.
The financial information presented for interim periods is unaudited; however, such information reflects all adjustments that are, in the opinion of management, necessary for the fair statement of the financial position, results of operations, comprehensive income and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP.
To fully understand the basis of presentation, these interim financial statements and related notes contained herein should be read in conjunction with the audited financial statements and notes thereto included in our 2018 Form 10-K. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. Certain prior period amounts have been reclassified to conform to current period presentation.
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
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our condensed consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Other Significant Accounting Policies
See Note 2 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for information regarding other significant accounting policies. There have been no significant changes in our significant accounting policies from those discussed in our 2018 Form 10-K, other than described below in “—“—Recent Accounting Pronouncements—Accounting Standards Adopted During 2019.2019.”
Recent Accounting Pronouncements
Accounting Standards Adopted During 2019. We adopted ASU 2016-02, Leases (“ASU 2016-02”), on January 1, 2019. Most significantly, this update requires a lessee to recognize, as of the lease commencement date, a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. Upon adoption for contracts in effect as of January 1, 2019, we recorded a lease liability of $73.5 million within other liabilities, and a right-of-use asset of $49.4 million within other assets, corresponding to the lease liability as adjusted for deferred rent and unamortized allowances and incentives of $24.1 million. We elected the optional transition method and 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 did not reassess expired or existing contracts to determine if they contain additional leases; (ii) we did not reassess the lease classification for expired and existing leases; and (iii) we did not reassess initial direct costs for existing leases. Prior period amounts continue to be reported in accordance with our historic accounting under previous lease guidance.
With respect to leases entered into subsequent to the adoption of this ASU, we determine if an arrangement includes a lease at inception. If it does, we recognize a right-of-use asset and lease liability in other assets and other liabilities, respectively, in our condensed consolidated balance sheet. Right-of-use assets represent our right to use an underlying asset for the lease term and are recognized net of any payments made or received from the lessor. Lease liabilities represent our obligation to make lease payments arising from the lease and are based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date or as of our date of adoption, January 1, 2019.
Lease expense is recognized on a straight-line basis over the expected lease term. For lease agreements entered into after the adoption of this ASU that include lease and non-lease components, such components are generally not accounted for separately. We have elected the short-term exemption for contracts with lease terms of 12 months or less.
Our lease agreements primarily relate to operating leases for office space we use in our operations. Certain of our leases include renewal options and/or termination options that we did not consider in the determination of the right-of-use asset or the lease liability as we did not believe it was reasonably certain that we would exercise such options. Our lease agreements do not contain any variable lease payments, material residual value guarantees or material restrictive covenants. We do not have material sublease agreements. As of JuneSeptember 30, 2019, there were no leases that had not yet commenced but that created significant rights and obligations for us. See Note 12 for more information about our lease agreements.
We adopted ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs, on January 1, 2019. 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 adoption of this update did not have a material effect on our financial statements and disclosures.
Accounting Standards Not Yet Adopted. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, and issued subsequent amendments to the initial guidance. This ASU and the associated subsequent amendments require 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-saleour 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 allowance method will allow reversals of credit losses if the estimate of credit losses declines. This ASU will also affect certain of our accounts and notes receivable, including premiums receivable, and certain of our other assets, including reinsurance recoverables. However, this ASU is not applicable to the accounting for insurance losses and loss adjustment expenses. Due to the nature of our assets affected by this update, we do not expect it to have a material effect on our financial statements and disclosures. 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
Radian Group Inc.
Notes to credit losses associated with our mortgage insurance policies. We are currently evaluating the scope and impact on our financial statements and future disclosures as a result of this update.Unaudited Condensed Consolidated Financial Statements (Continued)
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be reviewed at least annually; (ii) defines and simplifies the
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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 andbut do not expect it to have a material effect on our financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software. This ASU requires 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 andbut do not expect it to have a material effect on our financial statements and disclosures.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements related to Topic 326, Financial Instruments-Credit Losses, Derivatives and Hedging, and Financial Instruments. This update to the accounting standards regarding financial instruments and derivatives and hedging clarifies the accounting treatment for the measurement of credit losses and provides further clarification on previously issued updates. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of evaluating the new standard.potential impact of the adoption of this update but do not expect it to have a material effect on our financial statements and disclosures.
2. 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 stockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average number of dilutive potential common shares. Dilutive potential common shares relate to our share-based compensation arrangements.
The calculation of basic and diluted net income per share was as follows:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands, except per-share amounts) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Net income—basic and diluted | $ | 166,730 |
| | $ | 208,949 |
| | $ | 337,687 |
| | $ | 323,435 |
| $ | 173,438 |
| | $ | 142,797 |
| | $ | 511,125 |
| | $ | 466,232 |
|
| | | | | | | | | | | | | | | |
| Average common shares outstanding—basic | 208,097 |
| | 213,976 |
| | 211,264 |
| | 215,049 |
| 203,107 |
| | 213,309 |
| | 208,561 |
| | 214,499 |
|
Dilutive effect of share-based compensation arrangements (1) | 5,506 |
| | 3,854 |
| | 5,236 |
| | 3,692 |
| 5,584 |
| | 4,593 |
| | 5,402 |
| | 4,284 |
|
| Adjusted average common shares outstanding—diluted | 213,603 |
|
| 217,830 |
| | 216,500 |
| | 218,741 |
| 208,691 |
|
| 217,902 |
| | 213,963 |
| | 218,783 |
|
| | | | | | | | | | | | | | | |
| Net income per share: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Basic | $ | 0.80 |
| | $ | 0.98 |
| | $ | 1.60 |
| | $ | 1.50 |
| $ | 0.85 |
| | $ | 0.67 |
| | $ | 2.45 |
| | $ | 2.17 |
|
| | | | | | | | | | | | | | | |
| Diluted | $ | 0.78 |
| | $ | 0.96 |
| | $ | 1.56 |
| | $ | 1.48 |
| $ | 0.83 |
| | $ | 0.66 |
| | $ | 2.39 |
| | $ | 2.13 |
|
______________________
| |
| (1) | The following number of shares of our common stock equivalents issued under our share-based compensation arrangements were not included in the calculation of diluted net income per share because they were anti-dilutive: |
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Shares of common stock equivalents | 168 |
| | 484 |
| | 168 |
| | 351 |
| — |
| | 338 |
| | 160 |
| | 338 |
|
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
3. Segment Reporting
We have two2 strategic business units that we manage separately—Mortgage Insurance and 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. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation.
We allocate to our Mortgage Insurance 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; (ii) except as described below for periods prior to January 1, 2019, all interest expense; and (iii) all net investment income from corporate cash and investments. Prior to January 1, 2019, interest expense related to the Clayton Intercompany Note was allocated to our Services segment. Effective January 1, 2019, Radian Group recapitalized the Services segment with a capital contribution that enabled the Services segment to repay the Clayton Intercompany Note and its accumulated allocated interest expense associated with the note, and effective as of the same date, all interest expense is allocated to our Mortgage Insurance segment.
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) until January 1, 2019, the allocated interest expense related to the Clayton Intercompany Note as discussed above.
With the exception of goodwill and other acquired intangible assets that relate to our Services segment, which are reviewed as part of our annual goodwill impairment assessment, we do not manage assets by segment.
Adjusted Pretax Operating Income (Loss)
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 each of Radian’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
income (loss) excluding the effects of: (i) net gains (losses) on investments and other financial instruments; (ii) loss on extinguishment of debt; (iii) amortization and impairment of goodwill and other acquired intangible assets; and (iv) impairment of other long-lived assets and other non-operating items, such as losses from the sale of lines of business and acquisition-related expenses. See Note 4 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for detailed information regarding items excluded from adjusted pretax operating income (loss), including the reasons for their treatment.
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 pretax income (loss).
The reconciliation of adjusted pretax operating income (loss) for our reportable segments to consolidated pretax income is as follows:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Adjusted pretax operating income (loss): | | | | | | | | | | | | | | |
| Mortgage Insurance | $ | 219,365 |
| (1) | $ | 197,440 |
| | $ | 427,535 |
| (1) | $ | 369,151 |
| $ | 214,256 |
| | $ | 204,620 |
| | $ | 641,791 |
| (1) | $ | 573,771 |
|
| Services | (3,526 | ) | | (6,431 | ) | | (9,626 | ) | | (14,039 | ) | (1,513 | ) | | (7,921 | ) | | (11,139 | ) | | (21,960 | ) |
| Total adjusted pretax operating income | 215,839 |
| | 191,009 |
| | 417,909 |
| | 355,112 |
| 212,743 |
| | 196,699 |
| | 630,652 |
| | 551,811 |
|
| | | | | | | | | | | | | | | |
| Net gains (losses) on investments and other financial instruments | 12,540 |
| | (7,404 | ) | | 34,453 |
| | (26,291 | ) | 13,009 |
| | (4,480 | ) | | 47,462 |
| | (30,771 | ) |
| Loss on extinguishment of debt | (16,798 | ) | | — |
| | (16,798 | ) | | — |
| (5,940 | ) | | — |
| | (22,738 | ) | | — |
|
| Amortization and impairment of other acquired intangible assets | (2,139 | ) | | (2,748 | ) | | (4,326 | ) | | (5,496 | ) | (2,139 | ) | | (3,472 | ) | | (6,465 | ) | | (8,968 | ) |
| Impairment of other long-lived assets and other non-operating items | 103 |
| | (286 | ) | | (5,557 | ) | | (312 | ) | — |
| | (4,059 | ) | | (5,557 | ) | | (4,371 | ) |
| Consolidated pretax income | $ | 209,545 |
| | $ | 180,571 |
| | $ | 425,681 |
| | $ | 323,013 |
| $ | 217,673 |
| | $ | 184,688 |
| | $ | 643,354 |
| | $ | 507,701 |
|
______________________
| |
| (1) | Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies, as further described below. |
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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.
Our results for the second quarter ofnine months ended September 30, 2019 include a $32.9 million increase in net premiums earned and a $0.12 increase in net income per share, due to a reduction in our unearned premiums resulting from a cumulative adjustment in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies. The update to our earned premium recognition factors also resulted in a $6.2 million reduction in other operating expenses and a $0.02 increase in net income per share in the second quarter of 2019 due to the acceleration of earned ceding commissions related to policies covered under our Single Premium QSR Program. This cumulative adjustment reflects a change in our estimate of the period over which we recognize premiums during the life of our mortgage insurance policies. We periodically review our premium recognition models, with any adjustments to the estimate, if any, reflected in current period income. See Note 2 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information regarding our accounting policies for insurance premiums revenue recognition.
We updated the amortization rates due to the continuing increase in the significance of borrower-paid Single Premium Policies in our portfolio following our rate reductions on borrower-paid Single Premium Policies in 2018. Under the Homeowners Protection Act of 1998 (“HPA”), borrower-paid policies must be canceled automatically on the date the LTV is scheduled to reach 78% of the original value (or, if the loan is not current on that date, on the date that the loan becomes current). As a result, given the shift in our mix of Single Premium Policies toward more borrower-paid Single Premium Policies than lender-paid, the average anticipated term of our Single Premium IIF is declining compared to historical levels. We updated our analysis to reflect not only this anticipated effect of HPA cancellations on borrower-paid policies, but also changes in observed and projected loss patterns for both borrower-paid and lender-paid policies.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Revenue
The reconciliation of our reportable segment revenues to consolidated revenues is as follows:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Reportable segment revenues: | | | | | | | | | | | | | | |
| Mortgage Insurance | $ | 340,520 |
| (1) | $ | 287,036 |
| | $ | 647,159 |
| (1) | $ | 564,349 |
| $ | 321,056 |
| | $ | 295,031 |
| | $ | 968,215 |
| (1) | $ | 859,380 |
|
| Services | 42,981 |
| | 40,510 |
| | 79,028 |
| | 74,676 |
| 47,378 |
| | 40,901 |
| | 126,406 |
| | 115,577 |
|
| Total reportable segment revenues | 383,501 |
| | 327,546 |
| | 726,187 |
| | 639,025 |
| 368,434 |
| | 335,932 |
| | 1,094,621 |
| | 974,957 |
|
| Add: Net gains (losses) on investments and other financial instruments | 12,540 |
| | (7,404 | ) | | 34,453 |
| | (26,291 | ) | 13,009 |
| | (4,480 | ) | | 47,462 |
| | (30,771 | ) |
Less: Inter-segment revenues (2) | 1,077 |
| | 885 |
| | 2,047 |
| | 1,887 |
| 1,105 |
| | 766 |
| | 3,152 |
| | 2,653 |
|
| Total revenues | $ | 394,964 |
| | $ | 319,257 |
| | $ | 758,593 |
| | $ | 610,847 |
| $ | 380,338 |
| | $ | 330,686 |
| | $ | 1,138,931 |
| | $ | 941,533 |
|
| |
| (1) | Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies, as further described above. |
| |
| (2) | Inter-segment revenues included in the Services segment. |
The accounting standard on revenue from contracts with customers is primarily applicable to our services revenue and is not applicable to our investments and insurance products, which represent the majority of our revenue. See Notes 1 and 2 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information regarding our accounting policies and the services we offer.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The table below represents the disaggregation of services revenues from external customers, by type:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Services revenue | | | | | | | | | | | | | | |
| Mortgage Services | $ | 17,220 |
| | $ | 20,192 |
| | $ | 32,313 |
| | $ | 36,687 |
| $ | 19,218 |
| | $ | 18,839 |
| | $ | 51,531 |
| | $ | 55,552 |
|
| Real Estate Services | 16,938 |
| | 14,570 |
| | 32,775 |
| | 28,964 |
| 17,865 |
| | 15,984 |
| | 50,640 |
| | 44,948 |
|
| Title Services | 5,145 |
| | 2,066 |
| | 6,968 |
| | 4,341 |
| 5,426 |
| | 1,743 |
| | 12,394 |
| | 6,058 |
|
| Total services revenue | $ | 39,303 |
| | $ | 36,828 |
| | $ | 72,056 |
| | $ | 69,992 |
| $ | 42,509 |
| | $ | 36,566 |
| | $ | 114,565 |
| | $ | 106,558 |
|
Our services 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 expected to be recognized in any future period related to remaining performance obligations, such as contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.
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. Deferred revenue represents advance payments received from customers in advance of revenue recognition. We have no0 material bad-debt expense. The following represents balances related to services revenue contracts as of the dates indicated:
| | | (In thousands) | June 30,
2019 | | December 31, 2018 | September 30,
2019 | | December 31,
2018 |
| Accounts Receivable | $ | 16,846 |
| | $ | 15,461 |
| $ | 18,956 |
| | $ | 15,461 |
|
| Unbilled Receivables | 21,725 |
| | 19,917 |
| 25,110 |
| | 19,917 |
|
| Deferred Revenues | 2,861 |
| | 3,204 |
| 3,036 |
| | 3,204 |
|
4. Fair Value of Financial Instruments
For discussion of our valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 5 of Notes to Consolidated Financial Statements in our 2018 Form 10-K.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following is a list of assets that are measured at fair value by hierarchy level as of JuneSeptember 30, 2019:
| | | (In thousands) | Level I | | Level II | | Total | Level I | | Level II | | Total |
| Assets at fair value | | | | | | | | | | |
| Investments: | | | | | | | | | | |
| Fixed-maturities available for sale: | | | | | | | | | | |
| U.S. government and agency securities | $ | 49,929 |
| | $ | 34,491 |
| | $ | 84,420 |
| $ | 128,443 |
| | $ | 34,012 |
| | $ | 162,455 |
|
| State and municipal obligations | — |
| | 107,962 |
| | 107,962 |
| — |
| | 110,981 |
| | 110,981 |
|
| Corporate bonds and notes | — |
| | 2,249,315 |
| | 2,249,315 |
| — |
| | 2,347,346 |
| | 2,347,346 |
|
| RMBS | — |
| | 433,773 |
| | 433,773 |
| — |
| | 619,935 |
| | 619,935 |
|
| CMBS | — |
| | 571,923 |
| | 571,923 |
| — |
| | 563,338 |
| | 563,338 |
|
| Other ABS | — |
| | 661,089 |
| | 661,089 |
| — |
| | 717,986 |
| | 717,986 |
|
| Foreign government and agency securities | — |
| | 5,168 |
| | 5,168 |
| — |
| | 5,182 |
| | 5,182 |
|
| Total fixed-maturities available for sale | 49,929 |
| | 4,063,721 |
| | 4,113,650 |
| 128,443 |
| | 4,398,780 |
| | 4,527,223 |
|
| | | | | | | | | | | |
| Trading securities: | | | | | | | | | | |
| State and municipal obligations | — |
| | 128,824 |
| | 128,824 |
| — |
| | 121,190 |
| | 121,190 |
|
| Corporate bonds and notes | — |
| | 155,793 |
| | 155,793 |
| — |
| | 156,648 |
| | 156,648 |
|
| RMBS | — |
| | 17,511 |
| | 17,511 |
| — |
| | 17,116 |
| | 17,116 |
|
| CMBS | — |
| | 34,889 |
| | 34,889 |
| — |
| | 34,981 |
| | 34,981 |
|
| Total trading securities | — |
| | 337,017 |
| | 337,017 |
| — |
| | 329,935 |
| | 329,935 |
|
| | | | | | | | | | | |
| Equity securities | 144,882 |
| | 5,072 |
| | 149,954 |
| 116,762 |
| | 4,997 |
| | 121,759 |
|
| | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | |
| U.S. government and agency securities | 142,206 |
| | — |
| | 142,206 |
| 120,969 |
| | — |
| | 120,969 |
|
| State and municipal obligations | — |
| | 13,990 |
| | 13,990 |
| — |
| | 25,547 |
| | 25,547 |
|
| Money market instruments | 262,466 |
| | — |
| | 262,466 |
| 196,372 |
| | — |
| | 196,372 |
|
| Corporate bonds and notes | — |
| | 89,910 |
| | 89,910 |
| — |
| | 37,593 |
| | 37,593 |
|
Other investments (1) | — |
| | 401,308 |
| | 401,308 |
| — |
| | 171,614 |
| | 171,614 |
|
| Total short-term investments | 404,672 |
| | 505,208 |
| | 909,880 |
| 317,341 |
| | 234,754 |
| | 552,095 |
|
| | | | | | | | | | | |
Total investments at fair value (2) | 599,483 |
| | 4,911,018 |
| | 5,510,501 |
| 562,546 |
| | 4,968,466 |
| | 5,531,012 |
|
| | | | | | | | | | | |
| Other assets: | | | | | | | | | | |
Loaned securities: (3) | | | | | | | | | | |
| U.S. government and agency securities | 1,502 |
| | — |
| | 1,502 |
| 19,960 |
| | — |
| | 19,960 |
|
| Corporate bonds and notes | — |
| | 23,011 |
| | 23,011 |
| — |
| | 15,227 |
| | 15,227 |
|
| Equity securities | 4,551 |
| | — |
| | 4,551 |
| 30,257 |
| | — |
| | 30,257 |
|
Total assets at fair value (2) | $ | 605,536 |
| | $ | 4,934,029 |
| | $ | 5,539,565 |
| $ | 612,763 |
| | $ | 4,983,693 |
| | $ | 5,596,456 |
|
______________________
| |
| (1) | Comprising short-term certificates of deposit and commercial paper. |
| |
| (2) | Does not include other invested assets of $2.82.7 million that are primarily invested in limited partnership investments valued using the net asset value as a practical expedient. |
| |
| (3) | Securities loaned to third-party borrowers under securities lending agreements are classified as other assets in our condensed consolidated balance sheets. See Note 5 for more information. |
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following is a list of assets that are measured at fair value by hierarchy level as of December 31, 2018:
|
| | | | | | | | | | | |
| (In thousands) | Level I | | Level II | | Total |
| Assets at fair value | | | | | |
| Investments: | | | | | |
| Fixed-maturities available for sale: | | | | | |
| U.S. government and agency securities | $ | 55,658 |
| | $ | 28,412 |
| | $ | 84,070 |
|
| State and municipal obligations | — |
| | 138,313 |
| | 138,313 |
|
| Corporate bonds and notes | — |
| | 2,222,473 |
| | 2,222,473 |
|
| RMBS | — |
| | 332,142 |
| | 332,142 |
|
| CMBS | — |
| | 539,915 |
| | 539,915 |
|
| Other ABS | — |
| | 704,662 |
| | 704,662 |
|
| Total fixed-maturities available for sale | 55,658 |
| | 3,965,917 |
|
| 4,021,575 |
|
| | | | | | |
| Trading securities: | | | | | |
| State and municipal obligations | — |
| | 168,359 |
| | 168,359 |
|
| Corporate bonds and notes | — |
| | 228,152 |
| | 228,152 |
|
| RMBS | — |
| | 21,082 |
| | 21,082 |
|
| CMBS | — |
| | 51,478 |
| | 51,478 |
|
| Total trading securities | — |
| | 469,071 |
|
| 469,071 |
|
| | | | | | |
| Equity securities | 126,607 |
| | 3,958 |
| | 130,565 |
|
| | | | | | |
| Short-term investments: | | | | | |
| U.S. government and agency securities | 133,657 |
| | — |
| | 133,657 |
|
| State and municipal obligations | — |
| | 18,070 |
| | 18,070 |
|
| Money market instruments | 95,132 |
| | — |
| | 95,132 |
|
| Corporate bonds and notes | — |
| | 105,625 |
| | 105,625 |
|
| Other ABS | — |
| | 806 |
| | 806 |
|
Other investments (1) | — |
| | 175,113 |
| | 175,113 |
|
| Total short-term investments | 228,789 |
| | 299,614 |
|
| 528,403 |
|
| | | | | | |
Total investments at fair value (2) | 411,054 |
| | 4,738,560 |
| | 5,149,614 |
|
| | | | | | |
| Other assets: | | | | | |
Loaned securities: (3) | | | | | |
| U.S. government and agency securities | 9,987 |
| | — |
| | 9,987 |
|
| Corporate bonds and notes | — |
| | 7,818 |
| | 7,818 |
|
| Equity securities | 10,055 |
| | — |
| | 10,055 |
|
Total assets at fair value (2) | $ | 431,096 |
| | $ | 4,746,378 |
|
| $ | 5,177,474 |
|
______________________
| |
| (1) | Comprising short-term certificates of deposit and commercial paper. |
| |
| (2) | Does not include other invested assets of $3.4 million that are primarily invested in limited partnership investments valued using the net asset value as a practical expedient. |
| |
| (3) | Securities loaned to third-party borrowers under securities lending agreements are classified as other assets in our condensed consolidated balance sheets. See Note 5 for more information. |
At June 30, 2019 and December 31, 2018, there were no material Level III assets measured at fair value and no Level III liabilities. There were no investment transfers to or from Level III for the three and six months ended June 30, 2019 or the year ended December 31, 2018. Activity related to Level III assets and liabilities (including realized and unrealized gains and losses,
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
At September 30, 2019 and December 31, 2018, there were 0 material Level III assets measured at fair value and no Level III liabilities. There were no investment transfers to or from Level III for the three and nine months ended September 30, 2019 or the year ended December 31, 2018. 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 three and sixnine months ended JuneSeptember 30, 2019 and the year ended December 31, 2018.
Other Fair Value Disclosure
The carrying value and estimated fair value of other selected liabilities not carried at fair value in our condensed consolidated balance sheets were as follows as of the dates indicated:
| | | | June 30, 2019 | | December 31, 2018 | September 30, 2019 | | December 31, 2018 |
| (In thousands) | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| Liabilities: | | | | | | | | | | | | | | |
| Senior notes | $ | 982,890 |
| | $ | 1,016,661 |
| | $ | 1,030,348 |
| | $ | 1,007,687 |
| $ | 886,643 |
| | $ | 919,125 |
| | $ | 1,030,348 |
| | $ | 1,007,687 |
|
| FHLB advances | 106,382 |
| | 107,366 |
| | 82,532 |
| | 82,899 |
| 104,492 |
| | 105,661 |
| | 82,532 |
| | 82,899 |
|
The fair value of our senior notes is estimated based on the quoted market prices for the same or similar instruments. The fair value of our FHLB advances is estimated based on expected cash flows for similar borrowings. These liabilities are categorized in Level II of the fair value hierarchy. See Note 11 for additional information on our senior notes and FHLB advances.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
5. Investments
Available for Sale Securities
Our available for sale securities within our investment portfolio consisted of the following as of the dates indicated:
| | | | June 30, 2019 | September 30, 2019 |
| (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 | $ | 84,807 |
| | $ | 85,922 |
| | $ | 1,151 |
| | $ | 36 |
| $ | 176,682 |
| | $ | 182,415 |
| | $ | 5,839 |
| | $ | 106 |
|
| State and municipal obligations | 100,214 |
| | 107,962 |
| | 7,750 |
| | 2 |
| 100,070 |
| | 110,981 |
| | 10,911 |
| | — |
|
| Corporate bonds and notes | 2,192,119 |
| | 2,272,269 |
| | 81,488 |
| | 1,338 |
| 2,254,627 |
| | 2,362,004 |
| | 108,541 |
| | 1,164 |
|
| RMBS | 425,138 |
| | 433,773 |
| | 10,060 |
| | 1,425 |
| 605,687 |
| | 619,935 |
| | 15,286 |
| | 1,038 |
|
| CMBS | 557,353 |
| | 571,923 |
| | 15,302 |
| | 732 |
| 542,284 |
| | 563,338 |
| | 21,966 |
| | 912 |
|
| Other ABS | 661,898 |
| | 661,089 |
| | 2,166 |
| | 2,975 |
| 718,854 |
| | 717,986 |
| | 2,394 |
| | 3,262 |
|
| Foreign government and agency securities | 5,088 |
| | 5,168 |
| | 80 |
| | — |
| 5,089 |
| | 5,182 |
| | 93 |
| | — |
|
| Total securities available for sale, including loaned securities | 4,026,617 |
| | 4,138,106 |
| | $ | 117,997 |
| | $ | 6,508 |
| 4,403,293 |
| | 4,561,841 |
| | $ | 165,030 |
| | $ | 6,482 |
|
| Less: loaned securities | 23,250 |
| | 24,456 |
| | | | | 34,020 |
| | 34,618 |
| | | | |
| Total fixed-maturities available for sale | $ | 4,003,367 |
| | $ | 4,113,650 |
| |
|
| |
|
| $ | 4,369,273 |
| | $ | 4,527,223 |
| |
|
| |
|
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| (In thousands) | Amortized Cost | | Fair Value | | Gross Unrealized Gains | | Gross Unrealized Losses |
| Fixed-maturities available for sale: | | | | | | | |
| U.S. government and agency securities | $ | 85,532 |
| | $ | 84,070 |
| | $ | 46 |
| | $ | 1,508 |
|
| State and municipal obligations | 138,022 |
| | 138,313 |
| | 2,191 |
| | 1,900 |
|
| Corporate bonds and notes | 2,288,720 |
| | 2,229,885 |
| | 5,053 |
| | 63,888 |
|
| RMBS | 334,843 |
| | 332,142 |
| | 1,785 |
| | 4,486 |
|
| CMBS | 546,729 |
| | 539,915 |
| | 544 |
| | 7,358 |
|
| Other ABS | 712,748 |
| | 704,662 |
| | 814 |
| | 8,900 |
|
| Total securities available for sale, including loaned securities | 4,106,594 |
| | 4,028,987 |
| | $ | 10,433 |
| | $ | 88,040 |
|
| Less: loaned securities | 7,632 |
| | 7,412 |
| | | | |
| Total fixed-maturities available for sale | $ | 4,098,962 |
| | $ | 4,021,575 |
| |
|
| |
|
|
Gross Unrealized Losses and Fair Value 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. Included in the amounts as of JuneSeptember 30, 2019 and December 31, 2018 are loaned securities under securities lending agreements that are classified as other assets in our condensed consolidated balance sheets, as further described below.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| | | | | June 30, 2019 | | September 30, 2019 |
($ in thousands) Description of Securities | | Less Than 12 Months | | 12 Months or Greater | | Total | | 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 | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses |
| U.S. government and agency securities | | — |
| | $ | — |
| | $ | — |
| | 4 |
| | $ | 12,370 |
| | $ | 36 |
| | 4 |
| | $ | 12,370 |
| | $ | 36 |
| | 4 |
| | $ | 68,719 |
| | $ | 89 |
| | 3 |
| | $ | 9,051 |
| | $ | 17 |
| | 7 |
| | $ | 77,770 |
| | $ | 106 |
|
| State and municipal obligations | | 1 |
| | 3,249 |
| | 1 |
| | 1 |
| | 999 |
| | 1 |
| | 2 |
| | 4,248 |
| | 2 |
| |
| Corporate bonds and notes | | 19 |
| | 82,685 |
| | 586 |
| | 27 |
| | 102,857 |
| | 752 |
| | 46 |
| | 185,542 |
| | 1,338 |
| | 28 |
| | 126,732 |
| | 1,145 |
| | 4 |
| | 8,543 |
| | 19 |
| | 32 |
| | 135,275 |
| | 1,164 |
|
| RMBS | | 1 |
| | 32 |
| | 1 |
| | 24 |
| | 58,905 |
| | 1,424 |
| | 25 |
| | 58,937 |
| | 1,425 |
| | 5 |
| | 30,478 |
| | 52 |
| | 23 |
| | 44,649 |
| | 986 |
| | 28 |
| | 75,127 |
| | 1,038 |
|
| CMBS | | 16 |
| | 33,267 |
| | 555 |
| | 10 |
| | 6,751 |
| | 177 |
| | 26 |
| | 40,018 |
| | 732 |
| | 18 |
| | 32,861 |
| | 724 |
| | 10 |
| | 9,120 |
| | 188 |
| | 28 |
| | 41,981 |
| | 912 |
|
| Other ABS | | 42 |
| | 198,836 |
| | 1,188 |
| | 44 |
| | 167,724 |
| | 1,787 |
| | 86 |
| | 366,560 |
| | 2,975 |
| | 60 |
| | 257,688 |
| | 1,003 |
| | 40 |
| | 155,904 |
| | 2,259 |
| | 100 |
| | 413,592 |
| | 3,262 |
|
| Total | | 79 |
| | $ | 318,069 |
| | $ | 2,331 |
| | 110 |
| | $ | 349,606 |
| | $ | 4,177 |
| | 189 |
| | $ | 667,675 |
| | $ | 6,508 |
| | 115 |
| | $ | 516,478 |
| | $ | 3,013 |
| | 80 |
| | $ | 227,267 |
| | $ | 3,469 |
| | 195 |
| | $ | 743,745 |
| | $ | 6,482 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
|
Although we held available for sale securities in an unrealized loss position as of JuneSeptember 30, 2019, we did not consider those securities to be other-than-temporarily impaired as of such date. For all investment categories, the unrealized losses of 12 months or greater duration as of JuneSeptember 30, 2019 were generally caused by interest rate or credit spread movements since the purchase date, and as such, we expect to recover the amortized cost basis of these securities. As of JuneSeptember 30, 2019, we did not have the intent to sell any available for sale 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 JuneSeptember 30, 2019.
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. We recognized no0 other-than-temporary impairment losses in earnings during the sixnine months ended JuneSeptember 30, 2019 and $0.8$1.7 million of other-than-temporary impairment losses in earnings for the sixnine months ended JuneSeptember 30, 2018. There were no0 other-than-temporary impairment losses recognized in accumulated other comprehensive income (loss) for those periods.
Securities Lending Agreements
We participate in a securities lending program whereby we loan certain securities in our investment portfolio to third-party borrowers for short periods of time. Although we report such securities at fair value within other assets in our condensed consolidated balance sheets, rather than within investments, the detailed information we provide in this Note 5 includes these securities. See Note 4 for additional detail on the loaned securities, and see Notes 2 and 6 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information about our accounting policies with respect to our securities lending agreements and the collateral requirements thereunder, respectively.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Statements in our 2018 Form 10-K for additional information about our accounting policies with respect to our securities lending agreements and the collateral requirements thereunder, respectively.
All of our securities lending agreements are classified as overnight and revolving. Securities collateral on deposit with us from third-party borrowers totaling $9.0$32.3 million and $16.8 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively, may not be transferred or re-pledged unless the third-party borrower is in default, and is therefore not reflected in our condensed consolidated financial statements.
Net Gains (Losses) on Investments
Net gains (losses) on investments consisted of:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Net realized gains (losses): | | | | | | | | | | | | | | |
Fixed-maturities available for sale (1) | $ | 1,303 |
| | $ | (1,691 | ) | | $ | 808 |
| | $ | (4,811 | ) | $ | 4,401 |
| | $ | (4,219 | ) | | $ | 5,209 |
| | $ | (9,030 | ) |
| Trading securities | 274 |
| | (112 | ) | | (410 | ) | | (650 | ) | 19 |
| | (260 | ) | | (391 | ) | | (910 | ) |
| Equity securities | — |
| | 498 |
| | (680 | ) | | 640 |
| (28 | ) | | (69 | ) | | (708 | ) | | 571 |
|
| Other investments | 144 |
| | 217 |
| | 316 |
| | 291 |
| 205 |
| | 101 |
| | 521 |
| | 392 |
|
| Net realized gains (losses) on investments | 1,721 |
| | (1,088 | ) | | 34 |
| | (4,530 | ) | 4,597 |
| | (4,447 | ) | | 4,631 |
| | (8,977 | ) |
| Other-than-temporary impairment losses | — |
| | — |
| | — |
| | (844 | ) | — |
| | (900 | ) | | — |
| | (1,744 | ) |
| Net unrealized gains (losses) on investments | 9,117 |
| | (5,733 | ) | | 28,586 |
| | (18,537 | ) | 4,419 |
| | 1,405 |
| | 33,005 |
| | (17,132 | ) |
| Total net gains (losses) on investments | $ | 10,838 |
| | $ | (6,821 | ) | | $ | 28,620 |
| | $ | (23,911 | ) | $ | 9,016 |
| | $ | (3,942 | ) | | $ | 37,636 |
| | $ | (27,853 | ) |
______________________
(1)Components of net realized gains (losses) on fixed-maturities available for sale include: | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Gross investment gains from sales and redemptions | $ | 2,064 |
| | $ | 419 |
| | $ | 6,229 |
| | $ | 1,017 |
| $ | 4,697 |
| | $ | 814 |
| | $ | 10,926 |
| | $ | 1,831 |
|
| Gross investment losses from sales and redemptions | (761 | ) | | (2,110 | ) | | (5,421 | ) | | (5,828 | ) | (296 | ) | | (5,033 | ) | | (5,717 | ) | | (10,861 | ) |
The net changes in unrealized gains (losses) recognized in earnings on investments that were still held at each period-end were as follows: | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Net unrealized gains (losses) on investments still held: | | | | | | | | | | | | | | |
| Trading securities | $ | 7,608 |
| | $ | (5,816 | ) | | $ | 15,027 |
| | $ | (16,755 | ) | $ | 4,132 |
| | $ | (2,581 | ) | | $ | 18,962 |
| | $ | (18,431 | ) |
| Equity securities | 1,404 |
| | 224 |
| | 8,600 |
| | (702 | ) | 563 |
| | 2,971 |
| | 9,170 |
| | 2,238 |
|
| Other investments | 138 |
| | 89 |
| | 7 |
| | 212 |
| 47 |
| | 430 |
| | (64 | ) | | 655 |
|
| Net unrealized gains (losses) on investments still held | $ | 9,150 |
| | $ | (5,503 | ) | | $ | 23,634 |
| | $ | (17,245 | ) | $ | 4,742 |
| | $ | 820 |
| | $ | 28,068 |
| | $ | (15,538 | ) |
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Contractual Maturities
The contractual maturities of fixed-maturities available for sale were as follows:
| | | | June 30, 2019 | September 30, 2019 |
| | Available for Sale | Available for Sale |
| (In thousands) | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
Due in one year or less (1) | $ | 102,282 |
| | $ | 102,313 |
| $ | 132,819 |
| | $ | 132,897 |
|
Due after one year through five years (1) | 863,246 |
| | 878,955 |
| 885,660 |
| | 903,546 |
|
Due after five years through 10 years (1) | 1,041,249 |
| | 1,087,023 |
| 1,108,946 |
| | 1,168,298 |
|
Due after 10 years (1) | 375,451 |
| | 403,030 |
| 409,043 |
| | 455,841 |
|
RMBS (2) | 425,138 |
| | 433,773 |
| 605,687 |
| | 619,935 |
|
CMBS (2) | 557,353 |
| | 571,923 |
| 542,284 |
| | 563,338 |
|
Other ABS (2) | 661,898 |
| | 661,089 |
| 718,854 |
| | 717,986 |
|
| Total | 4,026,617 |
| | 4,138,106 |
| 4,403,293 |
| | 4,561,841 |
|
| Less: loaned securities | 23,250 |
| | 24,456 |
| 34,020 |
| | 34,618 |
|
| Total fixed-maturities available for sale | $ | 4,003,367 |
| | $ | 4,113,650 |
| $ | 4,369,273 |
| | $ | 4,527,223 |
|
______________________
| |
| (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. |
Other
For the sixnine months ended JuneSeptember 30, 2019, we did not transfer any securities from the available for sale or trading categories.
Our fixed-maturities available for sale include securities totaling $112.6$110.0 million and $88.4 million at JuneSeptember 30, 2019 and December 31, 2018, respectively, serving as collateral for our FHLB advances. See Note 11 for additional information about our FHLB advances.
Our fixed-maturities available for sale include securities totaling $16.8 million and $17.6 million at JuneSeptember 30, 2019 and December 31, 2018, respectively, on deposit and serving as collateral with various state regulatory authorities.
6. Goodwill and Other Acquired Intangible Assets, Net
All of our goodwill and other acquired intangible assets relate to our Services segment. The purchase price allocation for the acquisition of Five Bridges in December 2018 was finalized in the first quarter of 2019. In comparison to the preliminary fair value amounts recorded as of December 31, 2018, the final calculations resulted in: (i) an increase in goodwill of $0.5 million and (ii) decreases in intangible assets of $0.4 million related to technology and $0.1 million related to client relationships.
The following table shows the changes in the carrying amount of goodwill for the year-to-date periods ended December 31, 2018 and JuneSeptember 30, 2019:
| | | (In thousands) | Goodwill | | Accumulated Impairment Losses | | Net | Goodwill | | Accumulated Impairment Losses | | Net |
| Balance at December 31, 2017 | $ | 197,391 |
| | $ | (186,469 | ) | | $ | 10,922 |
| $ | 197,391 |
| | $ | (186,469 | ) | | $ | 10,922 |
|
| Goodwill acquired | 3,170 |
| | — |
| | 3,170 |
| 3,170 |
| | — |
| | 3,170 |
|
| Balance at December 31, 2018 | 200,561 |
| | (186,469 | ) | | 14,092 |
| 200,561 |
| | (186,469 | ) | | 14,092 |
|
| Goodwill acquired | 538 |
| | — |
| | 538 |
| 538 |
| | — |
| | 538 |
|
| Balance at June 30, 2019 | $ | 201,099 |
| | $ | (186,469 | ) | | $ | 14,630 |
| |
| Balance at September 30, 2019 | | $ | 201,099 |
| | $ | (186,469 | ) | | $ | 14,630 |
|
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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:
| | | | June 30, 2019 | September 30, 2019 |
| (In thousands) | Original Amount Acquired | | Accumulated Amortization and Impairment | | Net Carrying Amount | Original Amount Acquired | | Accumulated Amortization and Impairment | | Net Carrying Amount |
| Client relationships | $ | 83,860 |
| | $ | (51,257 | ) | | $ | 32,603 |
| $ | 83,860 |
| | $ | (52,764 | ) | | $ | 31,096 |
|
| Technology | 16,964 |
| | (13,978 | ) | | 2,986 |
| 16,964 |
| | (14,382 | ) | | 2,582 |
|
| Trade name and trademarks | 8,340 |
| | (4,296 | ) | | 4,044 |
| 8,340 |
| | (4,511 | ) | | 3,829 |
|
| Non-competition agreements | 185 |
| | (181 | ) | | 4 |
| 185 |
| | (183 | ) | | 2 |
|
| Licenses | 463 |
| | (58 | ) | | 405 |
| 463 |
| | (69 | ) | | 394 |
|
| Total | $ | 109,812 |
| | $ | (69,770 | ) | | $ | 40,042 |
| $ | 109,812 |
| | $ | (71,909 | ) | | $ | 37,903 |
|
|
| | | | | | | | | | | |
| | December 31, 2018 |
| (In thousands) | Original Amount Acquired | | Accumulated Amortization and Impairment | | Net Carrying Amount |
| Client relationships | $ | 84,000 |
| | $ | (48,227 | ) | | $ | 35,773 |
|
| Technology | 17,362 |
| | (13,141 | ) | | 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 |
|
For additional information on our accounting policies for goodwill and other acquired intangible assets, see Notes 2 and 7 of Notes to Consolidated Financial Statements in our 2018 Form 10-K.
7. Reinsurance
In our mortgage insurance and title insurance businesses, we use reinsurance as part of our risk distribution strategy, including to manage our capital position and risk profile. See Note 8 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for more information about our use of reinsurance in our title insurance business.
The reinsurance arrangements for our mortgage insurance business include premiums ceded under the QSR Program, the Single Premium QSR Program and the Excess-of-Loss Program.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The effect of all of our reinsurance programs on our net income is as follows:
| | | | Three Months Ended
June 30, |
| Six Months Ended
June 30, | Three Months Ended
September 30, |
| Nine Months Ended
September 30, |
| (In thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 | 2019 |
| 2018 |
| 2019 |
| 2018 |
| Net premiums written—insurance: | | | | | | | | | | | | | | |
| Direct | $ | 279,991 |
| | $ | 284,713 |
| | $ | 541,022 |
| | $ | 541,312 |
| $ | 287,000 |
| | $ | 279,137 |
| | $ | 828,022 |
| | $ | 820,449 |
|
Assumed (1) | 2,475 |
| | 1,504 |
| | 4,920 |
| | 2,816 |
| 2,608 |
| | 1,987 |
| | 7,528 |
| | 4,803 |
|
Ceded (2) | (14,289 | ) | | (31,883 | ) | | (24,445 | ) | | (51,814 | ) | (15,455 | ) | | (24,348 | ) | | (39,900 | ) | | (76,162 | ) |
| Net premiums written—insurance | $ | 268,177 |
| | $ | 254,334 |
| | $ | 521,497 |
| | $ | 492,314 |
| $ | 274,153 |
| | $ | 256,776 |
| | $ | 795,650 |
| | $ | 749,090 |
|
| | | | | | | | | | | | | | | |
| Net premiums earned—insurance: | | | | | | | | | | | | | | |
| Direct | $ | 333,791 |
| (3) | $ | 266,512 |
| | $ | 614,014 |
| (3) | $ | 523,943 |
| $ | 305,493 |
| | $ | 272,505 |
| | $ | 919,507 |
| (3) | $ | 796,448 |
|
Assumed (1) | 2,481 |
| | 1,510 |
| | 4,931 |
| | 2,828 |
| 2,614 |
| | 1,994 |
| | 7,545 |
| | 4,822 |
|
Ceded (2) | (37,106 | ) | (3) | (16,678 | ) | | (56,267 | ) | (3) | (32,877 | ) | (26,922 | ) | | (16,068 | ) | | (83,189 | ) | (3) | (48,945 | ) |
| Net premiums earned—insurance | $ | 299,166 |
| (3) | $ | 251,344 |
| | $ | 562,678 |
| (3) | $ | 493,894 |
| $ | 281,185 |
| | $ | 258,431 |
| | $ | 843,863 |
| (3) | $ | 752,325 |
|
| | | | | | | | | | | | | | | |
| Ceding commissions earned | $ | 16,353 |
| (3) | $ | 8,539 |
| | $ | 25,038 |
| (3) | $ | 17,355 |
| $ | 12,153 |
| | $ | 8,373 |
| | $ | 37,191 |
| (3) | $ | 25,728 |
|
| Ceded losses | 1,868 |
| | 1,019 |
| | 3,555 |
| | 2,165 |
| 771 |
| | 1,191 |
| | 4,326 |
| | 3,356 |
|
______________________
| |
| (1) | Includes premiums earned from our participation in certain Front-end and Back-end credit risk transfer programs. |
| |
| (2) | Net of profit commission. |
| |
| (3) | Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 3 for further information. |
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 additional NIW under this program. RIF ceded under the QSR Program was $0.8$0.7 billion and $1.0 billion as of JuneSeptember 30, 2019 and 2018, respectively.
Single Premium QSR Program
In the first quarter of 2016, Radian Guaranty entered into the 2016 Single Premium QSR Agreement with a panel of third-party reinsurers. As of January 1, 2018, Radian Guaranty is no longer ceding additional NIW under this arrangement. RIF ceded under the 2016 Single Premium QSR Agreement was $5.9$5.7 billion and $6.6$6.4 billion as of JuneSeptember 30, 2019 and 2018, respectively.
In October 2017, Radian Guaranty 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 up to 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. RIF ceded under the 2018 Single Premium QSR Agreement was $2.6$2.9 billion and $1.0$1.6 billion as of JuneSeptember 30, 2019 and 2018, respectively.
Excess-of-Loss Program
Since the fourth quarter of 2018, Radian Guaranty has entered into two2 fully collateralized reinsurance arrangements with the Eagle Re Issuers. Total ceded premiums earned under our Excess-of-Loss Program were $7.7$7.5 million and $10.9$18.4 million for the three and sixnine months ended JuneSeptember 30, 2019, respectively.
The Eagle Re 2018-1 reinsurance agreement, entered into in November 2018, provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for a specified percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Recurring Premium Policies issued between January 1, 2017 and December 31, 2017, 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 2018-1 on
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
those Recurring Premium Policies. Eagle Re 2018-1 financed its coverage by issuing mortgage insurance-linked notes in an aggregate amount of $434.0 million to eligible third-party capital markets investors in an unregistered private offering. 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.
The Eagle Re 2019-1 reinsurance agreement, entered into in April 2019, provides for up to $562.0 million of aggregate excess-of-loss reinsurance coverage for a specified percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Recurring Premium Policies issued between January 1, 2018 and December 31, 2018, with an initial RIF of $10.7 billion. Eagle Re 2019-1 financed its coverage by issuing mortgage insurance-linked notes in an aggregate amount of $562.0 million to eligible third-party capital markets investors in an unregistered private offering. Radian Guaranty and its affiliates have retained the first-loss layer of $267.6 million of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amount.
The aggregate excess-of-loss reinsurance coverage for these transactions decreases over a ten-year period as the principal balances of the underlying covered mortgages decrease and as any claims are paid by the applicable Eagle Re Issuer or the mortgage insurance is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained and 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 agreements upon the occurrence of certain events.
The Eagle Re Issuers are not subsidiaries or affiliates of Radian Guaranty. Based on the accounting guidance that addresses VIEs, we have not consolidated any of the Eagle Re Issuers in our consolidated financial statements, because Radian does not have: (i) the power to direct the activities that most significantly affect the Eagle Re Issuers’ economic performances or (ii) the obligation to absorb losses or the right to receive benefits from the Eagle Re Issuers that potentially could be significant to the Eagle Re Issuers. See Note 2 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for more information on our accounting treatment of VIEs.
The Eagle Re Issuers represent our only VIEs as of JuneSeptember 30, 2019. The following table presents the total assets of the Eagle Re Issuers as well as Radian Guaranty’s maximum exposure to loss associated with each Eagle Re Issuer, as of the dates indicated.
| | | | | At June 30, 2019 | | At September 30, 2019 |
| | | | | Maximum Exposure to Loss | | | | Maximum Exposure to Loss |
| (In thousands) | | Total VIE Assets (1) | | On - Balance Sheet | | Off - Balance Sheet (2) | | Total | | Total VIE Assets (1) | | On - Balance Sheet | | Off - Balance Sheet (2) | | Total |
| Eagle Re 2018-1 | | $ | 434,034 |
| | $ | 557 |
| (3) | $ | 434,034 |
| | $ | 434,591 |
| | $ | 408,586 |
| | $ | 1,493 |
| (3) | $ | 408,586 |
| | $ | 410,079 |
|
| Eagle Re 2019-1 | | 562,036 |
| | 410 |
| (3) | 562,036 |
| | 562,446 |
| | 562,036 |
| | 2,202 |
| (3) | 562,036 |
| | 564,238 |
|
| Total | | $ | 996,070 |
| | $ | 967 |
| | $ | 996,070 |
| | $ | 997,037 |
| | $ | 970,622 |
| | $ | 3,695 |
| | $ | 970,622 |
| | $ | 974,317 |
|
| | | | | | | | | | | | | | | | | |
| | | At December 31, 2018 | | At December 31, 2018 |
| | | | | Maximum Exposure to Loss | | | | Maximum Exposure to Loss |
| (In thousands) | | Total VIE Assets (1) | | On - Balance Sheet | | Off - Balance Sheet (2) | | Total | | Total VIE Assets (1) | | On - Balance Sheet | | Off - Balance Sheet (2) | | Total |
| Eagle Re 2018-1 | | $ | 434,034 |
| | $ | 1,114 |
| (3) | $ | 434,034 |
| | $ | 435,148 |
| | $ | 434,034 |
| | $ | 1,114 |
| (3) | $ | 434,034 |
| | $ | 435,148 |
|
| Total | | $ | 434,034 |
| | $ | 1,114 |
| | $ | 434,034 |
| | $ | 435,148 |
| | $ | 434,034 |
| | $ | 1,114 |
| | $ | 434,034 |
| | $ | 435,148 |
|
______________________
| |
| (1) | Assets held by the Eagle Re Issuers are required to be invested in U.S. government money market funds, cash or U.S. Treasury securities. Liabilities of the Eagle Re Issuers consist of their mortgage insurance-linked notes, described above. |
| |
| (2) | Represents Radian Guaranty’s maximum exposure to loss in the event the VIE is unable to meet its obligations to us and 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) were to lose their value 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 aggregate excess-of-loss reinsurance coverage amount. In the same scenario, the related embedded derivative would no longer have value. |
| |
| (3) | Represents the fair value of the related embedded derivative, included in other assets in our condensed consolidated balance sheets. |
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Collateral
Although we use reinsurance as one of our risk management 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
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
liable for any defaulted amounts. However, in all of our reinsurance transactions,consistent with the PMIERs reinsurer counterparty collateral requirements, Radian Guaranty’s reinsurers have established a trust to help secure our potential cash recoveries. In addition, for the Single Premium QSR Program, Radian Guaranty holds amounts received from ceded premiums written to collateralize the reinsurers’ obligations, which are reported in reinsurance funds withheld on our condensed consolidated balance sheets. Any loss recoveries and profit commissions paid to Radian Guaranty related to the Single Premium QSR Program are expected to be realized from this account.
See Note 8 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for more information about our reinsurance transactions.
8. Other Assets
The following table shows the components of other assets as of the dates indicated:
| | | (In thousands) | June 30,
2019 | | December 31,
2018 | September 30,
2019 | | December 31,
2018 |
| Company-owned life insurance | $ | 101,988 |
| | $ | 83,377 |
| $ | 103,877 |
| | $ | 83,377 |
|
| Prepaid federal income taxes (Note 9) | 55,000 |
| | — |
| 89,200 |
| | — |
|
| Loaned securities (Note 5) | | 65,444 |
| | 27,860 |
|
Internal-use software (1) | 53,631 |
| | 51,367 |
| 55,190 |
| | 51,367 |
|
Right-of-use assets (2) | 44,844 |
| | — |
| 42,613 |
| | — |
|
Property and equipment (3) | 35,742 |
| | 37,090 |
| 34,339 |
| | 37,090 |
|
| Accrued investment income | 32,119 |
| | 34,878 |
| 33,187 |
| | 34,878 |
|
| Loaned securities (Note 5) | 29,064 |
| | 27,860 |
| |
| Unbilled receivables | 21,725 |
| | 19,917 |
| 25,110 |
| | 19,917 |
|
| Deferred policy acquisition costs | 18,546 |
| | 17,311 |
| 19,928 |
| | 17,311 |
|
| Reinsurance recoverables | 16,841 |
| | 14,402 |
| 16,906 |
| | 14,402 |
|
Current federal income tax receivable (4) | — |
| | 44,506 |
| — |
| | 44,506 |
|
| Other | 20,736 |
| | 36,992 |
| 27,853 |
| | 36,992 |
|
| Total other assets | $ | 430,236 |
| | $ | 367,700 |
| $ | 513,647 |
| | $ | 367,700 |
|
______________________
| |
| (1) | Internal-use software, at cost, has been reduced by accumulated amortization of $66.6$70.4 million and $60.3 million at JuneSeptember 30, 2019 and December 31, 2018, respectively, as well as $3.8 million of impairment charges in the sixnine months ended JuneSeptember 30, 2019, and $5.1 million of impairment charges in 2018. Amortization expense was $3.4$3.3 million and $2.9 million for the three-month periods ended JuneSeptember 30, 2019 and 2018, respectively, and $6.5$9.8 million and $5.7$8.6 million for the six-monthnine-month periods ended JuneSeptember 30, 2019 and 2018, respectively. |
| |
| (2) | Represents right-of-use assets recognized as a result of our adoption, as of January 1, 2019, of the new accounting and disclosure requirements for leases of property, plant and equipment. See Note 1 for additional information. Right-of-use assets are shown less accumulated amortization of $4.6$6.8 million at JuneSeptember 30, 2019. |
| |
| (3) | Property and equipment at cost, less accumulated depreciation of $66.2$68.5 million and $62.9 million at JuneSeptember 30, 2019 and December 31, 2018, respectively. Depreciation expense was $1.9 million and $2.1 million for both the three-month periods ended JuneSeptember 30, 2019 and 2018, respectively, and $4.0 million and $3.8$5.9 million for both the six-monthnine-month periods ended JuneSeptember 30, 2019 and 2018, respectively.2018. |
| |
| (4) | During the sixnine months ended JuneSeptember 30, 2019, current federal income tax receivable was reduced by our receipt of the remaining $57.2 million refund from amounts on deposit with the IRS related to the settlement of the IRS Matter. |
9. Income Taxes
Certain entities within our consolidated group have generated deferred tax assets of approximately $63.6$68.0 million, relating primarily to state and local NOL carryforwards, which, if unutilized, will expire during various future tax periods. We are
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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 and this 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. We have determined that certain 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 of their state and local NOLs on their state and local tax returns. Therefore,
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $62.0$67.9 million at JuneSeptember 30, 2019.
In July 2018, we finalized a settlement with the IRS related to adjustments we had been contesting that resulted from the examination of our 2000 through 2007 consolidated federal income tax returns. During 2018, under the terms of the settlement, Radian utilized its qualified deposits with the U.S. Treasury to settle its $31.0 million obligation to the IRS, and during the first quarter of 2019, the IRS refunded to Radian the remaining $57.2 million that was previously on deposit.deposit resulting in a reduction of our current federal income tax receivable. As of September 30, 2019, our current federal income tax liability is $33.4 million and is included as a component of other liabilities in our condensed consolidated balance sheets.
As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, under IRC Section 832(e) for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is allowed only to the extent that we purchase non-interest bearing U.S. Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the U.S. Treasury in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. As of JuneSeptember 30, 2019, we held $55.0$89.2 million of T&L Bonds,these bonds, which are included inas prepaid income taxes within other assets in our condensed consolidated balance sheets, resultingsheets. The corresponding deduction of our statutory contingency reserves resulted in the recognition of a net deferred tax liability, and a decreasewhich is included in other liabilities in our net deferred tax asset.condensed consolidated balance sheets.
For additional information on our income taxes, including our accounting policies, see Notes 2 and 10 of Notes to Consolidated Financial Statements in our 2018 Form 10-K.
10. Losses and Loss Adjustment Expense
Our reserve for losses and LAE, at the end of each period indicated, consisted of:
| | | (In thousands) | June 30,
2019 | | December 31,
2018 | September 30,
2019 | | December 31,
2018 |
| Mortgage insurance loss reserves | $ | 401,294 |
| | $ | 397,891 |
| |
| Mortgage Insurance loss reserves | | $ | 394,087 |
| | $ | 397,891 |
|
Services loss reserves (1) | 3,984 |
| | 3,470 |
| 4,054 |
| | 3,470 |
|
| Total reserve for losses and LAE | $ | 405,278 |
| | $ | 401,361 |
| $ | 398,141 |
| | $ | 401,361 |
|
______________________
| |
| (1) | AThe Services loss reserves relate to Radian Title Insurance and the majority of this amount is subject to reinsurance, with the related reinsurance recoverables reported in other assets in our condensed consolidated balance sheets, and relates to Radian Title Insurance.sheets. For all periods presented, total incurred losses and paid claims for Radian Title Insurance were not material. See Note 8 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information about our use of reinsurance in our title insurance business. |
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following table presents information relating to our mortgage insurance reserve for losses, including our IBNR reserve and LAE, but excluding our second-lien mortgage loan premium deficiency reserve, for the periods indicated:
| | | | Six Months Ended
June 30, | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | 2019 | | 2018 |
| Balance at beginning of period | $ | 397,891 |
| | $ | 507,588 |
| $ | 397,891 |
| | $ | 507,588 |
|
Less: Reinsurance recoverables (1) | 11,009 |
| | 8,350 |
| 11,009 |
| | 8,350 |
|
| Balance at beginning of period, net of reinsurance recoverables | 386,882 |
| | 499,238 |
| 386,882 |
| | 499,238 |
|
| Add: Losses and LAE incurred in respect of default notices reported and unreported in: | | | | | | |
Current year (2) | 73,494 |
| | 67,286 |
| 107,866 |
| | 100,047 |
|
| Prior years | (5,617 | ) | | (11,311 | ) | (10,579 | ) | | (24,075 | ) |
| Total incurred | 67,877 |
| | 55,975 |
| 97,287 |
| | 75,972 |
|
| Deduct: Paid claims and LAE related to: | | | | | | |
Current year (2) | 507 |
| | 1,091 |
| 1,784 |
| | 2,316 |
|
| Prior years | 66,510 |
| | 115,369 |
| 101,927 |
| | 173,911 |
|
| Total paid | 67,017 |
| | 116,460 |
| 103,711 |
| | 176,227 |
|
| Balance at end of period, net of reinsurance recoverables | 387,742 |
| | 438,753 |
| 380,458 |
| | 398,983 |
|
Add: Reinsurance recoverables (1) | 13,552 |
| | 9,341 |
| 13,629 |
| | 9,997 |
|
| Balance at end of period | $ | 401,294 |
| | $ | 448,094 |
| $ | 394,087 |
| | $ | 408,980 |
|
______________________
| |
| (1) | Related to ceded losses recoverable, if any, on reinsurance transactions. See Note 7 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 would be considered a current year default. |
Reserve Activity
2019 Activity
Reserves established for new default notices were the primary driver of our total incurred losses for the sixnine months ended JuneSeptember 30, 2019, 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 was 8.0%7.5% as of JuneSeptember 30, 2019. Our provision for losses during the first sixnine months of 2019 was positively impacted by favorable reserve development on prior year defaults. This favorable development 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, 2018, partially offset by a $19.4 millionan increase in our IBNR reserve estimate in the threenine months ended JuneSeptember 30, 2019. The increase in our IBNR reserve
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
estimate is2019 related to previously disclosed legal proceedings involving challenges from certain servicers regarding our Loss Mitigation Activities, which challenges may result in the reversal of certain decisions regarding prior Rescissions, Claim Denials or Claim Curtailments.proceedings. See Note 12 for additional information.
Total claims paid decreased for the sixnine months ended JuneSeptember 30, 2019, compared to the same period in 2018. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory.
2018 Activity
Our mortgage insurance loss reserves at JuneSeptember 30, 2018 declined as compared to December 31, 2017, primarily as a result of the amount of paid claims outpacing 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 the sixnine months ended JuneSeptember 30, 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 was 9.0%8.5% as of JuneSeptember 30, 2018. The provision for losses during the first sixnine months of 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.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Mortgage Insurance Reserve Assumptions
Default to Claim Rate
Our aggregate weighted-average net Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 33% at both June 30, 2019 and December 31, 2018. As of JuneSeptember 30, 2019 our gross Default to Claim Rate assumptions on our primary portfolio ranged from 8.0%7.5% for new defaults, up to 68%65% for defaults not in foreclosure stage, and 72% for Foreclosure Stage Defaults. See Notes 2 and 11 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information about our mortgage insurance reserve assumptions and Loss Mitigation Activities.
11. Borrowings and Financing Activities
The carrying value of our debt at JuneSeptember 30, 2019 and December 31, 2018 was as follows:
| | | (In thousands) | June 30,
2019 | | December 31,
2018 | September 30,
2019 | | December 31,
2018 |
| Senior notes: | | | | | | |
| 5.500% Senior Notes due 2019 | $ | — |
| | $ | 158,324 |
| $ | — |
| | $ | 158,324 |
|
| 5.250% Senior Notes due 2020 | 26,852 |
| | 232,729 |
| — |
| | 232,729 |
|
| 7.000% Senior Notes due 2021 | 69,857 |
| | 195,867 |
| — |
| | 195,867 |
|
| 4.500% Senior Notes due 2024 | 443,931 |
| | 443,428 |
| 444,186 |
| | 443,428 |
|
| 4.875% Senior Notes due 2027 | 442,250 |
| | — |
| 442,457 |
| | — |
|
| Total senior notes | $ | 982,890 |
| | $ | 1,030,348 |
| $ | 886,643 |
| | $ | 1,030,348 |
|
| | | | | | | |
| FHLB advances: | | | | | | |
| FHLB advances due 2019 | $ | 72,400 |
| | $ | 60,550 |
| $ | 58,881 |
| | $ | 60,550 |
|
| FHLB advances due 2020 | 2,991 |
| | 2,991 |
| 6,621 |
| | 2,991 |
|
| FHLB advances due 2021 | 14,000 |
| | 8,000 |
| 14,000 |
| | 8,000 |
|
| FHLB advances due 2022 | 6,000 |
| | — |
| 9,000 |
| | — |
|
| FHLB advances due 2023 | 8,995 |
| | 8,995 |
| 8,994 |
| | 8,995 |
|
| FHLB advances due 2024 | 1,996 |
| | 1,996 |
| 6,996 |
| | 1,996 |
|
| Total FHLB advances | $ | 106,382 |
| | $ | 82,532 |
| $ | 104,492 |
| | $ | 82,532 |
|
Repayment and Extinguishment of Debt
Repayment of Senior Notes due 2019
In accordance with the terms of the notes under the related indenture, we retired the remaining aggregate principal amount of $158.6 million of outstanding Senior Notes due 2019 upon their maturity in June 2019.
Repurchases of Senior Notes due 2020 and 2021
During the second quarter of 2019, pursuant to cash tender offers to purchase any and all of our outstanding Senior Notes due 2020 and 2021, we purchased aggregate principal amounts of $207.2 million and $127.3 million of our Senior Notes due 2020 and 2021, respectively. We funded the purchases with $351.8 million in cash (which includes accrued and unpaid interest due on the purchased notes). These purchases resulted in a loss on extinguishment of debt of $16.8 million.
In the third quarter of 2019, we redeemed the remaining $27.0 million and $70.4 million aggregate principal amount of Senior Notes due 2020 and 2021, respectively, in accordance with the terms of the related indentures. The aggregate redemption amount paid was $103.1 million, which includes accrued interest through the applicable redemption dates. These purchases resulted in a loss on extinguishment of debt of $5.9 million.
Following these purchases theand redemptions, there were 0 remaining principal amountamounts outstanding on the Senior Notes due 2020 and 2021 at September 30, 2019.
Senior Notes due 2027
In June 30, 2019, was $27.0we issued $450 million and $70.4 million, respectively.
On June 20, 2019, Radian Group announced its intention to redeem, and on July 25, 2019, it redeemed the remaining $27.0 million of aggregate principal amount of Senior Notes due 2020, in accordance with the terms of the related indenture. The aggregate redemption amount paid was $27.8 million, which includes accrued interest through the redemption date.2027 and received net
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Senior Notes due 2027
In June 2019, we issued $450 million aggregate principal amount of Senior Notes due 2027 and received net
proceeds of $442.2 million. These notes mature on March 15, 2027 and bear interest at a rate of 4.875% per annum, payable semi-annually on March 15 and September 15 of each year, with interest payments commencing on March 15, 2020.
We have the option to redeem these notes, in whole or in part, at any time, or from time to time, prior to September 15, 2026 (the date that is six months prior to the maturity date of the notes) (the “Par Call Date”), at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed and (ii) the make-whole amount, which is the sum of the present values of the remaining scheduled payments of principal and interest in respect of the notes to be redeemed from the redemption date to the Par Call Date 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. At any time on or after the Par Call Date, we may, at our option, redeem the notes in whole or in part, at a redemption price equal to 100% of the aggregate principal amount of the notes to be redeemed, plus accrued and unpaid interest thereon to, but excluding, the redemption date.
The indenture governing the Senior Notes due 2027 contains covenants customary for securities of this nature, including covenants related to the payments of the notes, reports to be provided, compliance certificates to be issued and the ability to modify the covenants. Additionally, the indenture includes covenants restricting us from encumbering the capital stock of a designated subsidiary (as defined in the indenture 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.
FHLB Advances
Principal on FHLB advances is due at maturity. For obligations with original maturities greater than or equal to 90 days, we may prepay the debt at any time, subject to a prepayment fee calculation. See Note 13 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information about our FHLB advances.
Revolving Credit Facility
Radian Group has in place a $267.5 million unsecured revolving credit facility with a syndicate of bank lenders, which is scheduled to expire on October 16, 2020. At JuneSeptember 30, 2019, Radian Group was in compliance with all of the credit facility covenants, and there were no0 amounts outstanding. For more information regarding our revolving credit facility, including certain of its terms and covenants, see Note 13 of Notes to Consolidated Financial Statements in our 2018 Form 10-K.
12. Commitments and Contingencies
We are routinely involved in a number of legal actions and proceedings, including litigation and other disputes arising in the ordinary course of our business. The legal and regulatory matters discussed below and in our 2018 Form 10-K 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 actions will not have a material adverse effect on our consolidated financial condition. The outcome of litigation and other legal and regulatory matters and proceedings is inherently uncertain, and it is possible that one1 or more of the matters currently pending or threatened could have an adverse effect on our liquidity, financial condition or results of operations for any particular period.
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 Eastern District of Pennsylvania against Radian Guaranty 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 seeking payment of insurance benefits on approximately 2,500 certificates that Ocwen was previously pursuing through the
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
seeking payment of insurance benefits on approximately 2,500 certificates that Ocwen was previously pursuing through the Amended Filings; and (3) agreed to resolve the remaining dispute through the Arbitration. The Arbitration is proceeding, and Radian continues to defend against Ocwen’s claims vigorously.
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, equitable indemnification, unjust enrichment, and conversion claims and seeking monetary damages and declaratory relief. TheExhibit 1 to the Complaint lists 3,014 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving insurance coverage decisions. Thedecisions (the “Coverage Disputed Loans”). Exhibit 2 to 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 against these claims vigorously. In December 2018, Radian Guaranty filed a motion to dismiss the Complaint. In March 2019, the trial judge issued an Orderorder granting in part, and denying in part, our motion to dismiss, and dismissed Nationstar’s unjust enrichment and conversion claims. In May 2019, Radian Guaranty filed an answer, with affirmative defenses and counterclaims, in response to the Complaint. On September 23, 2019, the trial judge entered as an order a joint stipulation submitted by Nationstar and Radian Guaranty that narrowed the scope of the dispute involving Coverage Disputed Loans to claims relating to 1,704 mortgage insurance certificates. Radian Guaranty believes that Nationstar’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and continues to defend against these claims vigorously.
In the second quarter ofthree and nine months ended September 30, 2019, the Company increased its IBNR reserve estimate by $19.4$11.8 million and $31.2 million, respectively, related to our best estimate of our probable loss in connection with the above legal proceedings. While Radian believes it has substantial defenses in these matters and intends to continue to defend against these claims vigorously, it is not feasible to predict the ultimate outcome of these disputes, and the Company could in the future be required to pay amounts as a result of settlements or decisions in these matters, potentially in excess of accruals.
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 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, from time to time we face challenges from certain lender and servicer customers regarding our Loss Mitigation Activities. These challenges could result in additional arbitration or judicial proceedings and we may need to reassume the risk on, and increase loss reserves for, the associated policies or pay additional claims. See Note 10 for additional information.
Lease Liability
Our lease liability represents the present value of future lease payments over the lease term. Our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate, on a collateralized basis, to discount the lease payments based on information available at lease commencement. Our leases expire periodically through August 2032, and contain provisions for scheduled periodic rent increases. We estimate the incremental borrowing rate based on the yields of Radian Group corporate bonds, as adjusted to reflect a collateralized borrowing rate.rate, resulting in discount rates ranging from 4.22% to 7.08%. While the majority of our lease population expires within one year of one of the Radian Group corporate bonds, our more significant leases do not. For those leases, we adjust the corporate bond rate for both U.S. Treasury rate yields and a corporate spread adjustment determined from recent market data, resulting in discount rates ranging from 4.22% to 7.08%.data.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following tables provide additional information related to our leases, including: (i) the components of our total lease cost; (ii) the cash flows arising from our lease transactions; (iii) supplemental balance sheet information; (iv) the weighted-average remaining lease term; (v) the weighted-average discount rate used for our leases; and (vi) the remaining maturities of our lease liabilities, as of and for the periods indicated:
| | | ($ in thousands) | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| Lease cost | | | | |
| Operating lease cost | $ | 2,347 |
| | $ | 4,666 |
| $ | 2,340 |
| | $ | 7,006 |
|
| Short-term lease cost | 52 |
| | 75 |
| 36 |
| | 111 |
|
| Total lease cost | $ | 2,399 |
| | $ | 4,741 |
| $ | 2,376 |
| | $ | 7,117 |
|
| | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | $ | (2,639 | ) | | $ | (5,276 | ) | $ | (2,657 | ) | | $ | (7,933 | ) |
| | | | | | | |
| | | ($ in thousands) | June 30, 2019 | September 30, 2019 |
| Operating leases: | | |
Operating lease right-of-use assets (1) | $ | 44,844 |
| $ | 42,613 |
|
Operating lease liabilities (2) | 68,359 |
| 65,816 |
|
| | | |
| Weighted-average remaining lease term - operating leases (in years) | 10.22 years |
| 10.0 years |
|
| | | |
| Weighted-average discount rate - operating leases | 6.76 | % | 6.77 | % |
| | | |
| Remaining maturities of lease liabilities for the remainder of 2019 and thereafter is as follows: | | |
| 2019 | $ | 5,234 |
| $ | 2,681 |
|
| 2020 | 10,424 |
| 10,408 |
|
| 2021 | 9,961 |
| 9,945 |
|
| 2022 | 10,136 |
| 10,140 |
|
| 2023 | 10,275 |
| 10,279 |
|
| 2024 and thereafter | 56,542 |
| 56,421 |
|
| Total lease payments | 102,572 |
| 99,874 |
|
| Less: Imputed interest | (34,213 | ) | (34,058 | ) |
Present value of lease liabilities (2) | $ | 68,359 |
| $ | 65,816 |
|
______________________
| |
| (1) | Classified in other assets in our condensed consolidated balance sheets. See Note 8. |
| |
| (2) | Classified in other liabilities in our condensed consolidated balance sheets. |
Pursuant to the previous lease accounting standard, rent expense for the three and sixnine months ended JuneSeptember 30, 2018 was $2.2$2.5 million and $4.3$6.8 million, respectively. Our commitment for non-cancelable leases in future years as of December 31, 2018 was as follows (in thousands):
|
| | | |
| 2019 | $ | 11,310 |
|
| 2020 | 10,847 |
|
| 2021 | 10,165 |
|
| 2022 | 10,100 |
|
| 2023 | 10,251 |
|
| 2024 and thereafter | 56,317 |
|
| Total | $ | 108,990 |
|
At December 31, 2018, there were 0 future minimum receipts expected from sublease rental payments.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
At December 31, 2018, there were no future minimum receipts expected from sublease rental payments.
See Note 1 herein for additional information about our leases and Note 14 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for further information regarding our commitments and contingencies and our accounting policies for contingencies.
13. Capital Stock
Share Repurchase Program
On August 16, 2018, Radian Group’s board of directors approved a share repurchase program that authorized 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. On March 20, 2019, Radian Group’s board of directors approved a $150 million increase in authorization for this program, bringing the total authorization to repurchase shares up to $250 million, excluding commissions. Radian operated this program pursuant to a trading plan under Rule 10b5-1 of the Exchange Act, which permitted the companyCompany to purchase shares, at pre-determined price targets, when it may have otherwise been precluded from doing so. During the three and sixnine months ended JuneSeptember 30, 2019, the Company purchased 7,470,3322,241,568 and 9,017,00611,258,574 shares respectively, at an average price of $22.20$23.43 and $21.92$22.22 per share, respectively, including commissions. As of JuneSeptember 30, 2019, 0 further purchase authority of up to $52.5 million remained availableremains under this program. In July 2019, the Company completed the repurchase authorization under this share repurchase program by purchasing an additional 2,241,568 shares of its common stock at an average price of $23.43 per share, including commissions. Over the course of this program, the Company repurchased a total of 11,258,574 shares, or 5.3% of the shares outstanding at the beginning of the program.
On August 14, 2019, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to spend up to $200 million, excluding commissions, 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 operates this program pursuant to a trading plan under Rule 10b5-1 of the Exchange Act, which permits the Company to purchase shares, at pre-determined price targets, when it may otherwise be precluded from doing so. During the three months ended September 30, 2019, the Company purchased 1,104,786 shares at an average price of $22.64 per share, including commissions. As of September 30, 2019, purchase authority of up to $175.0 million remained available under this program, which expires on August 31, 2020.
Subsequent to September 30, 2019, the Company purchased 1,090,875 shares of its common stock under its share repurchase program at an average price of $22.93 per share, including commissions. As of November 8, 2019, purchase authority of up to $150.0 million remained available under this program.
Other Purchases
We may purchase shares on the open market to settle stock options exercised by employees and purchases under our Employee Stock Purchase Plan. 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
During each of the first and secondthree quarters of 2019 and each quarter of the quarters in 2018, we declared quarterly cash dividends on our common stock equal to $0.0025 per share.
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
14. Accumulated Other Comprehensive Income (Loss)
The following table shows the rollforward of accumulated other comprehensive income (loss) as of the periods indicated: | | | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| (In thousands) | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax |
| Balance at beginning of period | $ | 22,144 |
| | $ | 4,650 |
| | $ | 17,494 |
| | $ | (77,114 | ) | | $ | (16,194 | ) | | $ | (60,920 | ) | $ | 111,977 |
| | $ | 23,515 |
| | $ | 88,462 |
| | $ | (77,114 | ) | | $ | (16,194 | ) | | $ | (60,920 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gains (losses) on investments: | | | | |
| | | | | | | | | | |
| | | | | | |
| Unrealized holding gains (losses) arising during the period | 91,140 |
| | 19,140 |
| | 72,000 |
| | 189,903 |
| | 39,880 |
| | 150,023 |
| 51,460 |
| | 10,806 |
| | 40,654 |
| | 241,363 |
| | 50,686 |
| | 190,677 |
|
Less: Reclassification adjustment for net gains (losses) included in net income (1) | 1,303 |
| | 274 |
| | 1,029 |
| | 808 |
| | 170 |
| | 638 |
| 4,401 |
| | 924 |
| | 3,477 |
| | 5,209 |
| | 1,094 |
| | 4,115 |
|
| Net unrealized gains (losses) on investments | 89,837 |
| | 18,866 |
| | 70,971 |
| | 189,095 |
| | 39,710 |
| | 149,385 |
| 47,059 |
| | 9,882 |
| | 37,177 |
| | 236,154 |
| | 49,592 |
| | 186,562 |
|
| Unrealized foreign currency translation adjustments | (4 | ) | | (1 | ) | | (3 | ) | | (4 | ) | | (1 | ) | | (3 | ) | — |
| | — |
| | — |
| | (4 | ) | | (1 | ) | | (3 | ) |
| Other comprehensive income (loss) | 89,833 |
| | 18,865 |
| | 70,968 |
| | 189,091 |
| | 39,709 |
| | 149,382 |
| 47,059 |
| | 9,882 |
| | 37,177 |
| | 236,150 |
| | 49,591 |
| | 186,559 |
|
| Balance at end of period | $ | 111,977 |
| | $ | 23,515 |
| | $ | 88,462 |
| | $ | 111,977 |
| | $ | 23,515 |
| | $ | 88,462 |
| $ | 159,036 |
| | $ | 33,397 |
| | $ | 125,639 |
| | $ | 159,036 |
| | $ | 33,397 |
| | $ | 125,639 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| (In thousands) | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax |
| Balance at beginning of period | $ | (39,842 | ) | | $ | (8,367 | ) | | $ | (31,475 | ) | | $ | 32,669 |
| | $ | 9,584 |
| | $ | 23,085 |
| $ | (73,345 | ) | | $ | (15,402 | ) | | $ | (57,943 | ) | | $ | 32,669 |
| | $ | 9,584 |
| | $ | 23,085 |
|
| Cumulative effect of adopting accounting standard updates | — |
| | — |
| | — |
| | 284 |
| | (2,664 | ) | | 2,948 |
| — |
| | — |
| | — |
| | 284 |
| | (2,664 | ) | | 2,948 |
|
| Balance adjusted for cumulative effect of adopting accounting standard updates | (39,842 | ) | | (8,367 | ) | | (31,475 | ) | | 32,953 |
| | 6,920 |
| | 26,033 |
| (73,345 | ) | | (15,402 | ) | | (57,943 | ) | | 32,953 |
| | 6,920 |
| | 26,033 |
|
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gains (losses) on investments: | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized holding gains (losses) arising during the period | (35,194 | ) | | (7,390 | ) | | (27,804 | ) | | (111,957 | ) | | (23,510 | ) | | (88,447 | ) | (6,762 | ) | | (1,421 | ) | | (5,341 | ) | | (118,719 | ) | | (24,931 | ) | | (93,788 | ) |
Less: Reclassification adjustment for net gains (losses) included in net income (1) | (1,691 | ) | | (355 | ) | | (1,336 | ) | | (5,655 | ) | | (1,187 | ) | | (4,468 | ) | (5,120 | ) | | (1,076 | ) | | (4,044 | ) | | (10,775 | ) | | (2,263 | ) | | (8,512 | ) |
| Net unrealized gains (losses) on investments | (33,503 | ) | | (7,035 | ) | | (26,468 | ) | | (106,302 | ) | | (22,323 | ) | | (83,979 | ) | (1,642 | ) | | (345 | ) | | (1,297 | ) | | (107,944 | ) | | (22,668 | ) | | (85,276 | ) |
| Unrealized foreign currency translation adjustments | — |
| | — |
| | — |
| | 4 |
| | 1 |
| | 3 |
| — |
| | — |
| | — |
| | 4 |
| | 1 |
| | 3 |
|
| Other comprehensive income (loss) | (33,503 | ) | | (7,035 | ) | | (26,468 | ) | | (106,298 | ) | | (22,322 | ) | | (83,976 | ) | (1,642 | ) | | (345 | ) | | (1,297 | ) | | (107,940 | ) | | (22,667 | ) | | (85,273 | ) |
| Balance at end of period | $ | (73,345 | ) | | $ | (15,402 | ) | | $ | (57,943 | ) | | $ | (73,345 | ) | | $ | (15,402 | ) | | $ | (57,943 | ) | $ | (74,987 | ) | | $ | (15,747 | ) | | $ | (59,240 | ) | | $ | (74,987 | ) | | $ | (15,747 | ) | | $ | (59,240 | ) |
______________________
| |
| (1) | Included in net gains (losses) on investments and other financial instruments on our condensed consolidated statements of operations. |
15. Statutory Information
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. As of JuneSeptember 30, 2019, the amount of restricted net assets held by our consolidated insurance subsidiaries (which represents our equity investment in those insurance subsidiaries) totaled $3.7$4.0 billion of our consolidated net assets.
Under state insurance regulations, our mortgage insurance subsidiaries are required to maintain minimum surplus levels. In certain RBC States, mortgage insurers licensed in those states must also satisfy a Statutory RBC Requirement that is a minimum ratio of statutory capital relative to the level of net RIF, or Risk-to-capital. Other RBC States require mortgage
Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
insurers licensed in those states to satisfy a MPP Requirement that is calculated on both risk and surplus levels. Our mortgage insurance subsidiaries were in compliance with the Statutory RBC Requirements or MPP Requirements, to the extent applicable, in each of the RBC States as of JuneSeptember 30, 2019.
In addition, in order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. At JuneSeptember 30, 2019, Radian Guaranty is an approved mortgage insurer under the PMIERs and is in compliance with the current PMIERs financial requirements. See Note 1 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information regarding the PMIERs.
Radian Guaranty’s Risk-to-capital calculation appears in the table below. For purposes of the Risk-to-capital requirements imposed by certain states, statutory capital is defined as the sum of statutory policyholders’ surplus plus statutory contingency reserves.
| | | | June 30,
2019 | | December 31,
2018 | September 30,
2019 | | December 31,
2018 |
| ($ in millions) | | | | | | |
RIF, net (1) | $ | 42,154.0 |
| | $ | 40,711.3 |
| $ | 43,484.8 |
| | $ | 40,711.3 |
|
| | | | | | | |
| Common stock and paid-in capital | $ | 1,041.0 |
| | $ | 1,416.0 |
| $ | 1,041.0 |
| | $ | 1,416.0 |
|
| Surplus Note | 100.0 |
| | 100.0 |
| 100.0 |
| | 100.0 |
|
| Unassigned earnings (deficit) | (605.7 | ) | | (701.9 | ) | (553.5 | ) | | (701.9 | ) |
| Statutory policyholders’ surplus | 535.3 |
| | 814.1 |
| 587.5 |
| | 814.1 |
|
| Contingency reserve | 2,351.2 |
| | 2,109.9 |
| 2,475.9 |
| | 2,109.9 |
|
| Statutory capital | $ | 2,886.5 |
| | $ | 2,924.0 |
| $ | 3,063.4 |
| | $ | 2,924.0 |
|
| | | | | | | |
| Risk-to-capital | 14.6:1 |
| | 13.9:1 | 14.2:1 |
| | 13.9:1 |
______________________
| |
| (1) | Excludes risk ceded through all reinsurance programs (including with affiliates) and RIF on defaulted loans. |
Radian Guaranty’s statutory capital decreasedincreased by $37.5$139.4 million in the first sixnine months of 2019, primarily due to Radian Guaranty’s statutory net income of $525.5 million during this period, partially offset by the effect of an Extraordinary Distribution paid to Radian Group, as described below, partially offset by Radian Guaranty’s statutory net income of $339.9 million during this period.below. The net increase in Radian Guaranty’s Risk-to-capital in the first sixnine months of 2019 was primarily due to the decreaseincrease in RIF, partially offset by the increase in overall statutory capital, combined with an increase in RIF.capital.
The Risk-to-capital ratio for our combined mortgage insurance operations was 13.312.9 to 1 as of JuneSeptember 30, 2019, compared to 12.8 to 1 as of December 31, 2018.
In April 2019, the Pennsylvania Insurance Department approved a $375 million Extraordinary Distribution from Radian Guaranty to Radian Group, which was paid on April 30, 2019 in the form of cash and marketable securities, resulting in a $375 million decrease in Radian Guaranty’s statutory policyholders’ surplus.
For a description of our statutory compliance with regulations for our mortgage insurance and title services businesses, see Note 19 of Notes to Consolidated Financial Statements in our 2018 Form 10-K.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The disclosures in this quarterly report are complementary to those made in our 2018 Form 10-K and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report, as well as our audited financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 Form 10-K.
The following analysis of our financial condition and results of operations for the three and sixnine months ended JuneSeptember 30, 2019 provides information that evaluates our financial condition as of JuneSeptember 30, 2019 compared with December 31, 2018 and our results of operations for the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods last year. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report. In addition, investors should review the “Cautionary Note Regarding Forward-Looking Statements—Safe Harbor Provisions” above and “Item 1A. Risk Factors” in our 2018 Form 10-K for a discussion of those risks and uncertainties that have the potential to adversely affect our business, financial condition, results of operations, cash flows or prospects. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period.
|
| |
| Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| | PAGE |
| |
| |
| |
| |
| |
| |
| |
| |
Overview
We are a diversified mortgage and real estate services business with two business segments—Mortgage Insurance and Services. We operate in the highly competitive U.S. mortgage and real estate industries. 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. Our Services segment is primarily a fee-for-service business that offers a broad array of mortgage, real estate and title services to market participants across the mortgage and real estate value chain. In both our Mortgage Insurance and Services businesses, we compete on a number of factors, including price, overall service, customer relationships, perceived financial strength and reputation, among others.
Operating Environment
As a seller of mortgage credit protection and mortgage and credit risk management solutions, our results are subject to macroeconomic conditions and other events that impact the housing finance and real estate markets, including seasonal fluctuations that specifically impact the mortgage origination environment, the credit performance of our underlying insured assets and our future business opportunities. The macroeconomic conditions, seasonality 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 inSee “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Services” in our 2018 Form 10-K for further discussion of the drivers of revenues forand results in 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 as well as seasonality of these markets.business.
Our Mortgage Insurance business continues to benefit from the improvement in market conditions since the financial crisis of 2007-2008, and from the current strength of the U.S. economy and housing finance industry. See “Results of Operations—Consolidated” for an overview of our financial results for the three and sixnine months ended JuneSeptember 30, 2019. During the third quarter of 2019, average mortgage rates in the U.S. fell to their lowest levels since 2016. This drove an
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
the second quarter of 2019, average mortgage rates fell to their lowest levels since 2016. As a result,increase in refinance activity and overall mortgage origination volume, including refinance activity, has been strong in 2019.volume. Our resultsperformance for the three months ended JuneSeptember 30, 2019 reflectreflects this trend, including record levels of quarterly flow NIW driven by higher purchase volume, as well as lowerand refinance origination volumes, but also a decrease in Persistency Rates resulting from the increased refinance activity. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Net Premiums Written and Earned” for further discussion about these recent trends and the net impact on our IIF portfolio.
In the secondthird quarter of 2019, mortgage underwriting quality remained strong and our new business wascontinued to comprise insurance written on high credit quality loans. In addition, the performance of our existing portfolio of IIF, comprised almost entirely of high credit quality loans originated after the financial crisis, continues to benefit from the effects of positive growth in home prices and historically low levels of unemployment. These positive trends help to mitigateresulted in ongoing favorable results, including improvement in our volumeslevels of new defaults, incurred losses, and paid claims, and result in higher cure rates. See “Results of Operations—Mortgage Insurance” for further discussion.
During 2019, the mortgage insurance industry has continued to shift away fromto a predominantly rate-card-based pricing model to oneenvironment where a variety of pricing methodologies and pricing levels are being deployed with differing degrees of risk-based granularity. Although the current pricing frameworks are based upon the same general risk attributes as have been considered in mortgage insurance pricing historically, more granular risk-based pricing factors are now being incorporated into pricing tools. The shift away from a predominately rate card based pricing model and the increase in “black box” pricing frameworks provides a more dynamic pricing capability that has led to an increase in the frequency of pricing changes throughout the mortgage insurance industry.
Our newestrisk-based pricing optionstrategies are designed to grow the long-term economic value of our mortgage insurance portfolio and align with our overall strategic objectives. A majority of our NIW is currently being priced through RADAR Rates, our “black box” pricing framework, RADAR Rates, which is powered byutilizes 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. Although the current pricing frameworks continue to leverage the same general risk attributes as mortgage insurance pricing historically, they now incorporate more granular risk-based pricing factors. This shift provides a more dynamic pricing capability that has led to an increase in the frequency of pricing changes.
Our risk-based pricing strategies are designed to grow the long-term economic value of our mortgage insurance portfolio and align with our overall strategic objectives. Our approach to pricing, which utilizes more traditional pricing forms in addition to our “black box” option, RADAR Rates, is tailored to the specific business needs of our customers and their risk profiles and designed to achieve our targeted returns. This frameworkapproach represents a continuation of our strategy to consistently apply an approach that providesprovide a full spectrum of pricing options that are customer-centric, flexible and customizable based on a lender’s loan origination process, as well as balanced with our own objectives for managing our volume of NIW and the risk and return profile of our mortgage insurance portfolio. We expect that by leveraging our proprietary risk model, RADAR Rates will continue to enhance our ability to continue to build a high quality mortgage insurance portfolio. Our customers are increasingly utilizing RADAR Rates, and a majority of our NIW is currently being priced through RADAR Rates.
While our estimated share of the private mortgage insurance market during the first halfnine months of 2019 has remained relatively consistent at approximately 18%-19%-20%, the shift away from standard rate card filings to a more dynamic digital pricing delivery platform could result in increased volatility of market share within the mortgage insurance industry. In addition, more granular price competition through “black box” pricing frameworks could result in increased volatility of average premium rates for new business.
Legislative and Regulatory Developments
Our subsidiaries are subject to comprehensive regulations and other requirements. SeeIn addition to the discussion below, see “Item 1. Business—Regulation” in our 2018 Form 10-K for a discussion of the regulations that impact our business, as well as legislative and regulatory developments affecting the housing finance industry.
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. The most recent revisions to the PMIERs, or PMIERs 2.0, became effective on March 31, 2019. Radian Guaranty currently is an approved mortgage insurer under the PMIERs. See “Liquidity and Capital Resources—Mortgage Insurance” for further discussion about PMIERs.
Qualified Mortgage Requirements. As discussed in “Item 1. Business—Regulation” in our 2018 Form 10-K, the Dodd-Frank Act provides that a lender must make “a reasonable, good faith determination” of each borrower’s ability to repay a loan, but may presume that a borrower will be able to repay a loan if the loan has certain characteristics that meet the QM definition. The CFPB adopted its QM definition that establishes rigorous underwriting and product feature requirements for a loan to be deemed a QM. Within those regulations, the CFPB created a special exemption for the GSEs that is generally referred to as the “QM patch” and allows any loan that meets the GSE underwriting and product guidelines to be a QM. The QM patch effectively provides QM designation for GSE eligible loans that have a debt-to-income ratio in excess of 43%, which represents a meaningful portion of the loans currently purchased by the GSEs. Without the QM patch or an alternative, loans with debt-to-income ratios above 43% would not be designated as QM unless they were insured by a federal agency such as the FHA or VA, which have each adopted their own QM definition that does not currently have a debt-to-income ratio limitation. The QM patch expires on the earlier of the end of the GSEs’ conservatorship or January 10, 2021. On July 25, 2019, the CFPB released an Advanced Notice of Proposed Rulemaking (“ANPR”) regarding the expiration of the QM patch. The ANPR specifically states
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
that the CFPB intends to allow the QM patch to expire in January 2021 or after a short extension, if necessary, and requests comments on possible amendments to the CFPB’s QM definition, including potential replacements for the QM patch. The CFPB has stated that it is “committed to ensuring a smooth and orderly mortgage market” in considering these issues and any resulting transition away from the QM patch. We believe there are many viable alternatives for replacing the QM patch, which, if adopted consistentlyin a manner that brings greater consistency to how QM is defined across regulatory agencies, would limit the potential impact on the housing market and mortgage insurance market resulting from the expiration of the QM patch. However, the outcome of the rulemaking process is not known and the expiration of the QM patch without a viable replacement, or other potential amendmentamendments of the CFPB’s QM definition, could adversely impact our business, financial condition and results of operations. SeeIn our 2018 Form 10-K, see “Item 1. Business—Regulation” Regulationin our 2018 Form 10-K ”and “Item 1A. Risk Factors—Legislation and administrative and regulatory changes and interpretations could impact our businessbusinesses” for further discussion regarding the definition of QM, the QM patch and the potential impact on our business.
Housing Finance Reform. In September 2019, the U.S. Treasury and the Department of Housing and Urban Development (“HUD”) released plans (“Plans”) to reform the housing finance market, and with respect to the Treasury Plan, to release the GSEs from conservatorship after certain conditions were met. The Plans, which include actions that may be taken administratively (without Congressional action) and legislatively through Congressional action, call for, among other items: (i) recapitalizing the GSEs in preparation for their release from conservatorship; (ii) a greater role for private capital in limiting the GSEs’ risk profile and taxpayer exposure; (iii) a greater coordination of housing policy between the FHFA and HUD, including a reduction in the market overlap between the FHA and the GSEs; (iv) a better defined role for the FHA in adhering to its core mission of serving low and moderate income borrowers; and (v) increased transparency by the GSEs to support a more level playing field with private capital. Leadership at the FHFA and HUD have stated that they plan to use the Plans to guide the direction and activities of the GSEs and FHA, and in late September 2019, Treasury and the FHFA amended the Senior Preferred Stock Purchase Agreement between them to suspend the quarterly “net worth sweep” of the GSEs’ profits into Treasury and to allow the GSEs to retain collectively up to $45 billion in capital.
Further, in October 2019, the FHFA released its annual 2019 Strategic Plan and 2020 Scorecard for the GSEs with objectives that largely align with the recommendations set forth in the Treasury Plan. With the Plans serving as a roadmap, we expect HUD and FHFA will continue to take actions to shape the role of the FHA and GSEs in the housing finance market and to prepare the GSEs to exit conservatorship. While we believe that private capital is viewed favorably as a critical component of the current and any future housing finance market, actions taken in furtherance of the Plans could impact our business, financial condition and results of operations.
Quarterly Highlights and Recent Company Developments
During the secondthird quarter of 2019, we improved our debt-to-capital ratio and our debt maturity profile by completingredeeming the following transactions:
repayment at maturity of $158.6remaining $27.0 million and $70.4 million aggregate principal amount of our Senior Notes due 2019;
the issuance of $450 million aggregate principal amount of Senior Notes due 2027; and
tender offers resulting in the purchases of aggregate principal amounts of $207.2 million and $127.3 million of our Senior Notes due 2020 and 2021, respectively.
On July 25, 2019, Radian Group redeemed the remaining $27.0 million aggregate principal amount of Senior Notes due 2020, in accordance with the terms of the related indenture. See “Liquidity and Capital Resources—Capitalization—Holding Company” and Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information about these transactions.details on our borrowings and financing activities.
AsIn addition, we continued to execute upon and enhance our share repurchase programs during the third quarter of June 30, 2019, including through the Company had utilized $197.5 millionfollowing actions:
the completion of itsour $250 million share repurchase authorization, including $165.8 million, excluding commissions, for shares repurchased during the three months ended June 30, 2019. Subsequent to June 30, 2019, we completed the repurchase authorization under this programinitially authorized in August 2018, by purchasing additional shares of our common stock totaling $52.5 million, excluding commissions;
the initiation of a new share repurchase program with authority to spend up to $200 million to repurchase Radian Group common stock. During the three months ended September 30, 2019, we purchased shares under this new authorization totaling $25 million, excluding commissions; and
subsequent to September 30, 2019, the continuation of common stock repurchases under the current program totaling another $25 million, excluding commissions. Over the courseAs of the program, the Company repurchased 5.3%November 8, 2019, purchase authority of the shares outstanding at the beginning of theup to $150.0 million remained available under this program.
See Note 13 of Notes to Unaudited Condensed Consolidated Financial Statements for additional details on our share repurchase program.
As part of Radian’s long-term risk distribution strategy, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re 2019-1 in April 2019 that provides for up to $562.0 million of aggregate excess-of-loss reinsurance coverage. For additional information about Eagle Re 2019-1 and our other reinsurance arrangements, see Note 7 in Notes to Unaudited Condensed Consolidated Financial Statements and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Net Premiums Written and Earned.”
In April 2019, the Pennsylvania Insurance Department approved a $375 million Extraordinary Distribution from Radian Guaranty to Radian Group, which was paid on April 30, 2019 in the form of cash and marketable securities. See Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of this distribution of capital, including the effect on Radian Guaranty’s statutory capital.programs.
Key Factors Affecting Our Results
The key factors affecting our results are discussed in our 2018 Form 10-K. There have been no material changes to these key factors.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations—Consolidated
Three and SixNine Months Ended JuneSeptember 30, 2019 Compared to Three and SixNine Months Ended JuneSeptember 30, 2018
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 the three and sixnine months ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018 primarily reflect the financial results and performance of our two business segments—Mortgage Insurance and Services. See Note 3 of Notes to Unaudited Condensed 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
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
the operating results of these business segments for the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018.
In addition to the results of our operating segments, pretax income (loss) is also affected by those factors described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results” in our 2018 Form 10-K.
The following table highlights selected information related to our consolidated results of operations for the three and sixnine months ended JuneSeptember 30, 2019 and 2018:
| | | | | | | | Change | | | | | | Change | | | | | Change | | | | | | Change |
| | Three Months Ended
June 30, | | Favorable (Unfavorable) | | Six Months Ended
June 30, | | Favorable (Unfavorable) | Three Months Ended
September 30, | | Favorable (Unfavorable) | | Nine Months Ended
September 30, | | Favorable (Unfavorable) |
| (In millions, except per-share amounts) | 2019 |
| 2018 | | 2019 vs. 2018 | | 2019 |
| 2018 | | 2019 vs. 2018 | 2019 |
| 2018 | | 2019 vs. 2018 | | 2019 |
| 2018 | | 2019 vs. 2018 |
| Pretax income | $ | 209.5 |
| | $ | 180.6 |
| | $ | 28.9 |
| | $ | 425.7 |
| | $ | 323.0 |
| | $ | 102.7 |
| $ | 217.7 |
| | $ | 184.7 |
| | $ | 33.0 |
| | $ | 643.4 |
| | $ | 507.7 |
| | $ | 135.7 |
|
| Net income | 166.7 |
| | 208.9 |
| | (42.2 | ) | | 337.7 |
| | 323.4 |
| | 14.3 |
| 173.4 |
| | 142.8 |
| | 30.6 |
| | 511.1 |
| | 466.2 |
| | 44.9 |
|
| Diluted net income per share | 0.78 |
| | 0.96 |
| | (0.18 | ) | | 1.56 |
| | 1.48 |
| | 0.08 |
| 0.83 |
| | 0.66 |
| | 0.17 |
| | 2.39 |
| | 2.13 |
| | 0.26 |
|
| Book value per share at June 30 | 18.42 |
| | 15.01 |
| | 3.41 |
| | 18.42 |
| | 15.01 |
| | 3.41 |
| |
| Book value per share at September 30 | | 19.40 |
| | 15.69 |
| | 3.71 |
| | 19.40 |
| | 15.69 |
| | 3.71 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Net premiums earned—insurance (1) | 299.2 |
| | 251.3 |
| | 47.9 |
| | 562.7 |
| | 493.9 |
| | 68.8 |
| 281.2 |
| | 258.4 |
| | 22.8 |
| | 843.9 |
| | 752.3 |
| | 91.6 |
|
Services revenue (2) | 39.3 |
| | 36.8 |
| | 2.5 |
| | 72.1 |
| | 70.0 |
| | 2.1 |
| 42.5 |
| | 36.6 |
| | 5.9 |
| | 114.6 |
| | 106.6 |
| | 8.0 |
|
Net investment income (1) | 43.8 |
| | 37.5 |
| | 6.3 |
| | 87.6 |
| | 71.4 |
| | 16.2 |
| 42.8 |
| | 39.0 |
| | 3.8 |
| | 130.4 |
| | 110.4 |
| | 20.0 |
|
| Net gains (losses) on investments and other financial instruments | 12.5 |
| | (7.4 | ) | | 19.9 |
| | 34.4 |
| | (26.3 | ) | | 60.7 |
| 13.0 |
| | (4.5 | ) | | 17.5 |
| | 47.5 |
| | (30.8 | ) | | 78.3 |
|
Provision for losses (1) | 47.4 |
| | 19.3 |
| | (28.1 | ) | | 68.2 |
| | 56.6 |
| | (11.6 | ) | 29.2 |
| | 20.9 |
| | (8.3 | ) | | 97.4 |
| | 77.5 |
| | (19.9 | ) |
Cost of services (2) | 27.8 |
| | 24.2 |
| | (3.6 | ) | | 52.0 |
| | 47.3 |
| | (4.7 | ) | 29.0 |
| | 25.9 |
| | (3.1 | ) | | 81.0 |
| | 73.2 |
| | (7.8 | ) |
| Other operating expenses | 70.0 |
| | 70.2 |
| | 0.2 |
| | 148.9 |
| | 133.4 |
| | (15.5 | ) | 76.4 |
| | 70.1 |
| | (6.3 | ) | | 225.2 |
| | 203.6 |
| | (21.6 | ) |
| Restructuring and other exit costs | | — |
| | 4.5 |
| | 4.5 |
| | — |
| | 5.9 |
| | 5.9 |
|
| Loss on extinguishment of debt | 16.8 |
| | — |
| | (16.8 | ) | | 16.8 |
| | — |
| | (16.8 | ) | 5.9 |
| | — |
| | (5.9 | ) | | 22.7 |
| | — |
| | (22.7 | ) |
| Income tax provision (benefit) | 42.8 |
| | (28.4 | ) | | (71.2 | ) | | 88.0 |
| | (0.4 | ) | | (88.4 | ) | |
| Income tax provision | | 44.2 |
| | 41.9 |
| | (2.3 | ) | | 132.2 |
| | 41.5 |
| | (90.7 | ) |
Adjusted pretax operating income (3) | $ | 215.9 |
| | $ | 191.0 |
| | $ | 24.9 |
| | $ | 417.9 |
| | $ | 355.1 |
| | $ | 62.8 |
| $ | 212.7 |
| | $ | 196.7 |
| | $ | 16.0 |
| | $ | 630.7 |
| | $ | 551.8 |
| | $ | 78.9 |
|
Adjusted diluted net operating income per share (3) | 0.80 |
| | 0.69 |
| | 0.11 |
| | 1.52 |
| | 1.28 |
| | 0.24 |
| 0.81 |
| | 0.71 |
| | 0.10 |
| | 2.33 |
| | 1.99 |
| | 0.34 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Return on equity | 17.8 | % | | 26.7 | % | | (8.9 | )% | | 18.6 | % | | 20.9 | % | | (2.3 | )% | 18.0 | % | | 17.4 | % | | 0.6 | % | | 18.4 | % | | 19.6 | % | | (1.2 | )% |
Adjusted net operating return on equity (3) | 18.2 | % | | 19.3 | % | | (1.1 | )% | | 18.2 | % | | 18.1 | % | | 0.1 | % | 17.4 | % | | 19.0 | % | | (1.6 | )% | | 17.9 | % | | 18.3 | % | | (0.4 | )% |
______________________
| |
| (1) | Relates primarily to the Mortgage Insurance segment. See “Results of Operations—Mortgage Insurance” for more information. |
| |
| (2) | Relates to our Services segment. See “Results of Operations—Services” for more information. |
| |
| (3) | See “—Use of Non-GAAP Financial Measures” below. |
Net Income. As discussed in more detail below, our resultsnet income increased for the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018, primarily reflect: (i) income tax benefits in 2018 (see “—Income Tax Provision” below); and (ii) in 2019, an increase in provision for losses and loss on extinguishment of debt. Partially offsetting these items is:reflecting: (i) an increase in net premiums earned, including a cumulative adjustment to unearned premiums, as discussed in Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements;earned; (ii) an increase in net gains on investments and other financial instruments; and (iii) an increase in net investment income. Partially offsetting
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
these items are increases in: (i) provision for losses; (ii) other operating expenses; and (iii) loss on extinguishment of debt. The increase in net income for the nine months ended September 30, 2019, compared to the same period in 2018, also reflects a cumulative adjustment to unearned premiums recorded in the second quarter of 2019, as discussed in Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements. In addition, the overall increase in net income for the nine months ended September 30, 2019, compared to the same period in 2018, was partially offset by an increase in the income tax provision, due primarily to a $73.6 million tax benefit in 2018 related to the impact of the settlement of the IRS Matter (see “—Income Tax Provision” below).
Diluted Net Income Per Share. The change in diluted net income per share for the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018, is primarily due to the change in net income, as discussed above.
Book Value Per Share. The increase in book value per share from $16.34 at December 31, 2018, to $18.42$19.40 at JuneSeptember 30, 2019, is primarily due toto: (i) our net income for the sixnine months ended JuneSeptember 30, 2019 and (ii) an increase of $0.70$0.87 per share due to net unrealized gains in our available for sale securities, recorded in accumulated other comprehensive income. These
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
increases were partially offset by the $0.23$0.26 per share net impact of our share repurchases for the sixnine months ended JuneSeptember 30, 2019, inclusive of the cost of these repurchases.
Net Gains (Losses) on Investments and Other Financial Instruments. The increase in net gains on investments and other financial instruments for the three and sixnine months ended JuneSeptember 30, 2019, as compared to the same periods in 2018, is primarily due toto: (i) the increase in unrealized gains in our trading portfolio related to changes in fair value resulting from lower interest rates.rates and (ii) net realized gains on our fixed-maturities available for sale. The components of the net gains (losses) on investments and other financial instruments for the periods indicated are as follows:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In millions) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Net unrealized gains (losses) related to change in fair value of trading securities and other investments | $ | 9.1 |
| | $ | (5.7 | ) | | $ | 28.6 |
| | $ | (18.5 | ) | $ | 4.4 |
| | $ | 1.4 |
| | $ | 33.0 |
| | $ | (17.1 | ) |
| Net realized gains (losses) on investments | 1.7 |
| | (1.1 | ) | | — |
| | (4.5 | ) | 4.6 |
| | (4.5 | ) | | 4.6 |
| | (9.0 | ) |
| Other-than-temporary impairment losses | — |
| | — |
| | — |
| | (0.9 | ) | — |
| | (0.9 | ) | | — |
| | (1.8 | ) |
| Net gains (losses) on other financial instruments | 1.7 |
| | (0.6 | ) | | 5.8 |
| | (2.4 | ) | 4.0 |
| | (0.5 | ) | | 9.8 |
| | (2.9 | ) |
| Net gains (losses) on investments and other financial instruments | $ | 12.5 |
| | $ | (7.4 | ) | | $ | 34.4 |
| | $ | (26.3 | ) | $ | 13.0 |
| | $ | (4.5 | ) | | $ | 47.4 |
| | $ | (30.8 | ) |
| | | | | | | | | | | | | | | |
Other Operating Expenses. Other operating expenses for the three months ended JuneSeptember 30, 2019 decreased slightlyincreased as compared to the same period in 2018, primarily due to: (i) higher compensation expense in 2019, including variable and incentive-based compensation and (ii) ongoing investments in our technology systems. In addition to these items, other operating expenses for the nine months ended September 30, 2019 increased, as compared to the same period in 2018, due to: (i) the inclusion of operating expenses of businesses acquired in 2018 and (ii) an increase in non-operating items, primarily related to impairment of other long-lived assets. Partially offsetting these items for the nine months ended September 30, 2019, is an increase in ceding commissions, resulting from a change in estimate affecting policies covered under our Single Premium QSR partially offset by higher allocated corporate operating expenses primarily due to ongoing investments in our technology systems.Program. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for further discussion about the change in estimate for Single Premium Policies.
Restructuring and Other Exit Costs. For the three and nine months ended September 30, 2018, restructuring and other exit costs included charges associated with our plan to restructure the Services business. In addition to these items,restructuring charges
associated with our Services business, in the third quarter of 2018 we also recognized $3.6 million of other operating expenses forexit costs associated with impairment of internal-use software.
Loss on Extinguishment of Debt. For the sixthree and nine months ended JuneSeptember 30, 2019, as comparedthe redemption of our remaining Senior Notes due 2020 and 2021 resulted in a loss on extinguishment of debt of $5.9 million and $22.7 million, respectively. See Note 11 of Notes to the same period in 2018, also included: (i) increases due to businesses acquired in 2018 and the resulting inclusion of their operating expenses and (ii) an increase in non-operating items, primarily related to impairment of other long-lived assets. As a result, other operating expensesUnaudited Condensed Consolidated Financial Statements for the six months ended June 30, 2019 increased as compared to the same period in 2018.additional information.
Income Tax Provision. Our effective tax rate was 20.4%20.3% and 20.7%20.6% for the three and sixnine months ended JuneSeptember 30, 2019, respectively, which approximates the federal statutory rate. For the same periods in 2018, our effective tax rates were different from the federal statutory tax rate, primarily due to the tax impact of Discrete Items. The impact of Discrete Items on our effective tax rate may fluctuate from period to period. InDuring the threenine months ended JuneSeptember 30, 2018, the Discrete
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Items impacting our effective tax rate primarily included $73.6 million of tax benefit related to the impact of the settlement of the IRS Matter and related state tax liabilities.
Return on Equity. The change in return on equity is primarily due to the change in net income partially offset by the increase in stockholders’ equity.
Use of Non-GAAP Financial Measures. In addition to the traditional GAAP financial measures, we have presented “adjusted pretax operating income,” “adjusted diluted net operating income per share” and “adjusted net operating return on equity,” which are non-GAAP financial measures for the consolidated company, among our key performance indicators to evaluate our fundamental financial performance. These non-GAAP financial measures align with the way our business performance is evaluated by both management and by our board of directors. These measures have been established in order to increase transparency for the purposes of evaluating our operating trends and enabling more meaningful comparisons with our peers. Although on a consolidated basis “adjusted pretax operating income,” “adjusted diluted net operating income per share” and “adjusted net operating return on equity” are non-GAAP financial measures, for the reasons discussed above we believe these 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 the Company’s business segments and to allocate resources to the segments.
Adjusted pretax operating income is defined as GAAP consolidated pretax income (loss) excluding the effects of: (i) net gains (losses) on investments and other financial instruments; (ii) loss on extinguishment of debt; (iii) amortization and impairment of goodwill and other acquired intangible assets; and (iv) impairment of other long-lived assets and other non-operating items, such as losses from the sale of lines of business and acquisition-related expenses. Adjusted diluted net
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
operating income per share is calculated by dividing (i) adjusted pretax operating income attributable to common stockholders, net of taxes computed using the company’sCompany’s statutory tax rate, by (ii) the sum of the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, net of taxes computed using the company’sCompany’s statutory tax rate, by average stockholders’ equity, based on the average of the beginning and ending balances for each period presented. See Note 4 of Notes to Consolidated Financial Statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Consolidated—Use of Non-GAAP Financial Measures”Measures” each in our 2018 Form 10-K for detailed information regarding items excluded from adjusted pretax operating income including the reasons for their treatment.
Total adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity are not measures of overall profitability, and therefore should not be considered in isolation or viewed as substitutes for GAAP pretax income, diluted net income per share or return on equity. Our definitions 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.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following tables provide reconciliations of the most comparable GAAP measures of consolidated pretax income, diluted net income per share and return on equity, to our non-GAAP financial measures for the consolidated company of adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity, respectively:
| | Reconciliation of Consolidated Pretax Income to Adjusted Pretax Operating Income | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Consolidated pretax income | $ | 209,545 |
| | $ | 180,571 |
| | $ | 425,681 |
| | $ | 323,013 |
| $ | 217,673 |
| | $ | 184,688 |
| | $ | 643,354 |
| | $ | 507,701 |
|
| Less reconciling income (expense) items: | | | | | | | | | | | | | | |
| Net gains (losses) on investments and other financial instruments | 12,540 |
| | (7,404 | ) | | 34,453 |
| | (26,291 | ) | 13,009 |
| | (4,480 | ) | | 47,462 |
| | (30,771 | ) |
| Loss on extinguishment of debt | (16,798 | ) | | — |
| | (16,798 | ) | | — |
| (5,940 | ) | | — |
| | (22,738 | ) | | — |
|
| Amortization and impairment of other acquired intangible assets | (2,139 | ) | | (2,748 | ) | | (4,326 | ) | | (5,496 | ) | (2,139 | ) | | (3,472 | ) | | (6,465 | ) | | (8,968 | ) |
Impairment of other long-lived assets and other non-operating items (1) | 103 |
| | (286 | ) | | (5,557 | ) | | (312 | ) | — |
| | (4,059 | ) | | (5,557 | ) | | (4,371 | ) |
Total adjusted pretax operating income (2) | $ | 215,839 |
| | $ | 191,009 |
|
| $ | 417,909 |
|
| $ | 355,112 |
| $ | 212,743 |
| | $ | 196,699 |
|
| $ | 630,652 |
|
| $ | 551,811 |
|
| | | | | | | | | | | | | | | |
______________________
| |
| (1) | The amount for the sixnine months ended JuneSeptember 30, 2019 primarily relates to impairments of other long-lived assets and is included in other operating expenses on the condensed consolidated statement of operations. The amount for the three and nine months ended September 30, 2018 primarily relates to impairment of internal-use software and is included in restructuring and other exit costs on the consolidated statement of operations. |
| |
| (2) | Total adjusted pretax operating income on a consolidated basis consists of adjusted pretax operating income (loss) for our Mortgage Insurance segment and our Services segment, as further detailed in in Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| | Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share | Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share | Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | |
| Diluted net income per share | $ | 0.78 |
| | $ | 0.96 |
| | $ | 1.56 |
| | $ | 1.48 |
| | $ | 0.83 |
| | $ | 0.66 |
| | $ | 2.39 |
| | $ | 2.13 |
| |
| | | | | | | | | | | | | | | | | |
| Less per-share impact of reconciling income (expense) items: | | | | | | | | | | | | | | | | |
| Net gains (losses) on investments and other financial instruments | 0.06 |
| | (0.03 | ) | | 0.16 |
| | (0.12 | ) | | 0.06 |
| | (0.02 | ) | | 0.22 |
| | (0.14 | ) | |
| Loss on extinguishment of debt | (0.08 | ) | | — |
| | (0.08 | ) | | — |
| | (0.03 | ) | | — |
| | (0.11 | ) | | — |
| |
| Amortization and impairment of other acquired intangible assets | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.03 | ) | | (0.01 | ) | | (0.02 | ) | | (0.03 | ) | | (0.04 | ) | |
| Impairment of other long-lived assets and other non-operating items | — |
| | — |
| | (0.02 | ) | | — |
| | — |
| | (0.02 | ) | | (0.03 | ) | | (0.02 | ) | |
Income tax provision (benefit) on reconciling income (expense) items (1) | (0.01 | ) | | (0.01 | ) | | 0.01 |
| | (0.03 | ) | | |
Income tax (provision) benefit on reconciling income (expense) items (1) | | — |
| | 0.01 |
| | (0.01 | ) | | 0.04 |
| |
Difference between statutory and effective tax rates | — |
| | 0.30 |
| (2) | 0.01 |
| | 0.32 |
| (2) | — |
| | — |
| | 0.02 |
| | 0.30 |
| (2) |
| Per-share impact of reconciling income (expense) items | (0.02 | ) | | 0.27 |
| | 0.04 |
| | 0.20 |
| | 0.02 |
| | (0.05 | ) | | 0.06 |
| | 0.14 |
| |
Adjusted diluted net operating income per share (1) | $ | 0.80 |
| | $ | 0.69 |
| | $ | 1.52 |
| | $ | 1.28 |
| | $ | 0.81 |
| | $ | 0.71 |
| | $ | 2.33 |
| | $ | 1.99 |
| |
| | | | | | | | | | | | | | | | | |
______________________
| |
| (1) | Calculated using the company’sCompany’s federal statutory tax rate of 21%. Any permanent tax adjustments and state income taxes on these items have been deemed immaterial and are not included. |
| |
| (2) | 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. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| | Reconciliation of Return on Equity to Adjusted Net Operating Return on Equity (1) | Reconciliation of Return on Equity to Adjusted Net Operating Return on Equity (1) | Reconciliation of Return on Equity to Adjusted Net Operating Return on Equity (1) |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | |
Return on equity (1) | 17.8 | % | | 26.7 | % | | 18.6 | % | | 20.9 | % | | 18.0 | % | | 17.4 | % | | 18.4 | % | | 19.6 | % | |
Less impact of reconciling income (expense) items: (2) | | | | | | | | | | | | | | | | |
| Net gains (losses) on investments and other financial instruments | 1.3 |
| | (0.9 | ) | | 1.9 |
| | (1.7 | ) | | 1.4 |
| | (0.5 | ) | | 1.7 |
| | (1.3 | ) | |
| Loss on extinguishment of debt | (1.8 | ) | | — |
| | (0.9 | ) | | — |
| | (0.6 | ) | | — |
| | (0.8 | ) | | — |
| |
| Amortization and impairment of other acquired intangible assets | (0.2 | ) | | (0.4 | ) | | (0.2 | ) | | (0.4 | ) | | (0.2 | ) | | (0.4 | ) | | (0.2 | ) | | (0.4 | ) | |
| Impairment of other long-lived assets and other non-operating items | — |
| | — |
| | (0.3 | ) | | — |
| | — |
| | (0.5 | ) | | (0.2 | ) | | (0.2 | ) | |
Income tax provision (benefit) on reconciling income (expense) items (3) | (0.1 | ) | | (0.3 | ) | | 0.1 |
| | (0.4 | ) | | |
Income tax (provision) benefit on reconciling income (expense) items (3) | | (0.1 | ) | | 0.3 |
| | (0.1 | ) | | 0.4 |
| |
| Difference between statutory and effective tax rates | 0.2 |
| | 8.4 |
| (4) | — |
| | 4.5 |
| (4) | 0.1 |
| | (0.5 | ) | | 0.1 |
| | 2.8 |
| (4) |
| Impact of reconciling income (expense) items | (0.4 | ) | | 7.4 |
|
| 0.4 |
|
| 2.8 |
| | 0.6 |
| | (1.6 | ) |
| 0.5 |
|
| 1.3 |
| |
| Adjusted net operating return on equity | 18.2 | % | | 19.3 | % | | 18.2 | % | | 18.1 | % | | 17.4 | % | | 19.0 | % | | 17.9 | % | | 18.3 | % | |
| | | | | | | | | | | | | | | | | |
______________________
| |
| (1) | Calculated by dividing annualized net income by average stockholders’ equity, based on the average of the beginning and ending balances for each period presented. |
| |
| (2) | Annualized, as a percentage of average stockholders’ equity. |
| |
| (3) | Calculated using the company’sCompany’s federal statutory tax rate of 21%. Any permanent tax adjustments and state income taxes on these items have been deemed immaterial and are not included. |
| |
| (4) | For the three and six months ended June 30, 2018, includes 9.4% and 4.7%, respectively,Includes 3.1% 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. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations—Mortgage Insurance
Three and SixNine Months Ended JuneSeptember 30, 2019 Compared to Three and SixNine Months Ended JuneSeptember 30, 2018
The following table summarizes our Mortgage Insurance segment’s results of operations for the three and sixnine months ended JuneSeptember 30, 2019 and 2018:
| | | | | | | | $ Change | | | | | | $ Change | | | | | $ Change | | | | | | $ Change |
| | Three Months Ended
June 30, | | Favorable (Unfavorable) | | Six Months Ended
June 30, | | Favorable (Unfavorable) | Three Months Ended
September 30, | | Favorable (Unfavorable) | | Nine Months Ended
September 30, | | Favorable (Unfavorable) |
| (In millions) | 2019 | | 2018 | | 2019 vs. 2018 | | 2019 | | 2018 | | 2019 vs. 2018 | 2019 | | 2018 | | 2019 vs. 2018 | | 2019 | | 2018 | | 2019 vs. 2018 |
Adjusted pretax operating income (1) (2) | $ | 219.4 |
| | $ | 197.4 |
| | $ | 22.0 |
| | $ | 427.5 |
| | $ | 369.2 |
| | $ | 58.3 |
| $ | 214.3 |
| | $ | 204.6 |
| | $ | 9.7 |
| | $ | 641.8 |
| | $ | 573.8 |
| | $ | 68.0 |
|
| Net premiums written—insurance | 265.3 |
| | 252.0 |
| | 13.3 |
| | 516.9 |
| | 489.9 |
| | 27.0 |
| 270.6 |
| | 253.8 |
| | 16.8 |
| | 787.5 |
| | 743.8 |
| | 43.7 |
|
| (Increase) decrease in unearned premiums | 31.0 |
| | (3.0 | ) | | 34.0 |
| | 41.2 |
| | 1.6 |
| | 39.6 |
| 7.0 |
| | 1.7 |
| | 5.3 |
| | 48.2 |
| | 3.2 |
| | 45.0 |
|
| Net premiums earned—insurance | 296.3 |
| | 249.0 |
| | 47.3 |
| | 558.1 |
| | 491.5 |
| | 66.6 |
| 277.6 |
| | 255.5 |
| | 22.1 |
| | 835.7 |
| | 747.0 |
| | 88.7 |
|
| Net investment income | 43.6 |
| | 37.4 |
| | 6.2 |
| | 87.2 |
| | 71.4 |
| | 15.8 |
| 42.6 |
| | 38.8 |
| | 3.8 |
| | 129.8 |
| | 110.2 |
| | 19.6 |
|
| Provision for losses | 47.2 |
| | 19.4 |
| | (27.8 | ) | | 68.0 |
| | 56.8 |
| | (11.2 | ) | 29.1 |
| | 20.7 |
| | (8.4 | ) | | 97.1 |
| | 77.5 |
| | (19.6 | ) |
| Policy acquisition costs | 6.2 |
| | 6.0 |
| | (0.2 | ) | | 12.1 |
| | 13.1 |
| | 1.0 |
| 6.4 |
| | 5.7 |
| | (0.7 | ) | | 18.5 |
| | 18.8 |
| | 0.3 |
|
Other operating expenses (2) | 52.8 |
| | 53.4 |
| | 0.6 |
| | 108.9 |
| | 103.9 |
| | (5.0 | ) | 57.8 |
| | 52.9 |
| | (4.9 | ) | | 166.7 |
| | 156.8 |
| | (9.9 | ) |
| Interest expense | 15.0 |
| | 10.8 |
| | (4.2 | ) | | 30.7 |
| | 21.5 |
| | (9.2 | ) | 13.5 |
| | 11.1 |
| | (2.4 | ) | | 44.2 |
| | 32.6 |
| | (11.6 | ) |
______________________
| |
| (1) | Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of the Company’s business segments. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements. |
| |
| (2) | Includes allocation of corporate operating expenses of $24.4$26.7 million and $50.0$76.7 million for the three and sixnine months ended JuneSeptember 30, 2019, respectively, and $20.1$19.8 million and $38.7$58.5 million for the three and sixnine months ended JuneSeptember 30, 2018. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for more information about our allocation of corporate operating expenses to segments. |
Adjusted Pretax Operating Income. Our Mortgage Insurance segment’s adjusted pretax operating income increased for the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018, primarily reflecting: (i) an increase in net premiums earned including a cumulative adjustment to unearned premiums, as discussed in Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements; and (ii) an increase in net investment income. See “—NIW, IIF, RIF—Net Premiums Written and Earned” for more information about our net premiums earned. Partially offsetting these items are increases in: (i) provision for losses andlosses; (ii) interest expense. See “Results of Operations—Services—Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018—Interest Expense.”
In addition to these items, the six months ended June 30, 2019, as compared to the same period in 2018, reflected an increase in other operating expenses,expenses; and (iii) interest expense as described further below.a result of the Clayton Intercompany Note repayment. See “—NIW, IIF, RIF—Other Operating Expenses” as well as “Results of Operations—Services—Three and Nine Months Ended September 30, 2019 Compared to Three and Nine Months Ended September 30, 2018—Interest Expense” for additional information.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
NIW, IIF, RIF
A key component of our current business strategy is to write profitable insurance on high credit quality mortgages in the U.S. Consistent with this objective, we wrote $18.5$22.0 billion and $29.4$51.4 billion of primary NIW in the three and sixnine months ended JuneSeptember 30, 2019, respectively, compared to $16.4$15.8 billion and $28.1$43.8 billion of NIW in the three and sixnine months ended JuneSeptember 30, 2018, respectively. Our Persistency Rate for the twelve months ended JuneSeptember 30, 2019 increased slightly to 83.4%81.5%, as compared to 80.9%81.4% for the twelve months ended JuneSeptember 30, 2018. The combination of our NIW and our Persistency Rate resulted in an increase in IIF, from $221.4 billion at December 31, 2018 to $230.8$237.2 billion at JuneSeptember 30, 2019, 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) | Adjusted to reflect subsequent HARP refinancing activity, this percentage would decrease to 5.3%5.0%, 6.0% and 7.1%6.4% as of JuneSeptember 30, 2019, December 31, 2018 and JuneSeptember 30, 2018, respectively. |
Our IIF is the primary driver of the 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 its expected persistency 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” in our 2018 Form 10-K for more information.
NIW increased by 12.9%39.8% and 4.8%17.3% for the three and sixnine months ended JuneSeptember 30, 2019, respectively, compared to the same periods in 2018. We believe total mortgage origination volume was higher for the three and sixnine months ended JuneSeptember 30, 2019, as compared to the comparable periods in 2018, due to an increase in both purchase and refinance originations. Consistent with these trends in the mortgage origination market, the volume of both our purchase originations and our refinance originations increased during the three and six month periodsnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018. Our NIW for 2019 also reflects the successful implementation of RADAR Rates, our “black box” pricing strategy, which has been well received by customers andwith a majority of the NIW we are writing iscurrently being priced through RadarRADAR Rates.
Although it is difficult to project future volumes, industry sources expect the total mortgage origination market for the full year 2019 to increase 7% compared to 2018, driven by an expected increase in purchase originations as well as an increase in refinance originations as a result of lower interest rates. We currently expect the mortgage insurance market for the full year
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Although it is difficult to project future volumes, industry sources expect the total mortgage origination market for the full year 2019 to increase 20% compared to 2018, driven by an increase in refinance originations as a result of lower interest rates as well as an expected increase in purchase originations. Similarly, we currently expect the mortgage insurance market for the full year 2019 to increase in comparison to 2018, driven primarily by both purchase and refinance originations. Based on industry forecasts and our projections, we currently expect our NIW in 2019 to be in excessthe range of our prior year volume of $56.5$65 billion to $70 billion.
As of JuneSeptember 30, 2019, our portfolio of business written after 2008, including HARP refinancings, represented approximately 94.7%95% of our total primary RIF. Loan originations after 2008 consist primarily of high credit quality loans with significantly better credit performance than loans originated during 2008 and prior periods. The volume of insurance that we have written on high credit quality loans after 2008 has significantly improved our mortgage insurance portfolio mix.
Our actual and expected future losses on our portfolio written after 2008, together with HARP refinancings, are significantly lower than those experienced on our NIW prior to and including 2008. The following charts illustrate the trends of our cumulative incurred loss ratios by year of origination and development year.
______________________
| |
| (1) | Represents inception-to-date losses incurred as a percentage of net premiums earned. |
| |
| (2) | Incurred losses in 2017 were slightly, but not materially, elevated due to the impact of Hurricanes Harvey and Irma. |
| |
| (3) | Radian’s stochastic modeling, used for pricing, indicates an approximate 20% through-the-cycle loss ratio on newly originated mortgage insurance business. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
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. Throughout this report, unless otherwise noted, RIF is presented on a gross basis and includes the amount ceded under reinsurance. NIW, RIF and IIF for direct 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).
| | | Primary NIW | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| ($ in millions) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Total primary NIW | $ | 18,539 |
| | $ | 16,417 |
| | $ | 29,420 |
| | $ | 28,081 |
| $ | 22,037 |
| | $ | 15,764 |
| | $ | 51,416 |
| | $ | 43,845 |
|
| Total primary risk written | $ | 4,552 |
| | $ | 4,155 |
| | $ | 7,280 |
| | $ | 7,084 |
| $ | 5,261 |
| | $ | 3,979 |
| | $ | 12,531 |
| | $ | 11,063 |
|
| Average coverage percentage | 24.6 | % | | 25.3 | % | | 24.7 | % | | 25.2 | % | 23.9 | % | | 25.2 | % | | 24.4 | % | | 25.2 | % |
| | | | | | | | | | | | | | | |
| Primary NIW by Loan Purpose: | | | | | | | | | | | | | | |
| Purchases | 89.8 | % | | 94.8 | % | | 90.7 | % | | 92.3 | % | 80.7 | % | | 95.5 | % | | 86.4 | % | | 93.5 | % |
| Refinances | 10.2 | % | | 5.2 | % | | 9.3 | % | | 7.7 | % | 19.3 | % | | 4.5 | % | | 13.6 | % | | 6.5 | % |
| | | | | | | | | | | | | | | |
| Primary NIW by Premium Type: | | | | | | | | | | | | | | |
| Direct Monthly and Other Recurring Premiums | 83.3 | % | | 76.1 | % | | 83.3 | % | | 77.3 | % | 85.0 | % | | 78.4 | % | | 84.0 | % | | 77.7 | % |
| |
|
| |
|
| |
|
| | | |
Borrower-paid (1) | 14.2 |
| | 14.0 |
| | 13.7 |
| | 10.4 |
| 13.1 |
| | 14.2 |
| | 13.5 |
| | 11.7 |
|
| Lender-paid | 2.5 |
| | 9.9 |
| | 3.0 |
| | 12.3 |
| 1.9 |
| | 7.4 |
| | 2.5 |
| | 10.6 |
|
| Direct single premiums | 16.7 |
| | 23.9 |
| | 16.7 |
| | 22.7 |
| 15.0 |
| | 21.6 |
| | 16.0 |
| | 22.3 |
|
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | |
| Total borrower-paid | 96.5 | % | | 89.1 | % | | 96.0 | % | | 86.6 | % | 97.1 | % | | 91.4 | % | | 96.5 | % | | 88.3 | % |
| | | | | | | | | | | | | | | |
Primary NIW by FICO Score (2) : | | | | | | | | | | | | | | |
| >=740 | 62.2 | % | | 56.0 | % | | 60.5 | % | | 56.1 | % | 64.1 | % | | 55.5 | % | | 62.1 | % | | 55.9 | % |
| 680-739 | 32.5 | % | | 35.9 | % | | 33.3 | % | | 35.9 | % | 31.5 | % | | 34.7 | % | | 32.5 | % | | 35.5 | % |
| 620-679 | 5.3 | % | | 8.1 | % | | 6.2 | % | | 8.0 | % | 4.4 | % | | 9.8 | % | | 5.4 | % | | 8.6 | % |
| | | | | | | | | | | | | | | |
| Primary NIW by LTV: | | | | | | | | | | | | | | |
| 95.01% and above | 20.5 | % | | 16.3 | % | | 20.2 | % | | 15.9 | % | 16.8 | % | | 16.9 | % | | 18.7 | % | | 16.3 | % |
| 90.01% to 95.00% | 38.1 | % | | 45.3 | % | | 39.1 | % | | 45.0 | % | 37.4 | % | | 44.3 | % | | 38.5 | % | | 44.7 | % |
| 85.01% to 90.00% | 26.9 | % | | 27.5 | % | | 27.1 | % | | 27.5 | % | 27.4 | % | | 27.9 | % | | 27.2 | % | | 27.6 | % |
| 85.00% and below | 14.5 | % | | 10.9 | % | | 13.6 | % | | 11.6 | % | 18.4 | % | | 10.9 | % | | 15.6 | % | | 11.4 | % |
| | | | | | | | | |
______________________
| |
| (1) | Borrower-paid Single Premium Policies have lower Minimum Required Assets under the PMIERs as compared to lender-paid Single Premium Policies. |
| |
| (2) | For loans with multiple borrowers, the percentage of primary new insurance written by FICO score represents the lowest of the borrowers’ FICO scores. All periods prior to March 31, 2019 had previously been presented based on the FICO score of the primary borrower and have been restated to reflect the lowest of the borrowers’ FICO scores. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| | | Primary IIF and RIF | | | | | | | | | | |
| ($ in millions) | June 30, 2019 | | December 31, 2018 | | June 30, 2018 | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
| Total primary IIF | $ | 230,756 |
| | $ | 221,443 |
| | $ | 210,741 |
| $ | 237,158 |
| | $ | 221,443 |
| | $ | 217,096 |
|
| Total primary RIF | $ | 59,057 |
| | $ | 56,728 |
| | $ | 53,922 |
| $ | 60,420 |
| | $ | 56,728 |
| | $ | 55,577 |
|
| Average coverage percentage | 25.6 | % | | 25.6 | % | | 25.6 | % | 25.5 | % | | 25.6 | % | | 25.6 | % |
| | | | | | | | | | | |
| Total primary RIF on defaulted loans | $ | 986 |
| | $ | 1,032 |
| | $ | 1,093 |
| $ | 1,012 |
| | $ | 1,032 |
| | $ | 1,019 |
|
| Percentage of RIF in default | 1.7 | % | | 1.8 | % | | 2.0 | % | 1.7 | % | | 1.8 | % | | 1.8 | % |
| | | | | | | | | | | |
| Persistency Rate (12 months ended) | 83.4 | % | | 83.1 | % | | 80.9 | % | 81.5 | % | | 83.1 | % | | 81.4 | % |
Persistency Rate (quarterly, annualized) (1) | 80.8 | % | | 85.5 | % | | 82.3 | % | 75.5 | % | | 85.5 | % | | 83.4 | % |
| | | | | | | | | | | |
| Primary RIF by Premium Type: | | | | | | | | | | |
| Direct Monthly and Other Recurring Premiums | 71.2 | % | | 70.3 | % | | 69.6 | % | 72.0 | % | | 70.3 | % | | 69.9 | % |
| |
| |
| |
| |
Borrower-paid (2) | 8.0 |
| | 7.3 |
| | 6.5 |
| 8.5 |
| | 7.3 |
| | 7.0 |
|
| Lender-paid | 20.8 |
| | 22.4 |
| | 23.9 |
| 19.5 |
| | 22.4 |
| | 23.1 |
|
| Direct single premiums | 28.8 |
| | 29.7 |
| | 30.4 |
| 28.0 |
| | 29.7 |
| | 30.1 |
|
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | |
| Total borrower-paid | 76.4 | % | | 74.5 | % | | 72.6 | % | 77.8 | % | | 74.5 | % | | 73.7 | % |
| | | | | | | | | | | |
Primary RIF by FICO Score (3) : | | | | | | | | | | |
| >=740 | 55.7 | % | | 55.1 | % | | 55.0 | % | 56.2 | % | | 55.1 | % | | 55.1 | % |
| 680-739 | 34.6 | % | | 34.8 | % | | 34.6 | % | 34.5 | % | | 34.8 | % | | 34.7 | % |
| 620-679 | 8.9 | % | | 9.3 | % | | 9.4 | % | 8.6 | % | | 9.3 | % | | 9.3 | % |
| <=619 | 0.8 | % | | 0.8 | % | | 1.0 | % | 0.7 | % | | 0.8 | % | | 0.9 | % |
| | | | | | | | | | | |
| Primary RIF by LTV: | | | | | | | | | | |
| 95.01% and above | 13.2 | % | | 11.6 | % | | 10.3 | % | 13.9 | % | | 11.6 | % | | 11.0 | % |
| 90.01% to 95.00% | 52.5 | % | | 53.1 | % | | 53.3 | % | 51.9 | % | | 53.1 | % | | 53.1 | % |
| 85.01% to 90.00% | 28.2 | % | | 29.0 | % | | 29.7 | % | 27.9 | % | | 29.0 | % | | 29.4 | % |
| 85.00% and below | 6.1 | % | | 6.3 | % | | 6.7 | % | 6.3 | % | | 6.3 | % | | 6.5 | % |
| | | | | | | | | | | |
| Primary RIF by Policy Year: | | | | | | | | | | |
| 2008 and prior | 8.9 | % | | 10.1 | % | | 11.9 | % | 8.4 | % | | 10.1 | % | | 10.9 | % |
| 2009 - 2013 | 9.3 | % | | 11.4 | % | | 13.7 | % | 8.1 | % | | 11.4 | % | | 12.4 | % |
| 2014 | 5.3 | % | | 6.1 | % | | 7.1 | % | 4.8 | % | | 6.1 | % | | 6.5 | % |
| 2015 | 8.9 | % | | 10.2 | % | | 11.9 | % | 8.1 | % | | 10.2 | % | | 10.9 | % |
| 2016 | 14.8 | % | | 16.8 | % | | 19.2 | % | 13.5 | % | | 16.8 | % | | 17.9 | % |
| 2017 | 18.9 | % | | 21.1 | % | | 23.2 | % | 17.4 | % | | 21.1 | % | | 22.0 | % |
| 2018 | 21.8 | % | | 24.3 | % | | 13.0 | % | 19.7 | % | | 24.3 | % | | 19.4 | % |
| 2019 | 12.1 | % | | — | % | | — | % | 20.0 | % | | — | % | | — | % |
| | | | | | | |
______________________
| |
| (1) | The Persistency Rate on a quarterly, annualized basis is calculated based on loan-level detail for the quarter ending as of the date shown. It may be impacted by seasonality or other factors, including the level of refinance activity during the applicable periods, and may not be indicative of full-year trends. |
| |
| (2) | Borrower-paid Single Premium Policies have lower Minimum Required Assets under the PMIERs as compared to lender-paid Single Premium Policies. |
| |
| (3) | For loans with multiple borrowers, the percentage of primary risk in force by FICO score represents the lowest of the borrowers’ FICO scores. All periods prior to March 31, 2019 had previously been presented based on the FICO score of the primary borrower and have been restated to reflect the lowest of the borrowers’ FICO scores. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net Premiums Written and Earned. Net premiums written and earned for the three and sixnine months ended JuneSeptember 30, 2019 increased compared to the same periods in 2018, reflecting an increase in our IIF primarily related to an increase in our Monthly Premium Policies.monthly premium policies. Net premiums earned for the three and sixnine months ended JuneSeptember 30, 2019 includes a $32.9 million cumulative adjustment related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for further information.
The impact of mortgage prepayment speeds on the mix of business we write affects the revenue ultimately produced by our mortgage insurance business. 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” in our 2018 Form 10-K for more information.
The table below provides additional information about the components of mortgage insurance net premiums earned for the periods indicated, including the effects of our reinsurance programs.
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
Net premiums earned—insurance: | | | | | | | | | | | | | | |
| Direct | | | | | | | | | | | | | | |
| Premiums earned, excluding revenue from cancellations | $ | 315,109 |
| (1) | $ | 249,302 |
| | $ | 583,605 |
| (1) | $ | 494,398 |
| $ | 274,595 |
| | $ | 257,940 |
| | $ | 858,200 |
| (1) | $ | 752,338 |
|
| Single Premium Policy cancellations | 15,793 |
| | 14,776 |
| | 25,750 |
| | 27,111 |
| 27,254 |
| | 11,559 |
| | 53,004 |
| | 38,670 |
|
| Direct | 330,902 |
| (1) | 264,078 |
| | 609,355 |
| (1) | 521,509 |
| 301,849 |
| | 269,499 |
| | 911,204 |
| (1) | 791,008 |
|
| | | | | | | | | | | | | | | |
Assumed (2) | 2,481 |
| | 1,510 |
| | 4,931 |
| | 2,828 |
| 2,614 |
| | 1,993 |
| | 7,545 |
| | 4,821 |
|
| | | | | | | | | | | | | | | |
| Ceded | | | | | | | | | | | | | | |
| Premiums earned, excluding revenue from cancellations | (53,948 | ) | (1) | (20,491 | ) | | (78,434 | ) | (1) | (40,794 | ) | (28,457 | ) | | (20,989 | ) | | (106,891 | ) | (1) | (61,783 | ) |
Single Premium Policy cancellations (3) | (4,833 | ) | | (4,046 | ) | | (7,786 | ) | | (7,347 | ) | (8,137 | ) | | (3,288 | ) | | (15,923 | ) | | (10,635 | ) |
Profit commission—other (4) | 21,732 |
| (1) | 7,917 |
| | 30,046 |
| (1) | 15,322 |
| 9,729 |
| | 8,267 |
| | 39,775 |
| (1) | 23,589 |
|
| Ceded premiums, net of profit commission | (37,049 | ) | (1) | (16,620 | ) | | (56,174 | ) | (1) | (32,819 | ) | (26,865 | ) | | (16,010 | ) | | (83,039 | ) | (1) | (48,829 | ) |
| | | | | | | | | | | | | | | |
Total net premiums earned—insurance | $ | 296,334 |
| (1) | $ | 248,968 |
| | $ | 558,112 |
| (1) | $ | 491,518 |
| $ | 277,598 |
| | $ | 255,482 |
| | $ | 835,710 |
| (1) | $ | 747,000 |
|
| | | | | | | | | | | | | | | |
______________________
| |
| (1) | Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for further information. |
| |
| (2) | Includes premiums earned from our participation in certain Front-end and Back-end credit risk transfer programs. |
| |
| (3) | Includes the impact of related profit commissions. |
| |
| (4) | The amounts represent the profit commission on the Single Premium QSR Program, excluding the impact of Single Premium Policy cancellations. |
Net Premiums Written and Earned—Ceded. We use third-party reinsurance in our mortgage insurance business as part of our risk distribution strategy, including to manage our capital position and risk profile. 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. While these arrangements have the impact of reducing our earned premiums, they are expected to increase Radian Guaranty’s return on required capital for the related policies. The impact of these 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 portfolios, among other factors. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—Third-Party Reinsurance” and Note 8 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for more information about our reinsurance transactions.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table provides information related to the premium impact of our reinsurance programs. See Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements for more information about our reinsurance programs, including the ceded amounts related to those programs.
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| % of total direct and assumed premiums written | | | | | | | | | | | | | | |
| QSR Program | 1.6 | % | | 1.2 | % | | 0.9 | % | | 1.4 | % | 0.7 | % | | 1.1 | % | | 0.8 | % | | 1.3 | % |
| Single Premium QSR Program | 0.6 |
| | 9.8 |
| | 0.5 |
| | 8.1 |
| 2.2 |
| | 7.4 |
| | 1.1 |
| | 7.8 |
|
| Excess-of-Loss Program | 4.8 |
| | — |
| | 3.0 |
| | — |
| 2.4 |
| | — |
| | 2.8 |
| | — |
|
| Total | 7.0 | % | | 11.0 | % | | 4.4 | % | | 9.5 | % | 5.3 | % | | 8.5 | % | | 4.7 | % | | 9.1 | % |
| | | | | | | | | | | | | | | |
| % of total direct and assumed premiums earned | | | | | | | | | | | | | | |
| QSR Program | 1.4 | % | | 2.0 | % | | 1.3 | % | | 2.1 | % | 1.0 | % | | 1.7 | % | | 1.2 | % | | 1.9 | % |
| Single Premium QSR Program | 7.3 |
| | 4.2 |
| | 5.9 |
| | 4.1 |
| 5.3 |
| | 4.0 |
| | 5.7 |
| | 4.1 |
|
| Excess-of-Loss Program | 2.3 |
| | — |
| | 1.8 |
| | — |
| 2.4 |
| | — |
| | 2.0 |
| | — |
|
| Total | 11.0 | % | | 6.2 | % | | 9.0 | % | | 6.2 | % | 8.7 | % | | 5.7 | % | | 8.9 | % | | 6.0 | % |
| | | | | | | | | | | | | | | |
The table below provides information about the PMIERs impact ofamount by which our reinsurance programs onreduced our Minimum Required Assets as of the dates indicated.
| | | (in thousands) | June 30, 2019 | | December 31, 2018 | | June 30, 2018 | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
PMIERs impact - reduction in Minimum Required Assets: (1) | | | | | | | | | | |
| QSR Program | $ | 41,873 |
| | $ | 48,734 |
| | $ | 55,583 |
| $ | 38,227 |
| | $ | 48,734 |
| | $ | 51,883 |
|
| Single Premium QSR Program | 516,468 |
| | 522,318 |
| | 489,631 |
| 513,832 |
| | 522,318 |
| | 511,052 |
|
| Excess-of-Loss Program | 926,640 |
| | 455,440 |
| | — |
| 834,072 |
| | 455,440 |
| | — |
|
| Total PMIERs impact | $ | 1,484,981 |
| | $ | 1,026,492 |
| | $ | 545,214 |
| $ | 1,386,131 |
| | $ | 1,026,492 |
| | $ | 562,935 |
|
| | | | | | | | | | | |
| Percentage of gross Minimum Required Assets | 32.2 | % | | 22.8 | % | | 12.5 | % | 29.6 | % | | 22.8 | % | | 12.7 | % |
| | | | | | | | | | | |
______________________
| |
| (1) | Excludes the impact of intercompany reinsurance. |
Net Investment Income. Higher investment yields, combined with higher average investment balances, resulted in increases in net investment income for the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018. Our higher investment balances were primarily a result of investing our positive cash flow from operations. All periods include full allocation to the Mortgage Insurance segment of net investment income from investments held at Radian Group.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Provision for Losses. The following table details the financial impact of the significant components of our provision for losses for the periods indicated:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In millions) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
Current period defaults (1) | $ | 40.7 |
| | $ | 37.2 |
| | $ | 73.5 |
| | $ | 67.3 |
| $ | 42.0 |
| | $ | 40.4 |
| | $ | 107.9 |
| | $ | 100.1 |
|
Prior period defaults (2) | 6.5 |
| | (18.1 | ) | | (5.6 | ) | | (11.3 | ) | (12.6 | ) | | (20.4 | ) | | (10.6 | ) | | (24.1 | ) |
| Second-lien mortgage loan premium deficiency reserve and other | — |
| | 0.3 |
| | 0.1 |
| | 0.8 |
| (0.3 | ) | | 0.7 |
| | (0.2 | ) | | 1.5 |
|
| Provision for losses | $ | 47.2 |
| | $ | 19.4 |
| | $ | 68.0 |
| | $ | 56.8 |
| $ | 29.1 |
| | $ | 20.7 |
| | $ | 97.1 |
| | $ | 77.5 |
|
| | | | | | | | | | | | | | | |
Loss ratio (3) | 15.9 | % | | 7.8 | % | | 12.2 | % | | 11.6 | % | 10.5 | % | | 8.1 | % | | 11.6 | % | | 10.4 | % |
| | | | | | | | | | | | | | | |
______________________
| |
| (1) | Related to defaulted loans with a most recent default notice dated in the period indicated. For example, if a loan had defaulted in a prior period, but then subsequently cured and later re-defaulted in the current period, the default would be considered a current period default. |
| |
| (2) | Related to defaulted loans with a default notice dated in a period earlier than the period indicated, which have been continuously in default since that time. |
| |
| (3) | Provision for losses as a percentage of net premiums earned. See below and “—“—Net Premiums Written and Earned”Earned” for further discussion of the components of this ratio. |
Our mortgage insurance provision for losses for the three and sixnine months ended JuneSeptember 30, 2019 increased by $27.8$8.4 million and $11.2$19.6 million, respectively, as compared to the same periods in 2018. Reserves established for new default notices were the primary driver of our total incurred losses for the three and sixnine months ended JuneSeptember 30, 2019 and 2018. Current period new primary defaults increased by 12.0%9.6% and 12.2%11.3% for the three and sixnine months ended JuneSeptember 30, 2019, respectively, compared to the same periods in 2018. This increase primarily relates to new defaults on insurance written after 2008 and is consistent with typical default seasoning patterns for our recent NIW vintages. Our gross Default to Claim Rate assumption for new primary defaults was 8.0%7.5% at JuneSeptember 30, 2019, compared to 9.0%8.5% at JuneSeptember 30, 2018. This reduction in the estimated gross Default to Claim Rate assumption, which was based on observed trends, partially mitigated the increase in our provision for losses related to the increased number of new defaults in the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018.
Our provision for losses during the first sixthree and nine months ofended September 30, 2019 was positively impacted by favorable reserve development on prior period defaults. This favorable development was primarily driven by a reduction during the period in certain Default to Claim Rate assumptions for prior year defaults compared to the assumptions used at December 31, 2018, partially offset by a $19.4 millionan increase in our IBNR reserve estimate in the three months ended June 30, 2019. The increase in our IBNR reserve estimate is related to previously disclosed legal proceedings involving challenges from certain servicers regarding our Loss Mitigation Activities, which challenges may result in the reversal of certain decisions regarding prior Rescissions, Claim Denials or Claim Curtailments.proceedings. See Notes 10 andNote 12 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Our primary default rate at JuneSeptember 30, 2019 was 1.9% compared to 2.1% at December 31, 2018. The following table shows a rollforward of our primary loans in default, including new defaults from our insurance written in years: (i) prior to and including 2008 and (ii) after 2008:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| Beginning default inventory | 20,122 |
| | 24,597 |
| | 21,093 |
| | 27,922 |
| 19,643 |
| | 22,088 |
| | 21,093 |
| | 27,922 |
|
Plus: New defaults on insurance written in years: (1) | | | | | | | | | | | | | | |
| Prior to and including 2008 | 4,174 |
| | 4,695 |
| | 8,722 |
| | 9,708 |
| 4,413 |
| | 4,922 |
| | 13,135 |
| | 14,630 |
|
| After 2008 | 5,164 |
| | 3,644 |
| | 10,832 |
| | 7,720 |
| 6,149 |
| | 4,713 |
| | 16,981 |
| | 12,433 |
|
| Total new defaults | 9,338 |
| | 8,339 |
| | 19,554 |
| | 17,428 |
| 10,562 |
| | 9,635 |
| | 30,116 |
| | 27,063 |
|
Less: Cures (1) | 9,192 |
| | 9,739 |
| | 19,671 |
| | 21,106 |
| |
Less: Claims paid (2) | 604 |
| | 1,105 |
| | 1,266 |
| | 2,157 |
| |
Less: Rescissions and Claim Denials, net of (Reinstatements) (3) | 21 |
| | 4 |
| | 67 |
| | (1 | ) | |
| Less: Cures | | 9,215 |
| | 9,633 |
| | 28,886 |
| | 30,739 |
|
Less: Claims paid (1) | | 818 |
| | 1,280 |
| | 2,084 |
| | 3,437 |
|
Less: Rescissions and Claim Denials, net of (Reinstatements) (2) | | (12 | ) | | 40 |
| | 55 |
| | 39 |
|
| Ending default inventory | 19,643 |
| | 22,088 |
| | 19,643 |
| | 22,088 |
| 20,184 |
| | 20,770 |
| | 20,184 |
| | 20,770 |
|
| | | | | | | | | | | | | | | |
______________________
| |
| (1) | Amounts include 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 three and six months ended June 30, 2019 and 2018, new defaults and Cures in these areas were as follows:
|
|
| | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| New defaults | 1,083 |
| | 755 |
| | 2,189 |
| | 1,744 |
|
| Cures | 1,052 |
| | 2,284 |
| | 2,291 |
| | 4,452 |
|
| |
(2) | Includes those charged to a deductible or captive reinsurance transactions, as well as commutations. |
| |
(3)(2) | Net of any previous Rescissions and Claim Denials that were reinstated during the period. Such reinstated Rescissions and Claim Denials may ultimately result in a paid claim. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following tables show additional information about our primary loans in default as of the dates indicated:
| | | | June 30, 2019 | September 30, 2019 |
| | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 2nd Quarter | | Reserve for Losses | | % of Reserve | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 3rd Quarter | | Reserve for Losses | | % of Reserve |
| ($ in thousands) | # | | % | | # | | % | | $ | | % | # | | % | | # | | % | | $ | | % |
| Missed payments: | | | | | | | | | | | | | | | | | | | | | | |
| Three payments or less | 9,303 |
| | 47.4 | % | | 142 |
| | 38.6 | % | | $ | 84,134 |
| | 24.2 | % | 10,010 |
| | 49.6 | % | | 127 |
| | 34.9 | % | | $ | 84,512 |
| | 25.5 | % |
| Four to eleven payments | 5,682 |
| | 28.9 |
| | 432 |
| | 24.0 |
| | 91,015 |
| | 26.2 |
| 5,790 |
| | 28.7 |
| | 427 |
| | 22.5 |
| | 88,901 |
| | 26.8 |
|
| Twelve payments or more | 4,037 |
| | 20.5 |
| | 1,168 |
| | 6.6 |
| | 140,093 |
| | 40.4 |
| 3,838 |
| | 19.0 |
| | 1,094 |
| | 6.7 |
| | 129,322 |
| | 38.9 |
|
| Pending claims | 621 |
| | 3.2 |
| | N/A |
| | 5.3 |
| | 32,000 |
| | 9.2 |
| 546 |
| | 2.7 |
| | N/A |
| | 5.2 |
| | 29,370 |
| | 8.8 |
|
| Total | 19,643 |
| | 100.0 | % | | 1,742 |
| | | | 347,242 |
| | 100.0 | % | 20,184 |
| | 100.0 | % | | 1,648 |
| | | | 332,105 |
| | 100.0 | % |
| IBNR and other | | | | | | | | | 33,888 |
| | | | | | | | | | | 42,117 |
| | |
| LAE | | | | | | | | | 9,070 |
| | | | | | | | | | | 9,000 |
| | |
| Total primary reserve | | | | | | | | | $ | 390,200 |
| | | | | | | | | | | $ | 383,222 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | |
| September 30, 2019 | | September 30, 2019 |
Key Reserve Assumptions | | Gross Default to Claim Rate % | | Net Default to Claim Rate % | | Claim Severity % | | Net Default to Claim Rate % | | Claim Severity % |
| 35% | | 33% | | 98% | |
| 33% | | | 31% | | 98% |
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve |
| ($ in thousands) | # | | % | | # | | % | | $ | | % |
| Missed payments: | | | | | | | | | | | |
| Three payments or less | 10,038 |
| | 47.6 | % | | 148 |
| | 33.2 | % | | $ | 83,540 |
| | 23.1 | % |
| Four to eleven payments | 5,905 |
| | 28.0 |
| | 422 |
| | 24.7 |
| | 87,210 |
| | 24.1 |
|
| Twelve payments or more | 4,468 |
| | 21.2 |
| | 1,365 |
| | 6.5 |
| | 156,808 |
| | 43.4 |
|
| Pending claims | 682 |
| | 3.2 |
| | N/A |
| | 4.3 |
| | 34,130 |
| | 9.4 |
|
| Total | 21,093 |
| | 100.0 | % | | 1,935 |
| | | | 361,688 |
| | 100.0 | % |
| IBNR and other | | | | | | | | | 13,864 |
| | |
| LAE | | | | | | | | | 10,271 |
| | |
| Total primary reserve | | | | | | | | | $ | 385,823 |
| | |
| | | | | | | | | | | | |
|
| | | | |
| December 31, 2018 |
| Key Reserve Assumptions |
| Gross Default to Claim Rate % | | Net Default to Claim Rate % | | Claim Severity % |
| 35% | | 33% | | 96% |
______________________
N/A – Not applicable
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 31% and 33% at both JuneSeptember 30, 2019 and December 31, 2018.2018, respectively. This decrease was primarily due to the decrease in our gross Default to Claim Rate assumptions, as well as a shift in the mix of defaults during the nine months ended September 30, 2019, with a slightly lower proportion of pending claims in our total inventory. Our estimate with respect to future Rescissions, Claim Denials and Claim Curtailments, inclusive of claim withdrawals, reduced our loss reserve as of June 30, 2019 and December 31, 2018 by $30 million. These expectations are based primarily on our recent experience with respect to the number of claims that have been denied due to the policyholder’s failure to submit
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Curtailments, inclusive of claim withdrawals, reduced our loss reserve as of September 30, 2019 and December 31, 2018 by $29 million and $32 million, respectively. These expectations are based primarily on 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. See Note 11 of Notes to Consolidated Financial Statements in our 2018 Form 10-K.
Our mortgage insurance total loss reserve as a percentage of our mortgage insurance total RIF was 0.7% at both JuneSeptember 30, 2019 and December 31, 2018. See Note 10 of Notes to Unaudited Condensed Consolidated Financial Statements for information regarding our reserves for losses and a reconciliation of our Mortgage Insurance segment’s beginning and ending reserves for losses and LAE.
We considered the sensitivity of our loss reserve estimates at JuneSeptember 30, 2019 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 98% of our risk exposure at JuneSeptember 30, 2019), we estimated that our total loss reserve at JuneSeptember 30, 2019 would change by approximately $4$3 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 $10an $11 million change in our primary loss reserve at JuneSeptember 30, 2019.
Total mortgage insurance claims paid of $32.4$36.7 million and $67.0$103.7 million for the three and sixnine months ended JuneSeptember 30, 2019, respectively, decreased from claims paid of $56.5$59.8 million and $116.5$176.2 million for the same respective periods in 2018. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory. Although expected claims are included in our reserve for losses, the timing of claims paid is 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” in our 2018 Form 10-K) that make the timing of paid claims difficult to predict.
The following table shows claims paid by product and average claim paid by product for the periods indicated:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
Net claims paid: (1) | | | | | | | | | | | | | | |
| Total primary claims paid | $ | 31,940 |
| | $ | 48,092 |
| | $ | 65,300 |
| | $ | 106,650 |
| $ | 28,981 |
| | $ | 45,814 |
| | $ | 94,281 |
| | $ | 152,464 |
|
| Total pool and other | 472 |
| | 1,111 |
| | 1,702 |
| | 2,411 |
| 901 |
| | 1,241 |
| | 2,603 |
| | 3,652 |
|
| Subtotal | 32,412 |
| | 49,203 |
| | 67,002 |
| | 109,061 |
| 29,882 |
| | 47,055 |
| | 96,884 |
| | 156,116 |
|
Impact of commutations (2) | 15 |
| | 7,331 |
| | 15 |
| | 7,399 |
| 6,812 |
| | 12,712 |
| | 6,827 |
| | 20,111 |
|
| Total net claims paid | $ | 32,427 |
| | $ | 56,534 |
| | $ | 67,017 |
| | $ | 116,460 |
| $ | 36,694 |
| | $ | 59,767 |
| | $ | 103,711 |
| | $ | 176,227 |
|
| | | | | | | | | | | | | | | |
Total average net primary claim paid (1) (3) | $ | 50.1 |
| | $ | 54.8 |
| | $ | 49.4 |
| | $ | 54.4 |
| $ | 47.0 |
| | $ | 53.6 |
| | $ | 48.6 |
| | $ | 54.1 |
|
| | | | | | | | | | | | | | | |
Average direct primary claim paid (3) (4) | $ | 51.1 |
| | $ | 55.5 |
| | $ | 50.1 |
| | $ | 55.0 |
| $ | 48.1 |
| | $ | 54.2 |
| | $ | 49.5 |
| | $ | 54.7 |
|
______________________
| |
| (1) | Net of reinsurance recoveries. |
| |
| (2) | Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans and the impact of captive terminations. |
| |
| (3) | Calculated without giving effect to the impact of commutations. |
| |
| (4) | Before reinsurance recoveries. |
Other Operating Expenses. Other operating expenses for the three and nine months ended JuneSeptember 30, 2019 decreased slightlyincreased as compared to the same periodperiods in 2018, primarily due to higher allocated corporate operating expenses. This increase for the nine months ended September 30, 2019, was partially offset by an increase in ceding commissions, resulting from a change in estimate affecting policies covered under our Single Premium QSR partially offset by higher allocated corporate operating expenses.Program. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for further discussion about the change in estimate for Single Premium Policies. The six months ended June 30, 2019, as compared to the same period in 2018, also included anincrease in allocated corporate operating expenses, primarily due to (i) higher technology related expenses and (ii) higher compensation expense, including variable and incentive-based compensation. As a result, other operating expenses for the six months ended June 30, 2019 increased as compared to the same period in 2018.
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, as well as allocated corporate operating expenses), expressed as a percentage of net premiums earned. Our expense ratio was 19.9% and 21.7% for the three and six months ended
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Juneexpressed as a percentage of net premiums earned. Our expense ratio was 23.1% and 22.2% for the three and nine months ended September 30, 2019, respectively, compared to 23.9%22.9% and 23.8%23.5% for the same respective periods in 2018. The decline in our expense ratio in 2019 is primarily due to the cumulative adjustment for Single Premium Policies, as discussed above.
Results of Operations—Services
Three and SixNine Months Ended JuneSeptember 30, 2019 Compared to Three and SixNine Months Ended JuneSeptember 30, 2018
The following table summarizes our Services segment’s results of operations for the three and sixnine months ended JuneSeptember 30, 2019 and 2018:
| | | | | | | | $ Change | | | | | | $ Change | | | | | $ Change | | | | | | $ Change |
| | Three Months Ended
June 30, | | Favorable (Unfavorable) | | Six Months Ended
June 30, | | Favorable (Unfavorable) | Three Months Ended
September 30, | | Favorable (Unfavorable) | | Nine Months Ended
September 30, | | Favorable (Unfavorable) |
| (In millions) | 2019 | | 2018 | | 2019 vs. 2018 | | 2019 | | 2018 | | 2019 vs. 2018 | 2019 | | 2018 | | 2019 vs. 2018 | | 2019 | | 2018 | | 2019 vs. 2018 |
Adjusted pretax operating income (loss) (1) (2) | $ | (3.5 | ) | | $ | (6.4 | ) | | $ | 2.9 |
| | $ | (9.6 | ) | | $ | (14.0 | ) | | $ | 4.4 |
| $ | (1.5 | ) | | $ | (7.9 | ) | | $ | 6.4 |
| | $ | (11.1 | ) | | $ | (22.0 | ) | | $ | 10.9 |
|
| Net premiums earned—insurance | 2.8 |
| | 2.4 |
| | 0.4 |
| | 4.6 |
| | 2.4 |
| | 2.2 |
| 3.6 |
| | 2.9 |
| | 0.7 |
| | 8.2 |
| | 5.3 |
| | 2.9 |
|
| Services revenue | 40.4 |
| | 37.7 |
| | 2.7 |
| | 74.1 |
| | 71.9 |
| | 2.2 |
| 43.6 |
| | 37.3 |
| | 6.3 |
| | 117.7 |
| | 109.2 |
| | 8.5 |
|
| Cost of services | 28.0 |
| | 24.4 |
| | (3.6 | ) | | 52.6 |
| | 47.6 |
| | (5.0 | ) | 29.2 |
| | 26.0 |
| | (3.2 | ) | | 81.7 |
| | 73.6 |
| | (8.1 | ) |
Other operating expenses (2) | 18.2 |
| | 17.0 |
| | (1.2 | ) | | 35.8 |
| | 30.6 |
| | (5.2 | ) | 19.5 |
| | 17.7 |
| | (1.8 | ) | | 55.3 |
| | 48.3 |
| | (7.0 | ) |
| Interest expense | — |
| | 4.5 |
| | 4.5 |
| | — |
| | 8.9 |
| | 8.9 |
| — |
| | 4.5 |
| | 4.5 |
| | — |
| | 13.4 |
| | 13.4 |
|
______________________
| |
| (1) | Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of the Company’s business segments. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements. |
| |
| (2) | Includes allocation of corporate operating expenses of $4.0$4.3 million and $8.1$12.5 million for the three and sixnine months ended JuneSeptember 30, 2019, respectively, and $3.0$2.9 million and $5.8$8.7 million for the three and sixnine months ended JuneSeptember 30, 2018, respectively. |
Adjusted Pretax Operating Income (Loss). Our Services segment’s adjusted pretax operating loss for the three and sixnine months ended JuneSeptember 30, 2019 was $3.5$1.5 million and $9.6$11.1 million, respectively, compared to adjusted pretax operating loss of $6.4$7.9 million and $14.0$22.0 million for the same respective periods in 2018. The decrease in our adjusted pretax operating loss for the three and sixnine months ended JuneSeptember 30, 2019, as compared to the same periods in 2018, was driven by a decrease in interest expense, as discussed below, partially offset by an increase in other operating expenses resulting from the impact of the businesses acquired in 2018 and the inclusion of other operating expenses for these businesses from their respective dates of acquisition.expenses.
Net premiums earned—insurance.Premiums Earned—Insurance. Net premiums earned for the three and sixnine months ended JuneSeptember 30, 2019 increased compared to the same periods in 2018, as a result of the acquisition of the title insurance business in March 2018 and the inclusion of its operations.
Services Revenue. Services revenue increased for the three and sixnine months ended JuneSeptember 30, 2019, as compared to the same periods in 2018, primarily due to the inclusion of revenue from businesses acquired in 2018 since their respective dates of acquisition.
Cost of Services. Our cost of services is primarily affected by our level of services revenue. The level of these costs may also fluctuate if market rates of compensation change, or if there is decreased availability or a loss of qualified employees.
Other Operating Expenses. Other operating expenses for the three and sixnine months ended JuneSeptember 30, 2019 were impacted by businesses acquired in 2018 and the resulting inclusion of other operating expenses for these businesses from their respective dates of acquisition. Other operating expenses also include other selling, general and administrative expenses, depreciation, and allocations of corporate general and administrative expenses. See “Results of Operations—Consolidated—Three and SixNine Months Ended JuneSeptember 30, 2019 Compared to Three and SixNine Months Ended JuneSeptember 30, 2018—Other Operating Expenses.”
Interest Expense. Effective January 1, 2019, the Clayton Intercompany Note was repaid using proceeds from an additional capital contribution from Radian Group. As a result of the intercompany note repayment, the Services segment no longer incurs interest expense on the intercompany note.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Off-Balance Sheet Arrangements
There have been no material changes in off-balance sheet arrangements from those specified in our 2018 Form 10-K, other than as described below:
Variable Interest Entity
In April 2019, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re 2019-1, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $562.0 million of aggregate excess-of-loss reinsurance coverage for mortgage insurance losses in connection with new defaults on an existing portfolio of eligible Recurring Premium Policies issued between January 1, 2018 and December 31, 2018, with an initial RIF of $10.7 billion. Radian Guaranty and its affiliates have retained the first-loss layer of $267.6 million of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amount. Eagle Re 2019-1 is a special purpose VIE 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. For additional information about Eagle Re 2019-1 and our other reinsurance arrangements, see Note 7 in Notes to Unaudited Condensed Consolidated Financial Statements.
Contractual Obligations and Commitments
There have been no material changes outside of the ordinary course of business in our contractual obligations and commitments from those specified in our 2018 Form 10-K.
Liquidity and Capital Resources
Consolidated Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
| | | (In thousands) | Six Months Ended
June 30, | Nine Months Ended
September 30, |
| 2019 | | 2018 | 2019 | | 2018 |
| Net cash provided by (used in): | | | | | | |
| Operating activities | $ | 338,129 |
| | $ | 300,822 |
| $ | 506,805 |
| | $ | 491,929 |
|
| Investing activities | (144,794 | ) | | (376,700 | ) | (162,903 | ) | | (506,400 | ) |
| Financing activities | (221,215 | ) | | 84,360 |
| (398,654 | ) | | 32,565 |
|
| Effect of exchange rate changes on cash and restricted cash | (4 | ) | | (1 | ) | (4 | ) | | — |
|
| Increase (decrease) in cash and restricted cash | $ | (27,884 | ) | | $ | 8,481 |
| $ | (54,756 | ) | | $ | 18,094 |
|
| | | | | | | |
Operating Activities. Our most significant source of operating cash flows is generally from premiums received from our mortgage insurance policies, while our most significant uses of operating cash flows are generally for claims paid on our mortgage insurance policies and our operating expenses. Net cash provided by operating activities totaled $338.1$506.8 million for the sixnine months ended JuneSeptember 30, 2019, an increase compared to $300.8$491.9 million for the same period in 2018. This increase in net cash provided by operating activities in the six months ended June 30, 2019, compared to the same period in 2018, was principally the result of: (i) an increase in cash received from the IRS, including the remaining $57.2 million refund which was previously on deposit with the IRS; and (ii) a reduction in claims paid in 2019, partially offset by; (ii) ceded premiums paid under the Excess-of-Loss Program in 2019; and (iii) an increase in net cash paid to the IRS, including our purchase of U.S. Mortgage Guaranty Tax and Loss Bonds in 2019.
Investing Activities. Net cash used in investing activities decreased in the sixnine months ended JuneSeptember 30, 2019, compared to the same period in 2018, primarily as a result of: (i) a decrease in net purchases of short-term investments; (ii) an increase in proceeds from sales, net of purchases, of fixed-maturity investments available for salesale; and (ii)(iii) an increase in proceeds from sales of trading securities. These changes were partially offset by an increasea decrease in proceeds from sales, net of purchases, of short-term investments.equity securities.
Financing Activities. Net cash used in financing activities increased for the sixnine months ended JuneSeptember 30, 2019, as compared to net cash provided by financing activities during the same period in 2018. For the sixnine months ended JuneSeptember 30, 2019, our primary financing activities included: (i) an increase in repurchases of our common shares and (ii) repayments and repurchases of senior notes exceeding related issuances. See Notes 11 and13 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our debt transactions and share repurchases.
See “Item 1. Financial Statements (Unaudited)—Condensed Consolidated Statements of Cash Flows (Unaudited)” for additional information.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity Analysis—Holding Company
Radian Group serves as the holding company for our insurance and other subsidiaries and does not have any operations of its own. At JuneSeptember 30, 2019, Radian Group had available, either directly or through an unregulated subsidiary, unrestricted cash and liquid investments of $878.6$730.7 million. Available liquidity at JuneSeptember 30, 2019 excludes certain additional cash and liquid investments that have been advanced to Radian Group from our subsidiaries to pay their allocated share of corporate expenses and interest payments. In addition, this amount does not take into consideration transactions subsequent to JuneSeptember 30, 2019, including: (i) $52.5$25.0 million in repurchases of Radian Group common stock, excluding commissions, pursuant to the current share repurchase authorization discussed belowbelow; (ii) $20.0 million in distributions paid to Radian Group from subsidiaries; and (ii) redemption of the remaining $27.0(iii) a $65.0 million of aggregate principal amount of our Senior Notes due 2020.capital contribution paid from Radian Group to its subsidiary Radian Reinsurance to support participation in credit risk transfer transactions.
In addition to available cash and marketable securities, Radian Group’s principal sources of cash to fund future liquidity needs include payments made to Radian Group under expense- and tax-sharing arrangements with its subsidiaries. Radian Group also has in place a $267.5 million unsecured revolving credit facility with a syndicate of bank lenders. At JuneSeptember 30, 2019,
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
the full $267.5 million remains undrawn and available under the facility. See Note 13 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information on the unsecured revolving credit facility.
Radian Group’s principal liquidity demands for the next 12 months are: (i) potential investments to support our business strategy, including contributions to our subsidiaries; (ii) the payment of corporate expenses, including taxes; (ii)(iii) interest payments on our outstanding debt obligations; (iii)(iv) the payment of dividends on our common stock; (iv)and (v) the repurchases of Radian Group common stock pursuant to the share repurchase authorization, subsequent to June 30, 2019, as described below; and (v) repayments or repurchases of our debt obligations, including the early redemption of the remaining $27.0 million of aggregate principal amount of our Senior Notes due 2020 on July 25, 2019.below.
In addition to our short-term liquidity needs discussed above, our most significant needs for liquidity beyond the next 12 months are potential additional capital contributions to our subsidiaries and the repayment of $970$900 million aggregate principal amount of debt due in future years. See “—Capitalization—Holding Company” below. Radian Group’s liquidity demands for the next 12 months or in future periods could also include: (i) repayments, repurchases or early redemptions of portions of our debt obligations and (ii) potential investments to support our business strategy. Subject to certain limitations, borrowings under the credit facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to Radian Group’s insurance and reinsurance subsidiaries as well as growth initiatives. See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements for additional details.
If Radian Group’s current sources of liquidity are insufficient for Radian Group to fund its obligations, or if we otherwise decide to increase our liquidity position, Radian Group may seek additional capital, including by incurring additional debt, issuing additional equity, or selling assets, which we may not be able to do on favorable terms, if at all.
Share Repurchases. On March 20,During the nine months ended September 30, 2019, the Company repurchased 12,363,360 shares of Radian Group common stock under programs authorized by Radian Group’s board of directors, approved a $150 million increase in authorization for the Company’s existing share repurchase plan, bringing the total authorization to repurchase shares up to $250 million, excluding commissions. At June 30, 2019, purchase authority of up to a maximum of $52.5 million remained available under this program, which was scheduled to expire on July 31, 2020. Subsequent to June 30, 2019, Radian Group completed the repurchase authorization by purchasing additional shares of its common stock totaling $52.5 million, excluding commissions, which reduced available holding company liquidity from the amount reported at June 30, 2019, by the amount of such purchases. Over the course of the program, the Company repurchased a total cost of 11,258,574 shares, or 5.3% of the shares outstanding at the beginning of the program.$275.2 million, including commissions. See Note 13 of Notes to Unaudited Condensed Consolidated Financial Statements for additional details on our share repurchase program.programs.
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$2.0 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.
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 expenses, including interest payments on most of Radian Group’s outstanding debt obligations. Payments of these corporate expenses for the next 12 months, excluding interest payments on Radian Group’s debt, are expected to be approximately $90 million to $100 million. For the same period, payments of interest on Radian Group’s debt obligations are expected to be approximately $41$47 million. We expect nearly all of our holding company expenses to be reimbursed by our subsidiaries under our expense-sharing arrangements. The expense-sharing arrangements between Radian Group and our insurance subsidiaries, as amended, have been approved by the applicable insurance departments, but such approval may be modified or revoked at any time.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Capitalization—Holding Company
The following table presents our holding company capital structure:
| | | (In thousands) | June 30,
2019 | | December 31,
2018 | September 30,
2019 | | December 31,
2018 |
| Debt: | | | | | | |
| 5.500% Senior Notes due 2019 | $ | — |
| | $ | 158,623 |
| $ | — |
| | $ | 158,623 |
|
| 5.250% Senior Notes due 2020 | 26,959 |
| | 234,126 |
| — |
| | 234,126 |
|
| 7.000% Senior Notes due 2021 | 70,360 |
| | 197,661 |
| — |
| | 197,661 |
|
| 4.500% Senior Notes due 2024 | 450,000 |
| | 450,000 |
| 450,000 |
| | 450,000 |
|
| 4.875% Senior Notes due 2027 | 450,000 |
| | — |
| 450,000 |
| | — |
|
| Deferred debt costs on senior notes | (14,429 | ) | | (10,062 | ) | (13,357 | ) | | (10,062 | ) |
| Revolving credit facility | — |
| | — |
| — |
| | — |
|
| Total | 982,890 |
| | 1,030,348 |
| 886,643 |
| | 1,030,348 |
|
| | | | | | | |
| Stockholders’ equity | 3,783,244 |
| | 3,488,715 |
| 3,922,507 |
| | 3,488,715 |
|
| | | | | | | |
| Total capitalization | $ | 4,766,134 |
| | $ | 4,519,063 |
| $ | 4,809,150 |
| | $ | 4,519,063 |
|
| | | | | | | |
| Debt to Capital Ratio | 20.6 | % | | 22.8 | % | |
| Debt-to-capital ratio | | 18.4 | % | | 22.8 | % |
Radian’s holding company debt-to-capital ratio decreased to 20.6%18.4% at JuneSeptember 30, 2019 from 22.8% at December 31, 2018. During the second quarter ofnine months ended September 30, 2019, we reduced our total debt outstanding and improved our debt maturity profile by completing the following transactions:
repayment at maturity of $158.6 million aggregate principal amount of our Senior Notes due 2019;
the issuance of $450 million aggregate principal amount of Senior Notes due 2027; and
tender offers resultingand the subsequent redemptions that together resulted in the purchasesrepayment of the remaining aggregate principal amounts of $207.2$234.1 million and $127.3$197.7 million of our Senior Notes due 2020 and 2021, respectively.
On July 25, 2019, Radian Group redeemed the remaining $27.0 million aggregate principal amount of Senior Notes due 2020, in accordance with the terms of the related indenture.
Stockholders’ equity increased by $294.5$433.8 million from December 31, 2018 to JuneSeptember 30, 2019. The net increase in stockholders’ equity resulted primarily from: (i) our net income of $337.7$511.1 million for the sixnine months ended JuneSeptember 30, 2019 and (ii) net unrealized gains on investments of $149.4 million,$186.6 million. These items were partially offset by shares repurchased under our share repurchase programprograms of $197.6$275.2 million, including commissions.
We regularly evaluate opportunities, based on market conditions, to finance our operations by accessing the capital markets or entering into other types of financing 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.
Mortgage Insurance
The principal demands for liquidity in our mortgage insurance business include: (i) the payment of claims and potential claim settlement transactions, net of reinsurance; (ii) operating expenses (including those allocated from Radian Group); (iii) repayments of FHLB advances; and (iv) taxes. 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; (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 needs for the foreseeable future.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
mortgage insurance subsidiaries will provide these subsidiaries with a substantial portion of the funds necessary to satisfy their needs for the foreseeable future.
As of JuneSeptember 30, 2019, our Mortgage Insurance segment maintained claims paying resources of $4.3$4.5 billion on a statutory basis, which consists of contingency reserves, statutory policyholders’ surplus, premiums received but not yet earned and loss reserves.
Radian Guaranty’s Risk-to-capital as of JuneSeptember 30, 2019 was 14.614.2 to 1. Our combined Risk-to-capital, which represents the consolidated Risk-to-capital measure for all of our Mortgage Insurance subsidiaries, was 13.312.9 to 1 as of JuneSeptember 30, 2019. Radian Guaranty is not expected to need additional capital to satisfy state insurance regulatory requirements in their current form. See Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements for more information.
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 current PMIERs financial requirements. At JuneSeptember 30, 2019, Radian Guaranty’s Available Assets under the current PMIERs financial requirements totaled approximately $3.2$3.4 billion, resulting in excess available resources or a “cushion” of $660$652 million, or 26%24%, over its Minimum Required Assets of $2.6$2.7 billion.
The chart below summarizes our “cushion” under the PMIERs and Radian’s excess available resources as of JuneSeptember 30, 2018, December 31, 2018 and JuneSeptember 30, 2019, calculated based on the PMIERs financial requirements in effect for each date shown. 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 JuneSeptember 30, 2019 and December 31, 2018 includes $825 million and $450 million, respectively, from the April 2019 and December 2018 distributions of capital of $375 million and $450 million, respectively, from Radian Guaranty to Radian Group, as approved by the Pennsylvania Insurance Department. |
| |
| (2) | Represents Radian Guaranty’s excess of Available Assets over its Minimum Required Assets, calculated in accordance with the PMIERs financial requirements in effect for each date shown. PMIERs 1.0 was in effect for JuneSeptember 30, 2018 and December 31, 2018; PMIERs 2.0 was in effect for JuneSeptember 30, 2019. |
| |
| (3) | Percentages represent the values shown as a percentage of Minimum Required Assets under the applicable PMIERs financial requirements in effect for the dates shown. |
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
In April 2019, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re 2019-1 that reduced net RIF by a total of $562.0 million, reducing the PMIERs Minimum Required Assets by the same amount.amount at inception. See “Overview—Quarterly Highlights and Recent Company Developments” and Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information on this new agreement.
In April 2019, the Pennsylvania Insurance Department approved a $375 million Extraordinary Distribution from Radian Guaranty to Radian Group, which was paid on April 30, 2019 in the form of cash and marketable securities. This distribution reduced our PMIERs Available Assets by $375 million.
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, 2018 of $701.9 million and $84.8 million, respectively. Therefore, no ordinary dividends can be paid by these subsidiaries in 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.
Radian Guaranty and Radian Reinsurance are both 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 JuneSeptember 30, 2019, there were $106.4$104.5 million of FHLB advances outstanding.
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. We have the right to request the return of the loaned securities at any time. See Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements for more information.
Services
As of JuneSeptember 30, 2019, our Services segment maintained cash and cash equivalentsliquid investments totaling $7.3$40.3 million, which included restricted cash of $0.1 million.million, primarily held by Radian Title Insurance. Effective January 1, 2019, Radian Group recapitalized the Services segment with a capital contribution that enabled the Services segment to repay its accumulated allocated operating expense and interest expense, as well as to repay the Clayton Intercompany Note. While this action had no immediate net impact to Radian Group’s available liquidity, we expect that the Services segment will now be more likely to satisfy its reimbursement obligations in the 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 loan.
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.
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 subsidiaries. The following ratings have been independently assigned by third-party statistical rating organizations, are for informational purposes only and are subject to change.
|
| | | |
| | Moody’s (1) | | S&P (2) |
| Radian Group | Ba2Ba1 | | BB+ |
| Radian Guaranty | Baa2Baa1 | | BBB+ |
| Radian Reinsurance | N/A | | BBB+ |
______________________
| |
| (1) | Based on the October 1, 201817, 2019 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 Stable. |
Critical Accounting Policies
As of the filing date of this report, there were no significant changes in our critical accounting policies from those discussed in our 2018 Form 10-K, other than described below. See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for accounting pronouncements issued but not yet adopted that may impact the Company’s consolidated financial position, earnings, cash flows or disclosures.
Leases
We determine if an arrangement includes a lease at inception. If it does, we recognize a right-of-use asset and lease liability in other assets and other liabilities, respectively, in our condensed consolidated balance sheet. Right-of-use assets represent our right to use an underlying asset for the lease term and are recognized net of any payments made or received from the lessor. Lease liabilities represent our obligation to make lease payments arising from the lease and are based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental
Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
borrowing rate based on the information available at the lease commencement date or as of our date of adoption, January 1, 2019.
Lease expense is recognized on a straight-line basis over the expected lease term. For lease agreements entered into after the adoption of ASU 2016-02 that include lease and non-lease components, such components are generally not accounted for separately. We have elected the short-term exemption for contracts with lease terms of 12 months or less.
Our lease agreements primarily relate to operating leases for office space we use in our operations. Certain of our leases include renewal options and/or termination options that we did not consider in the determination of the right-of-use asset or the lease liability as we did not believe it was reasonably certain that we would exercise such options. Our lease agreements do not contain any variable lease payments, material residual value guarantees or material restrictive covenants. We do not have material sublease agreements. As of JuneSeptember 30, 2019, there were no leases that had not yet commenced but that created significant rights and obligations for us.
Item 3. 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 interest rates, credit spreads, equity prices, and foreign currency exchange rates. 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 market risk exposures at JuneSeptember 30, 2019 have not materially changed from those identified in our 2018Form 10-K.
Item 4. Controls and Procedures.
Evaluation of 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 Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of JuneSeptember 30, 2019, pursuant to Rule 15d-15(b) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of JuneSeptember 30, 2019, 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.
Changes in Internal Control Over Financial Reporting
During the three-month period ended JuneSeptember 30, 2019, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are routinely involved in a number of legal actions and proceedings, including litigation and other disputes arising in the ordinary course of our business.
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 Eastern District of Pennsylvania against Radian Guaranty 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 Orderorder 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 Amended Filings; and (3) agreed to resolve the remaining dispute through the Arbitration. The Arbitration is proceeding and Radian continues to defend against Ocwen’s claims vigorously.
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, equitable indemnification, unjust enrichment, and conversion claims and seeking monetary damages and declaratory relief. TheExhibit 1 to the Complaint lists 3,014 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving insurance coverage decisions. Thedecisions (the “Coverage Disputed Loans”). Exhibit 2 to 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 against these claims vigorously. In December 2018, Radian Guaranty filed a motion to dismiss the Complaint. In March 2019, the trial judge issued an Orderorder granting in part, and denying in part, our motion to dismiss, and dismissed Nationstar’s unjust enrichment and conversion claims. In May 2019, Radian Guaranty filed an answer, with affirmative defenses and counterclaims, in response to the Complaint. On September 23, 2019, the trial judge entered as an order a joint stipulation submitted by Nationstar and Radian Guaranty that narrowed the scope of the dispute involving Coverage Disputed Loans to claims relating to 1,704 mortgage insurance certificates. Radian Guaranty believes that Nationstar’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and continues to defend against these claims vigorously.
In the second quarter ofthree and nine months ended September 30, 2019, the Company increased its IBNR reserve estimate by $19.4$11.8 million and $31.2 million, respectively, related to our best estimate of our probable loss in connection with the above legal proceedings. While Radian believes it has substantial defenses in these matters and intends to continue to defend against these claims vigorously, it is not feasible to predict the ultimate outcome of these disputes, and the Company could in the future be required to pay amounts as a result of settlements or decisions in these matters, potentially in excess of accruals.
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 business.
The legal and regulatory matters discussed above and in our 2018 Form 10-K 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 actions will not have a material adverse effect on our consolidated financial condition. 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 adverse effect on our liquidity, financial condition or results of operations for any particular period.
Item 1A. Risk Factors.
There have been no material changes to our risk factors from those previously disclosed in our 2018 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuance of Unregistered Securities
During the three and sixnine months ended JuneSeptember 30, 2019, no equity securities of Radian Group were sold that were not registered under the Securities Act.
Issuer Purchases of Equity Securities
The following table provides information about purchases of Radian Group common stock by us (and our affiliated purchasers) during the three months ended JuneSeptember 30, 2019.
| | 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) | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2) |
| Share repurchase program | | | | | | | | |
| 4/1/2019 to 4/30/2019 | 4,133,652 |
| | $ | 21.94 |
| | 4,131,329 |
| | $ | 127,652 |
| |
| 5/1/2019 to 5/31/2019 | 2,153,016 |
| | $ | 22.52 |
| | 1,890,979 |
| | $ | 85,164 |
| |
| 6/1/2019 to 6/30/2019 | 1,452,156 |
| | $ | 22.58 |
| | 1,448,024 |
| | $ | 52,488 |
| |
| Share repurchase programs | | | | | | | | |
| 7/1/2019 to 7/31/2019 | | 2,242,176 |
| | $ | 23.43 |
| | 2,241,568 |
| | $ | — |
|
| 8/1/2019 to 8/31/2019 | | 1,107,250 |
| | $ | 22.64 |
| | 1,104,786 |
| | $ | 175,000 |
|
| 9/1/2019 to 9/30/2019 | | 772 |
| | $ | 23.12 |
| | — |
| | $ | 175,000 |
|
| Total | 7,738,824 |
| | | | 7,470,332 |
| |
| 3,350,198 |
| | | | 3,346,354 |
| |
|
| | | | | | | | | | | | | | | |
______________________
| |
| (1) | Includes 268,4923,844 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 March 20, 2019, Radian Group’s board of directors approved a $150 million increase in authorization for the Company’s existing share repurchase plan, bringing the total authorization to repurchase shares up to $250 million, excluding commissions. During the three months ended September 30, 2019, we completed this repurchase authorization by purchasing an additional 2,241,568 shares at an average price of $23.43 per share, including commissions. On August 14, 2019, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to spend up to $200 million to repurchase Radian Group common stock. Pursuant to this authorization, during the three months ended JuneSeptember 30, 2019, wethe Company purchased a total of 7,470,3321,104,786 shares at an average price of $22.20$22.64 per share, including commissions. This share repurchase program expires on August 31, 2020. See Note 13 of Notes to Unaudited Condensed Consolidated Financial Statements for additional details on our share repurchase program.programs. |
Item 6. Exhibits
|
| | |
| Exhibit No. | | Exhibit Name |
| | |
4.1 | | |
| | |
4.2 | | |
| | |
4.3 | | |
| | |
10.1 | | |
| | | |
| *31 | | |
| | | |
| **32 | | |
| | | |
| *101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | | |
| *101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | | |
| *101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
| *101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| *101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | | |
| *101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | | |
| *104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS) |
______________________
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements 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.
|
| |
| | Radian Group Inc. |
| | |
August 6,November 12, 2019 | /s/ J. FRANKLIN HALL |
| | J. Franklin Hall |
| | Senior Executive Vice President, Chief Financial Officer |
| | |
| | /s/ ROBERT J. QUIGLEY |
| | Robert J. Quigley |
| | Senior Vice President, Controller |
